Technology has radically altered many different aspects of modern business. When it comes to finance, electronic invoicing (e-invoicing) has always promised much, but time and time again has failed to deliver. That is due to antiquated systems where suppliers were forced to pay ridiculous charges, often per invoice, so it’s no surprise that take-up has been so low. By eliminating those charges, the whole e-invoicing trend is turned on its head and adoption can be widespread.
When simple tasks like invoicing move into the cloud and become electronic, it creates a host of benefits. It’s more efficient, requires less resource and ensures that companies are paid quicker. However, take it a step further and the success of e-invoicing could revolutionise business to a far greater extent and even change the way the entire banking industry operates.
Talking of a Revolution
Companies such as Square, PayPal and Dwolla believe they are revolutionising the payment industry. Thanks to them, soon shoppers will be able to pay anywhere with their mobile, finger or a number of other biometric options.
However, fundamentally, none of this really matters. At the base level it’s still the same common denominator; the same credit card companies shaving 2-3% off your transaction or your regular credit card sitting inside a Google Wallet or Square CardCase. Yet there is nothing new about that and it doesn’t really change anything. It’s another payment channel, but not a revolution.
This is not the big revolution in finance that we have been waiting for. All too often these shiny new products and services gloss over what is essentially the status quo. It is like fodder for a tech media scene that seems to struggle to find really meaty topics in the payments arena.
There is something far bigger on the horizon. It’s all driven by data and 2012 is the year this, in my opinion, will really take off. Money will be transformed and most people don’t appear to have noticed this coming.
Give us our Money
When banks lend money, in return they expect security. That generally means a data-backed prediction that they will get their money back as they are holding an asset that has value to you – generally a house or business. In time, you are expected to pay back the loan with interest. This interest is calculated in two ways: firstly, based on what the bank has calculated as the risk that their security is insufficient and, secondly, the bank’s share in terms of ‘cost of money’ or liquidity.
These systems have existed for thousands of years and whole industries have sprung up to help people who lend money to predict the risk with more accuracy. The better these predictions are, the lower the risk that the bank is taking and the lower the potential cost of money for us all. So in theory everyone should win, but clearly the reality is different
The truth is that banks don’t actually have a very good model for calculating individual risk for small companies. So these businesses, the backbone of innovation in a struggling economy and the breeding ground for tomorrow’s FTSE, suffer rejection or very expensive rates of interest.
However the world is changing. Small businesses, which traditionally sent all their invoices on paper and forced large buyers to manually process them internally now have the internet, which enables financial documents to be processed online in real-time.
Information is Power
This is a great situation for everyone involved since it’s now possible to know the real-time risk of every single transaction a company does.
This is all driven by big data. Cloud providers can now create very advanced global data collections. The algorithmic structures used drive suggestions for who to friend on Facebook but, more importantly, it is now having a very real effect on the cost of money.
Access to real-time financial data, rather than having to wait for paper invoices to be posted and processed, can change the way that rates get set for small to medium-sized business loans. A service we provide called Instant Payments allows a buyer to mark an e-invoice received from a supplier as ‘approved’. Once this step is taken, the buyer is committing to pay within the agreed timeframe. The supplier then gets the option to receive that money immediately at interest rates far lower than typical business loans. Other similar services are available online.
The money still comes with an interest rate, but the size of that rate is determined based on the buyer’s credit rating, not the supplier’s. This spells good news for small- and medium-sized suppliers, who often get hit with higher rates as they are perceived to be riskier bets.
With larger companies, many have better credit ratings. That, coupled with the fact that it can be seen when a buyer has accepted an invoice – thereby declaring that they do intend to pay the bill – means the risk for a company such as ours, and its financing partners, plummets.
Even Bigger Data
This is a great example of how electronic data can be used to improve life for businesses of all sizes. As we get more data on transactions, it changes the whole credit picture.
With e-invoicing the main value is not solely in productivity but in the databases which contain massive amounts of real-time data about economic activity that businesses would want to access and put to use beyond simply checking the status of invoices. So the future of finance is clear: better data means better predictions and therefore a lower cost of money.
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