Philipp Schönbucher, Chief Data Scientist and co-founder of Previse, explains what the new collaboration with Beat Syndicate 4242 means for the world of insurance and Previse’s mission to make slow invoice payments history.
Globally, there is over $30 trillion of trade between large and small companies. Much of it is paid late. Still more of it on extended, slow payment terms.
That represents a huge demand for financial support from SME suppliers to cover their cashflow while they await payment. Unfortunately, reaching these SMEs in a cost-effective manner has been almost impossible using conventional Supply Chain Finance (SCF) programmes.
With SCF, both the funder and the buyer are faced with significant hurdles which make reaching the ‘long tail’ of smaller SMEs more difficult. From the buyer’s side, SCF creates additional process in the already manually intensive invoice approval process. This means that most buyers are only able to offer SCF to their largest few buyers. For funders, on the other hand, SCF creates additional compliance hurdles to onboard each supplier.
The end result is that many small suppliers are unable to access a cost-effective early payments programme, leaving a huge addressable market completely unserved. Until now.
Working together, Previse and Beat have developed a brand-new category of artificial intelligence-enabled insurance designed to allow buyers to get their suppliers paid instantly at a very affordable rate.
By unlocking the value in invoice data, we’re creating a new multi-trillion-dollar market and, at the same time, solving one of businesses’ most persistent challenges.
The key, as with any other insurance category, is understanding risk. In this case, the risk that a buyer won’t approve and pay an invoice if a funder provides instant payment to the supplier, known as dilution risk. By its nature, this risk is a type of contingent operational risk rather than a credit risk: dilutions happen if there has been an error on the invoice, or if the goods and services delivered are not matching the specification. If we can accurately understand it, then it will be possible to underwrite the dilution risk, providing security to the funder and enabling them to fund the invoice instantly at a highly economical rate.
Normally, that dilution risk would be very difficult to quantify. It simply hasn’t been possible for insurers to access the relevant data to understand – pre-approval – the likelihood that a particular invoice will be approved and paid in full. There is too much variability given the wide range of commercial relationships that companies engage in.
This is where Previse steps in. The artificial intelligence models Previse has developed are trained on billions of dollars of historical invoice data. These algorithms can take into account a huge number of relevant variables – everything from the type of products being invoiced for, to the amounts and even the particular trader’s history with the buyer. Combined with powerful tools to automate breaking down invoices into structured data sets, Previse’s InstantPay can provide a highly accurate measure of the dilution risk in a particular invoice.
As the underwriter, Beat is provided with granular, specific and tailored risk measures for every invoice, giving it unprecedented levels of control over its dilution risk exposure and enabling them to provide cost-efficient underwriting to the funder.
This also solves the scalability challenge for both the buyer and the funder. For the funder, transactions are greatly simplified. While it still expects to be paid by the buyer, when the dilution risk does materialise, Beat’s insurance will payout. It also reduces the risks the funder’s own capital is open to so that its principal risk becomes that the buyer will default on the payment – a risk which funders such as banks are already expert in assessing.
For the buyer, InstantPay creates no additional steps in the invoice approval process. Unlike SCF, the programme doesn’t require the buyer to commit to paying an invoice as Previse’s algorithms are making the payment decision pre-approval. This makes InstantPay far more scalable than a traditional SCF programme and enables buyers to roll it out well beyond their largest suppliers, to all suppliers, which wish to make use of InstantPay.
When it comes to unlocking the value in invoice data, we’re still very much in the early stages. What is clear, however, is that the opportunity for insurance when it comes to instant payments is huge.
Across multiple developed economies, companies are coming under sustained government-backed and public pressure to pay SME suppliers more quickly. Doing so simply by speeding up existing payment processes would be prohibitively expensive, while traditional SCF programmes face the scalability challenges we’ve already discussed. Buyers are in desperate need of tools which can enable them to meet their obligations to their supplier base without compromising their profitability. InstantPay, underwritten by dilution risk insurance, provides the cost-effective and highly scalable tool which they require. We’re excited to pioneer this brand new insurance category together and look forward to rapidly scaling our programmes to meet the global challenge of slow payments.