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Posted July 19, 2016

dynamic discounting b2b payments

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Payment terms aren’t what they used to be. By enabling faster payments and complete transparency into transactions, new technologies have helped push ahead more than invoice payments dates—they’ve driven the adoption of innovative AP cash management strategies. Let’s examine the evolution of early payments discounts from the static “2% 10, net 30” to the more dynamic—and why more B2B payments professionals are transforming their approach to supply chain financing and vendor relationships.

A Softer Way to Earn a Price Decrease

For many corporations, accounts payable is a source of significant “free” capital, so they stretch their invoice payments dates as far out into the future as possible to make better (i.e. more profitable) use of their available cash. But suppliers want cash, too, so they’ll entice their customers to pay sooner by discounting the payment amount. What’s the sweeter deal? It all depends on interest rates, payments terms, and the financial needs of the company. Someone in AP does the math to determine the more favorable course of action.

In a perfect world, a simple calculation would dictate the customer’s payment strategy. But in reality, larger companies may leverage their power against smaller suppliers and essentially “force” a discount. If the supplier is in a weaker cash position and lacks access to adequate external funding to support their accounts receivables, they have little choice but to acquiesce to their customer’s demand for a discount in exchange for a timely payment. This phenomenon is discussed by Tony Furman, CEO and founder of BidPay, in the PYMNTS.com article Faster Supplier Payments Aren’t Free.

Assuming all parties are playing fair, however, it’s not necessarily easy for companies to achieve supplier discounts, even when their vendors build early payment discounts into their contracts and state them on their invoices (e.g. “2% 10, net 30”). As revealed in PayStream Advisors’ and C2FO’s 2015 AP and Working Capital Report, only half of companies “always” capture these discounts. Usually, manual processes ripe with bottlenecks are to blame.

Enter: procurement automation. Electronic invoicing, electronic payments, and Purchase-to-Pay (P2P) solutions are a first step toward better supply chain cash management. Read Exploring AP Technologies, Part 1: Supplier Portals, Exploring AP Technologies: Complete Procure-to-Pay Solutions, and Five Strategies to Uncover Value in Procure-to-Pay through E-Payments for more. The next step? Dynamic discounting.

A Buyer/Seller Win-Win

Instead of offering static discount terms, suppliers can work in concert with their customers to arrive at mutually beneficial invoice discounts based on variable rates—on an invoice-to-invoice basis. In essence, it’s like a sliding scale: the earlier the payment, the greater the discount. This method is made possible through dynamic discounting. Here are the high points of how it works:

  • Process is typically managed through specialized software
  • Invoices and payments are accessed by buyers and sellers through a web-based platform providing real-time financial visibility
  • Suppliers designate which invoices are eligible for discounts and for what type of discount
  • Buyers or sellers can initiate early-pay discounts

The Dynamic Discounting for Dummies Infographic from Taulia breaks it down simply while providing more detail. Having flexible trade terms built into an automatic, electronic model can free up the manual processes that are in place today while meeting the cash management needs of both buyers and sellers. Buyers can assess their own balance sheet and cash on-hand at any given time to increase the number and size of early payment discounts, and suppliers get quicker access to cash at a lower cost of capital than alternative options.

In B2B Payments Get Dynamic on PYMNTS.com, Scot Sasser, Senior Director of Commercial Services at TSYS, says “we need the flexibility to adjust for dynamic trade terms that are really transactional and relationship-driven” and that give both buyer and supplier flexibility to define rates within a program. The model represents the future of B2B payments because it provides value to both sides while leveraging the up-and-coming technologies in the space, strengthening key links along the supply chain.

Growth Forward: Virtual Reality?

E-payment solutions are central to the success of dynamic discounting because their use results in faster payments and lower costs. The PayStream Advisors and C2FO report contends that virtual card accounts are among the most effective payment methods for enhancing working capital programs. And they work perfectly with dynamic discounting arrangements because when using virtual card numbers (VCNs), a buyer can potentially “triple-dip”: gain early payment discounts, earn card volume rebates, and take advantage of the grace period between purchase and monthly statement dates.

What really sets dynamic discounting apart is that, for the first time, it gives suppliers more control in negotiating terms, which is important in driving their adoption of new technologies that customers might be eager to introduce. Take a look at Supplier Relationships Believed Central to B2B Customer Engagement and Promoting Virtual Cards Among Your Suppliers for more insights into suppliers’ role in marketplace innovation. And as more suppliers embrace ePayments, it will become easier for the dynamic discounting “ecosystem” to thrive and start making large-scale, industry-wide impact.

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