Leakage, lack of transparency and a lack of access to credit are all supply chain killers for FMCG brands and merchants in emerging markets. Most of these challenges can be remedied by removing cash from the process and implementing cutting edge technology such as blockchain can solve common pain points. We will be running a series on why removing cash from supply chain ecosystems will benefit everyone from FMCG brands to the on the street merchant. Today we will be tackling the role of suppliers in the promotion of cashless supply chains.
Suppliers have both the financial incentives and operational capabilities to encourage retailers to pay them electronically.
Of the payments between retailers and suppliers, the first leg B2B supply chain payments are substantial, at over $13 trillion. More specifically in most emerging markets in Asia, Latin America, the Middle East and Africa, less than one-third of the value are transacted electronically, representing an enormous, untapped opportunity. Several factors make the shift from cash to electronic payments more plausible for B2B transactions:
- Suppliers often have corporate bank accounts to manage their business finances; they tend to be more sophisticated entities and to conduct more payment transactions and manage more payment volume than small merchants. Thus, merchants can more easily transfer payments into an existing account.
- Merchants tend to pay their suppliers frequently and in a consistent way, usually every week or two, and more often for products that turn over quickly, such as beverages. This, in turn, makes it easier for merchants to become accustomed to and comfortable with conducting transactions electronically.
- Unlike P2B transactions, where the business may not necessarily be “hurt” by being paid in cash, suppliers almost always manage substantially large volumes of cash. Doing so, however, is a pain point: the cost of handling cash, paying for insurance and suffering an occasional robbery or theft amounts to almost 1.7% of total volumes, according to one payment network interviewed that works with a large regional beverage distributor. Moreover, multinational fast-moving consumer goods (FMCG) companies believe that the morale of their delivery-team employees would improve because they would feel more secure driving without cash. Suppliers often have bank accounts which, from a technical perspective, make it easier for merchants to “push” payments into an existing account. In developing countries, an obstacle to merchant-supplier payments is that even if suppliers have bank or electronic accounts, few retailers have funds available to pay suppliers.
Consumers rarely pay retailers electronically, and retailers seldom deposit cash payments from consumers in a bank account on a frequent basis. Thus, merchants just prefer to pay suppliers in cash. Suppliers can help limit the frequency of making such bank deposits by offering credit in the form of deferred payments. Another obstacle is that very few suppliers have enough leverage to persuade individual retailers to pay electronically. Even the largest supplier may represent only 30% of the cost of goods sold by a typical small retailer, and most suppliers represent a small fraction of that. However, a stronger case for a business owner to adopt electronic payments would be if several suppliers both used such a payment solution and represented the majority of a retailer’s costs.
Paying suppliers with money received electronically from consumers can help build positive network effects.
Retailers prefer to receive payments from customers and pay suppliers and employees from the same account because it is convenient. For example, if consumers are content to pay retailers electronically, but retailers, in turn, cannot pay suppliers in a similar way (or if the suppliers demand cash instead), the retailers are more likely to insist that consumers pay them in cash. But the opposite is also true: suppliers who accept electronic payments are more likely to have retailers who welcome such payments from consumers, creating a cycle that increases the use of payments and the underlying transaction account (deposit transaction account or e-money). Stayed for our next blog which will be on one of the most significant opportunities for supply chains optimisation ever – blockchain.
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