Can open banking solve the U.K.'s unpaid payments problem?
While the impact of the U.K.’s endemic late payments culture has captured the headlines over the past couple of years, there is arguably an even bigger problem afflicting the country’s merchant population — the threat of not being paid at all.
Bankruptcies are on the rise, with 17,454 companies failing in 2018 alone, according to the Insolvency Service. The collapse of big corporates — such as travel group Thomas Cook, which went into liquidation in September — has an enormous impact on their small and medium-sized enterprise clients that often find themselves struggling to absorb the losses from unpaid invoices.
“For smaller businesses with more limited financial resources, and therefore less financial flexibility, unpaid invoices have the potential to be catastrophic for cash flows,” said Anne Matchell, head of marketplace at Starling Bank.
However, open banking may provide a solution by making it easier for SMEs to access new payments services looking to tackle this problem. Challenger banks such as Starling are creating digital payments marketplaces which use APIs to connect SMEs with fintechs, and this month Starling added invoice insurance fintech Nimbla to its own digital marketplace.
Nimbla allows SMEs to recoup up to 90% of the value of an unpaid invoice when a client goes into administration, and the Federation of Small Businesses predicted that such solutions, combined with the flexibility of open banking, could go a long way to negating the threat posed by both late payments and unpaid bills.
FSB Policy and Advocacy Chairman Martin McTague pointed out that many of the large corporates that eventually go into administration are typically late paying their suppliers anyway, meaning that SMEs do not realize that their client is facing financial difficulties and insolvency until too late. He said that open banking solutions will make it easier for SMEs to take matters into their own hands and pursue overdue payments at an earlier stage.
“Fintech is a vital weapon in the fight against late payments,” said McTague. “If we move via open banking to an environment where small-business owners are increasingly able to see all of their finance information in one place, including invoices against cash flow, that could pave the way for huge efficiencies."
A digital platform can send reminders to clients about imminent deadlines, McTague noted. "Equally, you can send a notice the minute an invoice becomes overdue to alert a customer that you’re exercising the legal right to charge interest on unpaid sums until debts are cleared.”
While open banking can provide options to help SMEs deal with the threat of unpaid invoices, they should not rely entirely on a single solution, according to Nick Raper, head of open banking pioneer Nuapay U.K.
“What SMEs need is a suite of solutions to help manage late payments,” he said. “If an SME is relying on a product like Nimbla, then often it is too late. While these products are valuable, particularly if you don’t have a diversified portfolio of clients or are dependent on one or two unstable companies, a SME won’t receive a payment from the insurer until the customer has become insolvent or declared bankruptcy."
This could be many months after the invoice was initially due, creating a cash flow gap, Raper said.
"A suite of fintechs, for example MarketInvoice which provides invoice financing, and Liberis which provides cash flow lending, offer working capital solutions until the money comes in the door," he said. "And then businesses like Nimbla can offer an additional layer of protection.”
But while open banking offers SMEs options which they never had before, McTague says there is still a grave need for government intervention to offer greater protection to the fragile small-business economy.
“Government action on late payments is a must,” he said. “We’ve fought hard for progress, but there’s a lot more work to do to put our poor payment culture to bed for good. The chancellor should lead the charge and set out his plans for doing so when he publishes the autumn budget" on Nov. 6.