Axel Goedecke, Director of Product Management, begins our podcast by setting the scene for Dynamic Discounting (DD): “Some corporate buyers may be flush with liquidity, but others are cash-poor and need to borrow – some with poor ratings.”
Axel adds that companies may be too small or weak to attain financing at attractive spreads on the supplier side. So, on the one hand, there are enterprises that need cash, and on the other hand, there are companies with excess liquidity. Today there are few alternatives for placing short term cash beyond banks, at low or negative interest rates. So, the key is to bring both sides together, e.g., the corporate buyer who is long on cash and the supplier that needs funding. However, the situation can also be reversed. The corporate buyer may have a seasonal bottleneck or need short-term funding, and the supplier may be long on cash. If your liquidity planning shows either a short-term surplus or a shortfall, DD can be a valuable tool. However, the right kind of platform is needed to make sure this can all be handled seamlessly. With Dynamic Discounting, a supplier can receive funds earlier from a corporate buyer at a discount, or the buyer could pay later – extending his payment terms – by adding a premium. The size of that discount or premium depends on how early or late the payment is made relative to the trade terms and, e.g., the players’ geography.
However, Axel is quick to point out, “this 2-way liquidity play only works if a company’s processes are well managed and work in real-time. If a company knows what it will receive and what it needs to pay and exactly when, then DD is beneficial.” It is vital to have an accurate financial status through actual cash and liquidity forecasting. Axel is also very clear that the financial advantages need to significantly outweigh the process costs… or why bother? He describes the possibility of extending terms for corporate buyers while paying suppliers on time or earlier by introducing virtual cards. All types of industries are applicable for DD, because, regardless of which goods or services are being bought and sold, there are payment terms tied to a receipt or disbursement of funds”. With Dynamic Discounting on both sides, you are simply influencing and optimizing that flow.
Axel describes how all this comes together in three steps. “First, a company needs complete information on payments and collections. This is a service that TIS provides today on its Enterprise Payment Optimization (EPO) Platform. Connectivity to internal systems and banks is achieved, silos are removed, and complexity is outsourced. This, in turn, allows the client to achieve the second step, accurate cash forecasting. The third step is helping suppliers by accelerating invoices or supporting buyers by allowing them to pay after the original due date. The latter works if the supplier is flush.” It is even possible, according to Axel, that this type of set-up could support a virtual, automated, straight-through processing of liquidity based on a client’s forecasted needs. “We see this today for suppliers and are getting closer to it for corporate buyers.”
Axel Goedecke sees TIS as a premier payments’ platform with connectivity to other best-of-breed solutions, providing complete data for informed decisions and better processes. This information can also be used to reduce fraud, legal and compliance risk in a highly secure, yet flexible environment. Data can be used for analytics so that companies can better forecast patterns and events – even beyond liquidity optimization. Axel’s vision includes “total integration of payments and balance information, cash forecasting, plus Dynamic Discounting. This would allow full calibration of liquidity at the push of a button. This scenario represents a true value-added service proposition for corporate clients including full visibility and 360-degree control of liquidity – for at least 3 months out. Using tools such as DD to balance cash positions could revolutionize the finance function and give busy treasurers more opportunity to sit on the beach and sip a pina colada!”
