• supply chain finance

Treasury on trial?

by Mark Parsley

Published: 27 April 2017

The recent allegations of bullying levelled at large MNCs by Jeremy Corbyn, leader of Britain’s main opposition party, have reminded boards that treasury is not all payment protocols and SWIFT message codes. Treasury activities carry significant reputational risk and seemingly arcane decisions on tax or supply chain finance, can damage brands and alienate customers. The row also shows how important it is that treasury technicalities are understood far beyond the audit committee.

On 11 April, Corbyn accused large companies of “managing their cash by borrowing – interest free – from their suppliers.” He named and shamed large firms including E.On, Capita, BT Group, Vodafone, National Grid and Marks & Spencer; which he says contribute to withholding more than £26 billion from suppliers through late payment, driving 50,000 out of business ever year. “Some of the biggest names in business are holding cash piles that don’t actually belong to them. It’s a national scandal. And it’s stopping businesses from growing and causing thousands to go bust every year. It kills jobs and holds back economic growth.”

The figure of £26 billion is based on data from BACS Payment Schemes, and that of 50,000 businesses driven under is from a November 2016 report by the Federation for Small Businesses which includes the claim that “instances of supply chain bullying are rife across the UK’s payment culture.”

The most controversial claims, which put a number on the days past due that big firms pay, comes from figures derived from three sources: an Experian report that, according to them, aimed to give “small businesses an idea of how late some companies can be with payments” and not “the company’s overall track record on the payment of suppliers.”

The companies have quibbled with the data Corbyn used from Experian, arguing that it did not represent their actual payment terms. Most have also said that they have or will sign up to prompt payment code, a voluntary agreement aimed at ensuring big firms pay their suppliers in reasonable time. And, like all big companies, they will be publishing performance data on payment to suppliers from next year.

However, conspicuous by its absence from their response is any acknowledgment at all that yes, companies have dedicated treasury departments for which supply chain finance efficiency is a core goal. Using the supply chain as a bank, while running large cash piles and having access to ultra-cheap funding in the capital markets, is a reasonable description of the overall position of many large MNCs. Apple’s DPOs have hit 98 in the last year, Dell’s 114, HP’s 96.

Equally absent is any attempt to explain how newer supply chain financing technology, such as that developed by Orbian, Prime Revenue, C2FO, Taulia, and Ariba as well as new operations launched by traditional financial service firms such as Citi Group, HSBC, BNP Paribas, and Deutsche Bank; can extend DPOs while giving suppliers earlier payments, subject to a discount tied to the cost of capital of the buyer. Given current conditions in the funding markets, suppliers can accept discounts in the handfuls of dollars for guaranteed payments within 15 days while at the same time buyers can have extended their DSOs to 120 days. As FinTech platforms mature, aggregating an ever-increasing number of suppliers of capital, simple transaction will extract billions in value from supply chains without any of the exploitation that Corbyn perceives and without any need for the crude extension of DPOs through deliberate late payment.

Bankers and treasurers have done a poor job of rebutting the narrative set by the media. They need to do a better job of explaining how late payment data may not reflect real late payments. And suppliers need to stop complaining and push themselves and their buyers towards the solutions to the problem. This is one area in which FinTech is not simply the creation of a cherry-picking middleman. It’s extracting real value that could not be accessed before.