Trade credit technology in focus

Editor's note: This article originally appeared on the CFO Journal of the Wall Street Journal

While customer preferences for mobile access, sleek web portals, and other tech-enabled features have shaped payment systems at B2C companies, payment processing in much of the B2B side of commerce is often less refined. Manual processing, checks, and paper-based invoicing are frequently the norm, and long-term relationships with large customers and many small customers can be key, especially among middle-market B2B suppliers.  

So it may not be a surprise that, with ever-advanced versions of technologies like blockchain, robotic process automation, and generative AI filtering through many corporate functions, a steady wave of digital capabilities appears to be headed toward some of the cruder areas of accounts payable (AP) and accounts receivable (AR) processing. For finance leaders weighing the benefits of a new payments technology against the costs and risks, the task is perhaps more complex and important than ever. 

Trade credit is one such area undergoing rapid advances. The AR sub-function typically involves a business extending financing, shipping, and other terms to its customers, and as such, trade credit can be central to its overall sales, cash conversion cycle (CCC), working capital inventory management, and ultimate cash flow. The risks involved can also be high, especially in times of rapidly changing economic factors such as rising interest rates and stalled supply chains. Credit evaluations of customers can also be a challenge and, in the case of new customers for an expanding business, subject to fraud risks.  

“For some companies, it can take a serious, unexpected event, such as the pandemic or a major fraud incident, to spark change to a vulnerable trade credit program,” says Lauren Holohan, a principal at Deloitte Consulting LLP. "CFOs can use these situations as a chance to help de-risk these operations for the future.” 

More than just a defensive play, a properly updated trade credit program should support new channels of growth and align to strategic ambitions for new products and markets. “Modernizing trade credit can lower operational expenses for finance by making the function more efficient, freeing up personnel to do more than just manage customer payments. It should also improve the customer experience to help drive growth by integrating more effectively with existing sales, purchasing, and customer service processes,” adds Holohan. 

CFOs and their finance teams are critical to understanding the extent of inefficiencies in existing AR and trade credit processes. That can start with up-to-date analyses of CCCs, AR cycles, balances, and payment histories, as well as current credit risk profiles of their customer base.  

“Bringing change to a system that may have operated the same way for decades can be difficult,” says Shawn Cunningham, managing vice president and head of Capital One Trade Credit. “One of the great roles for CFOs is laying out what needs to change based on current outcomes of their AR program, mapping out a way ahead, and determining what capabilities are needed to get there,” he adds. 

There are also signs that the marketplace may be shifting away from the old ways—recent data suggests that B2B buyers are increasingly using online capabilities to research purchasing decisions, a trend that Cunningham says presents both opportunities and risks to B2B suppliers.¹ “The trend toward more digitalization on the part of buyers is an opportunity for suppliers to attract new customers they weren’t able to reach before, but to do so, clunky, manual payment processes will no longer suffice. And if new customers are not vetted properly, that can raise the risk of fraud or nonpayment.” 

Another important focus for understanding vulnerabilities can involve assessing the multiple inputs and various stakeholders that feed into an organization’s existing trade credit and payments infrastructure. “Trade credit brings together many aspects from across the organization—the shopping experience, credit risk evaluation, point-of-sale checkout, future payment intake and processing, and the very human experience of customer service,” says Bill Dworsky, a senior manager at Deloitte Consulting LLP. “It’s a complex ecosystem. Trying to improve only one area won’t deliver scalable benefits that can help grow the business.”  

Business partnering is another critical factor in addressing weak points in trade credit, since many upgrades will typically extend well beyond the CFO’s purview. Improving components such as new promotional offers and online portals for customer service generally require cross-functional support and coordination involving sales, IT, and marketing. Sales teams should add their perspectives about the customer experience in order to sell effectively, technology and operation functions are critical for designing and delivering on the customer experience, and the marketing function can help communicate to customers new services and offerings available to them.  

Ongoing customer credit evaluations is another key feature of automated programs. “An up-front credit evaluation of a potential customer shouldn’t be the end of it, since a good credit risk today may not be a good one tomorrow,” says Cunningham. “Suppliers should routinely update the credit assessments of their customers and consider adjusting the terms or credit lines offered when appropriate.” 

Although there are no shortcuts on the overall journey to modernize AR and transform trade credit, CFOs can focus on three main areas to get started:  

1. Review in depth the sales and payment histories for their major B2B customer segments. Include analyses of receivables aging and delinquency to help identify opportunities to improve cash flow. 
2. Work with frontline teammates to analyze common customer journeys when requesting and receiving trade credit as part of buying from the organization. Identify friction points that may result in lost sales, missed payments, or one-and-done purchasing. 
3. Prioritize opportunities to improve the overall end-to-end flow by modernizing AR process and trade credit offers underlying the customer journey. 

Cunningham says that B2B companies with the most advanced trade credit operations tend to rely on seamless, technology-fused automation across the lead-to-cash life cycle. “That includes the ability for customers to apply online, get approved in real time, and then make purchases immediately. Historically in the B2B space, those steps could take days to complete.”   

At a time of shifting business models across many sectors, B2B suppliers may consider upgrades to their trade credit practices and operations to be an important strategic component to their future performance.  

—by John Labate, editor, Executive Perspectives in The Wall Street Journal, Deloitte Services LP