Will negative interest rates cause suppliers to demand later payments?

An article in the New York Times (February 12, 2016) titled “Negative 0.5 % interest rates: Why people are paying to save”, asks if suppliers, in a shift from the past, prevent buyers from paying up front. The logic is that upfront payments held in banks will create supplier costs. But will customers also shift their money to inventory which incurs physical storage costs but can avoid the fees for money. How will supply chains change in response to more rampant negative interest rates across the world? Will larger inventories at negative interest rate countries become the norm? Or will cash payments increase and thus create a different set if physical flow handling issues for retailers?

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27 Responses to Will negative interest rates cause suppliers to demand later payments?

  1. Rodney Williams says:

    I do believe that if negative interest rates become the norm, then companies will conform their business practices to what they believe is the most cost effective as they adapt. However, because of relatively newness of negative interest rates, it is difficult to predict the direction suppliers will take in response. By delaying customers from paying up front, will allow suppliers to have assets in accounts receivables that they are not getting charged because it hasn’t yet been converted to cash and placed in banks for storage. I think that one probable route (preferred by central banks) is that suppliers would immediately reuse the cash in order to prevent incurring storage cost. In this case, inventories would be purchased (also on credit to prevent cash holdings on part of inventory suppliers), invested, etc. The point here is to keep the money moving and prevent it from going to banks and incurring cost. However, on the reverse side, what if suppliers choose to move their cash reserves to oversea banks that do not have negative interest rates? In this case, there will be money leaving the domestic economy and preventing GDP growth. Negative interest rates could also open the door to new industries that allow suppliers to store cash without being charged, thus depleting cash reserves in banks without immediately being pumped back into the economy. Ultimately, I believe that simply using negative interest rates alone would not produce the sought after results, without being combined with other restrictive measures that would prevent loopholes that companies would try to take advantage of.

  2. Sooin Kim says:

    Negative interest itself may trigger a certain level of consumer consumption and more cash payments. However as the negative interests would not be everywhere, there will be always some alternative ways to manage the individual capital. Also I don’t think people consume drastically as long as their future expectation is not positive despite the negative interest rates. The negative interest rate doesn’t seem to imply this. The negative cost of capital may trigger suppliers to stack more inventories but they are supposed “react” to the consumer demand accordingly as well. Probably a lead of entrepreneur or some state lead on certain consumption policy would be boosting the consumption indirectly.

  3. Patrick Lee says:

    I think the exchange rate will impact this also. Supply chains will more than likely find ways to hedge against the negative interest–find floating rates to support them. I don’t think this will be the norm, if alternatives can be found thus cash payments may be varied within this realm and with in retail establishments.

  4. Kyle Harshbarger says:

    Inventory holding cost depends on each businesses’ cost of capital. While a lower interest rate lowers the cost of capital, it is still more valuable to have the cash as sooner for investment in other things. If they only source of investing is the negative interest rate, then the timing of payment is not important. Since the cost of capital is much higher than -0.25% at any supply chain using business I can think of, they will continue to want cash as soon as possible.

    • Paul C. Barron says:

      Kyle, you said “If the only source of investing is the negative interest rate, then the timing of payment is not important.” I’m unable to see the logic, would you please explain?

  5. Emily London says:

    How will supply chains change in response to more rampant negative interest rates across the world?

    Companies will be more inclined to purchase inventory more often in order to avoid the fees of having cash in the savings account. There will be a larger focus on the pace of ordering and stocking items. Customers will be purchasing more to get rid to turn their cash into physical form instead of lose money in their accounts due to the negative interest rate.

    Will larger inventories at negative interest rate countries become the norm? Or will cash payments increase and thus create a different set if physical flow handling issues for retailers?

    I do not believe the negative interest rate will be the norm. Cash payments might increase just due to the fact it looks better for a company to not owe any money. Overall negative interest rate will create new supply chain issues and disrupt the distribution flow for the company.

  6. Paul C. Barron says:

    Rodney, great points! I don’t remember the precise context, but I do recall Prof. Lazer (or possibly Prof. DeRoon) mentioning capital management by doing exactly what you suggested: extend the time frame of accounts receivable while reducing accounts payable. Then pulling back into the macro perspective–“what is suppliers choose to move their cash reserves to overseas banks…money leaving the domestic economy”–I think this is a VERY REAL possibility. There are companies that have been doing just that over the past 8 years. When the U.S. dropped the interest rate to near-zero, companies like Apple, Microsoft, Eaton, and even Walmart moved large portions of their cash reserves into Chinese banks as China’s interest rate was much more “competitive.” Not exactly related to interest rates but corporate tax rates, American companies have already shown their willingness to relocate their company HQ to foreign locations to avoid U.S. corporate tax (e.g. Facebook and others moving to Ireland). The approach of reducing the interest rate to spur the economy is a method with decades of historical success; however, dropping the interest rates into the negative realm in a downward trending economy (a economic frontier of sorts) may have the opposite effect. With corporate cash reserves and taxable operations leaving the U.S.–and even individuals possibly doing the same respectively–could result in greater damage to the economy. So with the right accounting and finance strategy to protect a company’s cash, supply chains may not be altered AS MUCH as other areas in a business.

  7. Frank Griffin says:

    Banks have been charging customers a service charge for keeping accounts below a certain amount for years. Overall, that charge does not change behavior my opinion, as long as the change is not too significant. I feel the same will be for negative interest rates, as long as the rates do not become to negative. Also I feel suppliers will not change behavior based on slightly negative interest rates. If customers want to pay early, to guarantee payment and create cash flow, that will out way some increase in cost. The shift from inventory storage cost vs. negative rate charges will probably cancel each other and not affect change. Again, I feel slightly negative interest rates will not force much change.

  8. Brian Karabelski says:

    The intention of a negative interest rate is to incentivize consumer spending by pushing them to spend money instead of paying a fee to keep it safe in a bank. The other intention is to push banks to lend money more freely to both individuals and businesses for investment and overall economic growth. Personally, I don’t think this will change the supply chain. The cost to hold larger inventories is larger than the benefit of the negative interest rate.

  9. Colleen Mockbee says:

    I think this could be an interesting factor for negotiating terms in a supply chain expanding the options to tailor inventory/lead time etc. For example, to extend credit for having short lead times from suppliers. Perhaps it would provide enough incentive to small companies to carry a high level of inventory.

  10. Jimmy J. Guerrero says:

    I am not sold on the policy of using negative interest rates as an effective mean to stimulate economic growth and raise inflation. While I understand that one of the intentions is to discourage investors from buying the local currency, which tends to push its value up, it may also unintentionally lead to people relocating their saving account balances from the bank to somewhere underneath their mattresses or safe boxes. The latter does not benefit the economy.
    Supply chains, as well as demand, may not be necessarily impacted by negative rates since they are a great incentive to borrow money, which will most likely get converted into inventory.

  11. Peter says:

    I agree with Brian K’s assessment on what the purpose of the negative rate is and that it probably won’t change supply chains very much. The negative interest rates will be in near zero if not negative growth. The safety of risk free assets with known loss is much preferred over large inventories with the potential for obsolescence, shrinkage and other dangers in addition to regular inventory costs…

  12. Matt Geddie says:

    As of now I do not believe the small negative rate will have much effect, however if the rate begins to creep to 2-4%, suppliers will need to refine their manufacturing and strive to run leaner.

    With a negative interest rate it makes more sense to put your cash into inventory than in the bank, meaning suppliers will end up with larger purchase orders and in turn more cash. Suppliers will need to adopt practices of attempting to bring in cash that is turned right back around to do an additional run. Growing in a stable manner, whilst ensuring they are spending their cash and not just letting it sit and deflate.

    I think it could be great for growth in some market, but the management of cash assets will have to be uniquely managed in a way most CFO’s have not seen.

  13. Pratik Chandhoke says:

    I agree with Frank Griffin’s assessment. A negative 0.5% will not be a huge impact to the supply chain behavior. The assumption is that this would lead to increased inventories to store as asset and avoid saving cash in a bank. Like Frank mentioned banks already charge a fee to have your accounts above certain threshold. This negative interest rate is low enough to be considered as a fee. It would be more expensive to move money out of the bank (for example increased holding costs due to additional inventory) then the “fee” incurred due to -0.5% interest rate. Supply chain however should benefit from low interest rates as exports from international manufacturers will be cheaper due to drop in currency value.

  14. I do not see much change because of negative 0.5%. Though some people may look for alternative places to invest their money where there is lesser risk of losing money, I think most people would not mind paying paying for it.

    Some customers may shift their money to inventory only in the case it is a significant number for them. But supply chains may not change otherwise even for a more rampant negative interest rates as this phenomenon would soon reverse to positive rates. Larger inventories at negative interest rate countries will not become a norm even when all the countries are developed economies with no much space to expand and when some more economies are contracting. Cash payments may find space in some sectors sporadically but it would create interest only to a few retailers.

  15. Mike Flatt says:

    I agree with Frank and Pratik as it regards to supply chain investments. I don’t see the small amount of negative interest rates having a tremendous effect or affecting much long term behavior. Time will tell in how long the condition persists though. I think something more crucial is how safe a bet the inventory is. If the inventory has a chance of obsolesce the risk increases and thus the holding cost will increase. How does this increase in holding cost compare to the negative interest rates? The reason the negative interest rates are present is due to the weakness of the overall global market. Personally I would take a slight penalty for holding cash vs. the risk of inventory.

  16. Oswin Joseph says:

    Its highly unlikely that the US will head towards negative interest rates unless we go back into 2008 – 2009 type recession. Corporations will move cash from countries yielding negative rates to countries that are not. It is hard to tell what will happen to money market funds in the US for example if we did have prolonged negative rates greater than 1%. Suppliers would typically re-invest the cash into inventory or use it for other long term fixed investments instead of holding at the bank and getting charged the negative rates. Its an interesting dynamic that know one has really seen in Finance and goes against many of the tenets of modern day finance. Only time will tell what will ultimately happen but Central banks need to come up with creative ways to prevent countries plunging into deflation…though they may be out of bullets and fiscal policies may need to looked at (tax rate levers) to stimulate global growth.

  17. Dan Skinner says:

    I agree with Brian Karabelski. If the interest rates don’t go significantly negative, the holding cost of inventory will still be larger that the benefit of a negative interest rate.
    I think an externality of this interest rate will be that more companies that do decide to convert their cash to inventory will risk bankruptcy. This will encourage behaviors that will cause companies to put themselves in positions that aren’t as liquid, and more prone to financial distress.

  18. Courtney Metzger says:

    Thanks for the perspective Oswin. I had not yet thought through the global implications for capital.

    In regards to inventory, my team manages approx $4M in issued material a year. All of which sits in inventory for some period of time. While we are currently entertaining a proposal for VOI (which would have less value in this situation) our holding cost is higher than .5%. There would be no benefit to a corporation to move their cash into inventory at this rate.

    Perhaps with a negative IR we would see faster turns on accounts payable, but that would likely be offset by faster turns on accounts receivable. If the rate was pushing 3-5% then a logical outcome for my company, would be to investment in PPE, which is the FED’s objective.

  19. M. Moore says:

    Customers will look to pay in advance for goods or services like a prepaid account or prepaid blanket P.O.. The supply chain itself will be impacted by those who desire to maximize their current value of cash in stockpiling inventories. This will stimulate stockpiling commodities and raw materials, component level inventories and assemblies will be a bit more risky due to obsolescence.
    For the supplier they will then shift from an accounts receivable focused company to creating a mini banking system to manage and allocate pre-paid funds from customers and fielding the burden of negative interest rates.
    The negative interest rates will need to be balanced with carrying cost. There may be a teetering point where stocking may be more expensive than avoiding negative interest.
    I foresee that inventories of far upstream materials like metals, chemicals, etc that have a variety of uses and infinite shelf life would increase as an investment for liquid capital.
    For assemblies and finished goods, I would foresee payments in advance from customers and suppliers creating an internal banking system to hold these funds and apply for when delivery request are placed. In addition, holding costs will throttle the levels of inventories companies will be willing to hold
    I would see an increase in “cash” Payments, but I would also see an increase in retailers providing a pre-paid service. The prepays would be a vehicle to lock your funds and commit to future purchases. Industries in Pre-Paid Credit Cards, I would foresee exploding as a vehicle to harbor your money. To be competitive the prepay company would have the card start-up or reload fees be less than the negative interest rate

  20. LaBaron Hartfield says:

    As many have stated, I do not believe negative rates will become the norm. This is likely a short term phenomenon as the benefits of the negative interest rates are likely to be overshadowed by the costs injected into the supply chain to build and maintain storage space. For a firm to place all its cash in inventories comes at a high opportunity cost that limits the options of firms to invest in other areas of the business. For negative interest rates to persist, one would have to assume that there is an endless supply of credit to finance purchases and that payments can be postponed indefinitely. Given this scenario does not and will not exist, cash will be needed to finance some level transactions always. Long term negative interest rates should result in a contracted credit supply. Less available credit will drive the demand for cash to settle payments. The free market equilibrium would correct by forcing rates to zero and above.

  21. Kriti Chandhoke says:

    I agree with Pratik and Mike that negative interest rates are not a norm. Supply chain will not change their behavior and buy excessive inventory in the short term. Increased inventory leads to higher holding costs which could be higher than the expense occurred due to -0.5% interest rate. If the -0.5% interest rate do persist in the long run, there will be less supply of credit as people will pull money out of banks. On the other hand, the exported goods will become cheaper for international manufacturers as US dollar weakens.

  22. Courtney Metzger says:

    Thanks for the perspective Oswin Joseph. I had not thought through the global implications of a move like this.

    In regards to inventory, my team manages approx $4M in issued material a year. All of which sits in inventory for some period of time. While we are currently entertaining a proposal of VOI (which would complicate this question more) our holding cost is higher than .5%. There would be no benefit to a corporation to move their cash into inventory at this rate.

    Perhaps with a negative IR we would see faster turns on accounts payable, but that would likely be offset by faster turns on accounts receivable. If the rate was pushing 3-5% then a logical outcome for my company, would be to investment in PPE. Which is what the FED would be trying to stimulate.

  23. C. Thomas says:

    How will supply chains change in response to more rampant negative interest rates across the world?
    Companies will begin pulling their funds out of the central bank, because it doesn’t make sense for them to pay money to hold cash. Corporations will begin doing exactly what the FED wants them to do with this move and use their reserves to buy PPE to promote economic expansion, promote job development, reduce unemployment, and increase wages. In addition, this move will help to devalue the dollar relative to other currencies which will help increase the demand for U.S. exports. With this increase in demand, supply chains will need to invest more heavily in inventory or make improvements to their supply chain to reduce lead time by incorporating techniques to manufacture on an as-needed basis.

  24. Meera Gursahaney says:

    Since negative interest is a new concept it is difficult to predict the impacts but it seems to me that there would not be a major shift in the consumer mindset to keep more of their money in tangibles. While I believe companies would adapt their supply chain to maximize cost savings, it seems that avoiding negative interest by increasing inventory would not be viable as holding costs associated with an increase in inventory would negate the interest expense. It seems more likely that companies would adapt by passing the cost onto consumers as well as increase positive liquid investments. That being said, with the vast majority of the world at positive interest rates, and the globalization of the market place, for major companies there will be no change in overall business operations.

  25. Marcellus Robinson says:

    I was unaware of negative interest rates until I read this article and we discussed it in class. From a Finance perspective, I have to echo Oswin’s comments. My own company, a brokerage firm, expressed that the Market is aware of the “talk” around negative interest rates, but there doesn’t seem to be any serious consideration to move in that direction.

  26. Yana Simanovsky says:

    I agree with the chorus of comments made thus far. I view the concept of negative interest rates much like the introduction of new technology. It will draw attention because it is new, but will find itself slow toward adoption if at all. In the United States. from what I have read, there doesn’t seem to be a wide appetite yet in embracing this new concept. But I suppose, like all things, time will tell but my personal opinion is that for the foreseeable future this will prove to be a non-event.

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