With credit still scarce, corporate treasurers are embracing any process that helps them maximise working capital and reduces the cost of credit. Electronic invoicing (e-invoicing) will be a key tool for achieving this. But is adoption happening fast enough – and how can it be increased? Corporates of all sizes benefit from e-invoicing in a number of ways. The most obvious are the direct cost savings for sending the invoice (paper, postage and printing) and in processing (accepting the invoice, processing and approving it) for the recipient.
Control of the information is another benefit, while a better view of the information allows a better grip on invoicing flows. The electronic format allows data to be stored, archived and retrieved more easily in case of queries from customers and tax authorities. This in turn facilitates compliance. Additionally, e-invoicing allows the streamlining of the financial supply chain, affording a better view and control of invoices. They are now more likely to be paid quickly, with fewer non-payments due to lost invoices, meaning that e-invoicing can have a major effect on working capital. Furthermore, swiftly approved invoices can affect credit lines offered by banks, which use invoice approval as a benchmark.
Achieving Full Integration
The implementation of e-invoicing is just one step on the path to a fully-integrated digital operational supply chain. The next step is to integrate the electronic invoice with other (electronic) trade documents, such as the proof of delivery, the order and even the initial offer. Some industries are further developed than others but, in general, the electronic integration is currently limited.
From a banking perspective the implementation of e-invoicing is just one step on the path to a fully-integrated financial supply chain. Step one is getting an invoice from A to B electronically, while step two is integration with the payments and cash management process, and, of course, with working capital. Step three is the integration of the e-invoice with the financing function, allowing a company to raise finance against their accounts receivable (A/R).
Regarding step three, although supply chain finance and reverse factoring have long been popular with larger corporates, this has not been the case across the board. Before e-invoicing, A/R involved a lot of paperwork, making it impractical to offer to customers other than large corporates or those experiencing financial problems. Electronic payments and e-invoicing are making it considerably easier to process the volumes involved. Banks get a better insight into a company’s finances, making it easier to evaluate the risk they are taking and move slowly towards an automated financing system or supply chain finance. By giving banks this insight into their credit and cash flow, e-invoicing allows medium-sized corporates to access these financing models as well, whereas previously the this was deemed too high a credit risk by their bank. The cost of implementing a supply chain finance solution was also a hindrance for mid-sized corporates. Nowadays, with e-invoicing based on internet technology these implementation costs are considerably lower.
This integration has other benefits. For example the supplier’s (or invoicer’s) clients can benefit from the early payment discount passed along from the bank to the invoicer. In this case the bank intermediates in the actual payment flow. The bank pays the invoicer immediately in the name of the client, who benefits from the early payment discount. The client’s payment does not go out to the bank until the due date. By splitting the early payment discount between the bank and the client, the client can benefit from financial benefits offered by the bank.
Across the board, the banking industry is still in step one of the electronically integrated financial supply chain where we need corporates and small and medium-sized enterprises (SMEs) to start to use e-invoicing. Banks and non-banks can offer e-invoicing to corporates. Banks are better positioned to also help SMEs implement e-invoicing. Both banks and non-bank service providers usually target the large corporates on the invoice recipient side, but sometimes also the sender. But it’s an enormous effort for non-bank suppliers to get the SME market on e-invoicing in order to service their larger clients. So they’re looking to banks to add the e-invoicing functionality to the online banking environment, which will allow SMEs to start sending and receiving e-invoices as well.
There are format standardisation and legal factors to consider. However, e-invoicing can be achieved with any format or any standard and there are service providers out there that can convert one file to another if they’re using different formats, this is not crucial. Of course, it helps if participants are using the same format – that is what standardisation is all about – but it’s not necessary. In payments, different formats have been used for a considerable while. We managed quite well in the past few decades. However the single euro payments area (SEPA), which aims to standardise domestic and cross-border payments in the eurozone, will improve efficiency and can be a catalyst for European growth and innovation. Integration with the operational supply chain is as important as the financial supply chain for the standardisation of e-invoicing.
From a legal perspective, the emphasis has changed. Until recently, e-invoicing has been governed by a VAT directive that groups e-invoicing with other documents requiring digital signatures. As complying with these regulations can make implementation cumbersome, reputable providers, bank or non-bank, should have been taking care of this. The directive required that integrity and authenticity of an invoice be proven based on certain specified electronic means, generally a digital signature.
However, a new directive states that paper invoices and electronic invoices are to be treated equally, meaning that the digital signature is no longer mandatory. In both cases you need to guarantee the integrity of the invoice, the authenticity of the invoice, and the legality – the fact that the invoice does actually relate to a product or service delivered. And as long as you can guarantee those, in whichever way, the invoice is legal. The directive was recently approved and has already been taken up in countries such as the Netherlands and Belgium.
As I’ve established, ensuring integrity and authenticity are still compulsory, but not necessarily by using an electronic digital signature. It can, for example, also be based on well-documented and aligned business processes. However, I believe that in practice the digital signature is still the best solution to solve this, especially because most reputable service providers already offer this service.
The Real Success Factors
In my opinion, reach is the most important success factor for achieving the widespread use of e-invoicing. A single company sending invoices electronically is of little value – but as more companies adopt e-invoicing, the more valuable the service becomes. The European Commission (EC) has estimated the combined cost savings and benefits of complete e-invoicing adoption at €243bn. ING is seeing more companies considering the process, and putting in place an implementation timeline. But the actual implementation, realisation and reach of an e-invoicing network, even where the products are available, is not yet sufficiently well-developed. It is analogous to a payments network between banks – the process needs to be addressed at both a domestic and cross-border level.
There are limited, but welcome, signs of increased co-operation between service providers. Banks and non-banks have to work together to create a market for e-invoicing across Europe or even worldwide. A number of players in the sector are starting to realise that, despite not being able to bring the whole market on to their platform, the increasing size of the market will benefit all participants. There is an awareness in the sector that the market would otherwise stay too small to be profitable.
To extend reach, SWIFT, the European Banking Association (EBA) and providers such as Equens are tackling the routing network, with some at the stage of starting pilots. Using the existing banking infrastructure is a relatively cheap and secure way to create such a routing network. The internet, a potential alternative, is currently perceived as insufficiently secure, although this needs further research.
An important aspect in creating reach is the addressing function. There are already some ways of matching to support the addressing of counter parties at different providers. However, it would help greatly if addressing would be standardised similar to the postal world. The known structure of an email address can be very helpful in this. The EC can take a leading role in this development.
Awareness and Implementation
In terms of awareness, e-invoicing is reaching a tipping point. As stated, ING is seeing more companies considering the process, and putting in place an implementation timeline. The launch of the European Union (EU) expert group on e-invoicing, chaired by Bo Harald, was a major landmark in the development of e-invoicing. The group has had a major effect on awareness. Although it was well-developed in certain regions, such as Scandinavia and Benelux, the expert group has helped to replicate this throughout Europe.
Regarding business-to-consumer (B2C) e-invoicing, reach can be achieved by integrating the receipt of electronic invoices in the online banking environment of the consumer. For this the banks within a country or region need to cooperate. In Scandinavian countries, the Benelux and Poland, the banks are working hard on such a proposition. On the sending side bank and non-bank service providers support the sender to deliver his invoices electronically via several channels to the consumer of which the online banking environment can be one. Others can be via email or via an independent portal.
Business-to-business (B2B) e-invoicing adoption needs another approach. Although e-invoicing can be limited to sending an invoice from A to B, the actual sending and receiving usually need to be interfacing with the internal processes of the different clients, of corporate clients of all sizes in the financial supply chain. This is especially true of the receiving side, where there’s usually more than one person validating the invoice before payment is initiated. This means that there is a whole approval workflow within a company to approve the invoice. Although they are usually two different services, the e-invoicing service has to be connected to that approval workflow. For this reason, e-invoicing is also often seen by both the sender and the recipient of invoices as a chance to overhaul all processes.
Implementing e-invoicing can be quick and cheap, especially for SMEs. On the corporate side, however, it can also be time-consuming. Some investment might also be required, depending on the impact on the existing processes. Service providers can support a corporate in this.
The evolution of e-invoicing can be viewed similarly to that of electronic payments in the 1980s and 1990s. Although the networked world we now live in is likely to speed that process, it is still not going to happen over the course of a year or so. In countries that have actively used e-invoicing for some time, adoption levels are limited. Market leaders such as Norway, Switzerland and Canada have taken a decade to reach 15% adoption.
Reaching a Tipping Point
To really reach a tipping point a market needs to create reach. If a market starts to implement e-invoicing, where players – banks and non-banks – in that market are co-operating, e-invoicing could potentially be up and running in a year or so. With the current increasing awareness an adoption level of 25% can be achieved within three to five years. When that critical mass is achieved, adoption rates will increase more strongly.
The potential of e-invoicing and specifically the global economic crisis have created, and continue to create, more awareness of e-invoicing. For a company with the willingness and the available funds for the (limited) initial investment, e-invoicing can have a short payback time.
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