Digital dynamic discounting: no short straw for the long tail

The long tail of smaller suppliers has historically struggled to access the benefits of supply chain finance. Adeline de Metz, Editorial Board Member of TRF News and UniCredit’s Global Co-Head of Trade and Working Capital Solutions, explores how digital dynamic discounting solutions can address this deficit – with mutual benefits for both buyers and suppliers.

Corporates invested in optimising their working capital will be aware that, while supply chain finance provides invaluable support for key suppliers, its advantages rarely reach those in the so-called “long tail”. The cost and effort of onboarding the large number of smaller suppliers that typically make up this long tail has limited uptake for many years. This is an area that has seen progress in recent years, however, with advances in digital platforms for dynamic discounting opening up new opportunities.

Dynamic discounting is a buyer-funded form of supplier financing whereby the buyer simply makes an early payment to the supplier in order to earn a discount on the total invoice amount. This discount is applied on a dynamic basis, in line with the number of days the invoice is settled in advance of the original due date.

There are now a number of financial technology companies on the market, offering easy-to-use dynamic discounting platforms that make this technique open to corporates and suppliers of all sizes. In Italy, for instance, fintech FinDynamic has developed a proprietary technology that allows both buyers and suppliers to automatically view invoices through a web-based or mobile platform and select approved invoices for early payment – giving users the ability to safely optimise their financial resources. The solution can be easily integrated with the ERPs and treasury software and requires no onboarding for the supplier.

This kind of tool stands to extend the benefits of SCF techniques to the long tail of suppliers – circumventing bank on-boarding processes that often prove a barrier for SMEs. In so doing, it also reinforces the stability of the entire supply chain. What’s more, not only can buyers help smaller suppliers optimise their working capital through early invoice payments, they can also earn a return on their excess cash reserves. Indeed, the discounts earned through this technique mean this product is not just an SCF product, but a liquidity management solution too.

Of course, for comprehensive SCF coverage, dynamic discounting is best used as a complement to a wider, tailored programme. Traditional, bank-funded supplier finance remains a core technique, providing financing at attractive rates for larger suppliers without depleting the working capital of the buyer. Dynamic discounting, on the other hand, has a different impact on the buyer’s finances – running down working capital in exchange for improvements to P&L.

With this in mind, a typical programme will likely see the biggest suppliers supported through traditional bank-financed early payments, while digital dynamic discounting platforms help extend support to the long tail of suppliers. This combined approach equips corporate buyers with the tools to support suppliers of all sizes – assuming, of course, they have liquidity to invest in a dynamic discounting programme.

Web-based dynamic discounting platforms are a useful addition to the working capital tool box – enabling buyers to extend support to a wider range of suppliers while securing attractive returns on investment. Digital solutions such as this are at the heart of a wider shift towards a more collaborative ecosystem – one that spells good news both for corporates looking to optimise their working capital and for SMEs looking to access the benefits of SCF.

In time, these solutions are poised to bridge the gap between traditional, bank-financed SCF programmes and the long tail of suppliers, adding a new dimension to working capital programmes and strengthening the supply chain from end to end.