Evolution of Payment Systems in Developed Markets

Over the past two decades, payment systems in most developed markets have transitioned from slow, multi-day processes—such as checks—to near-instant transfers between counterparties. Despite this advancement, many buyers continue to delay payments, often for maintaining cash reserves within their supply chains.

According to Hugh Thomas, Lead Analyst at Javelin Strategy & Research, governments have been tasked with addressing the issue of suppliers’ delayed payments, particularly smaller ones. In his article “Faster Funds by Fiat: A Global Comparison of Payment Timing Regulations,” Thomas explains that this delay is due to a shift in financial considerations post-global financial crisis.

Factors Contributing to Delayed Payments

The tendency for companies to hold back payments stems from the emphasis on cash flow. Financial analysts now evaluate companies based on their available cash, generating cash, and liquidity at any given time. This shift incentivizes businesses to delay payments as long as possible.

“There’s an ability to get paid by one party, then hold off on paying for your input costs and have that much cash on hand as a result of your supply chain,” said Thomas. “Large companies have tended to hoard cash more often in the past 15 years, which governments aim to address.”

Another factor driving government intervention is high inflation, such as in Brazil where real interest rates can reach 30% to 40%. In these environments, suppliers effectively lose money if payments are delayed beyond 60 days. This has prompted regulators to mandate faster payment times.

Government Interventions

Governments are implementing various methods to ensure suppliers receive timely payments. Some regimes offer fast-track arbitration systems, allowing payees to resolve disputes with specialist arbiters. In other regions, governments collaborate with local financiers to create government-approved invoice discounting markets, influencing who qualifies and the charges.

“That’s a way of speeding payment to suppliers without mandating how quickly buyers need to pay their suppliers,” said Thomas. “Setting fixed rules could be impractical given the diverse needs of different industries.”

Name and Shame Schemes

Another effective strategy is the “name and shame” approach, where governments require public disclosure of companies’ payment practices. Businesses must report how many payments are made within 30 days, 60 days, and their average payment period. Australia and the UK have successfully reduced average days payable through these schemes.

These initiatives also benefit suppliers by providing insights into a customer’s payment history. A supplier may discover that a customer pays only 20% of invoices within agreed terms with an average payment period of 90 days, allowing for more realistic negotiations and avoiding cash flow issues.

Publicizing Payment Practices

In the UK, disclosure requirements are now included in companies’ directors’ reports. This ensures visibility to shareholders and analysts, with signatories bearing reputational risk.

“The UK has made significant progress, but there’s still a mandate for greater transparency in annual reports,” said Thomas. “This is an indication that they believe the current measures aren’t sufficient.”

Uneven Progress

According to Thomas, roughly 60% of companies have improved their payment practices since the introduction of these initiatives, while about 30% have worsened. Governments recognize the importance of faster payments and are prepared to impose stricter regulations if necessary.

“Taking on this approach might be a strategic move to avoid more draconian measures,” said Thomas. “Finding the right balance is crucial.”