Australia’s small businesses watchdog says the government may have “little choice but to regulate” the use of supply chain finance (SCF), after accusing firms of pressuring suppliers to take up early payment offerings and using artificial intelligence to extract the largest possible returns.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) made the claims in a position paper published last week, which follows a review into the impact of SCF launched in October last year.
The paper says financing programmes can help suppliers bridge the gap before they are paid – in practice allowing them early payment at a discount – while maximising working capital held by the buyer.
However, the ombudsman says it has uncovered evidence of “clearly unacceptable” conduct by both corporates and SCF providers.
Some buyers are accused of artificially extending the amount of time before a supplier will be paid – sometimes by up to 90 days – before then offering earlier payment at a lower rate, in effect pressuring suppliers into signing up to SCF that may not be to their benefit.
The paper also takes aim at the use of data analytics to shape financing offerings.
“The data collected by SCF providers is extremely detailed and provides insight into individual small business profit margins and cash flow fluctuations,” it says.
“We are aware that some SCF providers are using artificial intelligence (AI) and algorithms to target small businesses by dynamically setting SCF fees to extract the greatest possible return from small businesses, including those that are already in distress.”
Though a final report is not due until March, the additional scrutiny has already prompted supplier financing pioneer Greensill to scale back its Australian offerings.
The firm announced last week it was “very pleased to announce the endorsement” of ombudsman Kate Carnell having agreed to stop financing businesses that offer payment terms beyond 30 days.
On the corporate side, two high-profile Australian businesses have already agreed to restrict their SCF programmes.
Metals and mining firm Rio Tinto and telecoms giant Telstra are each restricting payment terms to 20 days, for invoices of up to A$10mn and A$2mn respectively. A spokesperson for Rio Tinto tells GTR it has also chosen to scrap its dynamic discounting scheme, where the amount a supplier is paid changes depending on how early the payment is made.
The ombudsman does not say which firms it believes have been misusing AI, and a spokesperson tells GTR it is “still looking at just how widespread the issue is”.
However, it recommends that the issue is taken up by regulators on competition grounds, given that it risks disadvantaging smaller businesses that already operate from a weakened position.
“This is being facilitated by external online platforms to strip value from other people’s businesses and concentrate information in the hands of those with the greatest bargaining power,” the paper says.
Industry sources insist nuance is necessary. Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA), says he is “aware that some SCF providers are using AI to gauge and value risk on behalf of buyers”.
However, he says that in other cases data can enable buyers to judge the level at which early discounting is most beneficial to all parties.
“There is a biting point at which SCF works for everyone and AI helps identify that point,” he tells GTR. “Otherwise, the offer of early discount simply falls on deaf ears.”
Taulia, a San Francisco-headquartered SCF provider consulted by the ombudsman as part of its review, argues the use of technology is “much misunderstood”. The company does use AI, but says it has no access to the kind of information outlined in the paper.
“We do not do this,” Bob Glotfelty, the company’s vice-president of growth, tells GTR. “No data sources are used by Taulia that pull in financials for small businesses.”
Instead, Glotfelty says Taulia uses AI to optimise adoption, for example by predicting how quickly an invoice will be approved.
“If a 30-day invoice isn’t approved until day 28, let’s say, there’s essentially no opportunity for early payment,” he says. “We use AI to identify situations like this so we know not to contact the supplier.”
In addition to Greensill and Taulia, the ombudsman consulted with three other providers of supply chain finance. A spokesperson for Fifo Capital says the company does not use artificial intelligence in any part of its business, while representatives from Apricity Finance and C2FO did not respond when contacted by GTR.
Supply chain “bullying”
The paper also argues some businesses are using supply chain finance as a means of strengthening their own cash flows, delaying payments to suppliers they know are financially weaker and so more likely to agree to early, lower repayment.
The ASBFEO says it has detected a tendency for buyers to extend payment terms from 30 days to 45, 60 or “in the most alarming circumstances” 90 days from the end of the invoicing month.
“We consider it unacceptable for corporate entities to extend payment times to their suppliers and then offer a product to suppliers to enable them to get paid on their original terms (with a discount),” it says.
Greensill said in January it considers such firms to be “abusers of its core business”, and that historically it has been up to the buyer to decide how payment to suppliers is handled.
“Historically we haven’t told our customers how they have to operate their business – and that may change,” says founder and chief executive Lex Greensill.
Speaking to the Australian Financial Review (AFR) at January’s World Economic Forum in Davos, Switzerland, he said: “We’re in the process of formulating a position on eligibility for our products moving forward that is consistent with the view that Kate [Carnell] and indeed the AFR has espoused.”
Ombudsman Carnell suggests small businesses should receive payment in 30 days or fewer as a minimum standard, monitored and enforceable under the Commonwealth Government’s Payment Times Reporting Framework.
The paper also proposes that the definition of “small business” should be reworked to cover either any company outside Australia’s top 100, or any firm with fewer than 100 employees. Today, it says most define a small business as one with fewer than 20 employees.
In addition, the ombudsman responds to widespread concerns that providers can misuse supply chain finance arrangements to “artificially manipulate accounts”, citing the 2018 collapse of UK construction giant Carillion and subsequent warnings from Moody’s about accounting practices.
Echoing efforts in the US to improve transparency around disclosure, the paper calls for further review from the Australian Treasury and securities regulator as to whether SCF should be “a regulated financial product with coverage of rate setting”.
The ASBFEO is consulting on its policy paper until February 28.