Programmatic’s Slow Payment Problem Puts A Strain On The Industry

Pity the ad tech middleman. They place an ad on behalf of the advertiser, but when it comes time to get paid…they wait. And wait. And wait.

In the meantime, they owe their own bills to creditors who want cash now.

Since the economic crisis in 2008, marketers have slowed down payments to vendors and agencies to as long as 120 days after a transaction. Ten years later, the economy has bounced back, but the trend hasn’t let up, said Jed Simon, CEO at FastPay, which offers lines of credit to publishers.

“Payment terms are as slow as they’ve ever been,” Simon said. “Net-120 is not uncommon.”

But marketers aren’t the only ones slowing down the system. The path to selling an ad is increasingly complicated. The agency places an ad via a demand-side platform (DSP) on behalf of an advertiser. After the supply-side platform (SSP) helps the publisher manage inventory, the ad hopefully appears on the website. Then it needs to be validated and measured before the advertiser pays for it.

So there are multiple places for the payment process to bog down.

Vendors accuse agencies of sitting on client money to make interest off the float. DSPs are often forced to meet SSPs’ and exchanges’ terms or risk being shut off. And as the final link in the chain, SSPs have to pay publishers well before they get paid.

“Both DSPs and SSPs are getting squeezed,” said Ari Paparo, CEO of the DSP Beeswax. “There’s a significant cash flow problem that comes to ad tech intermediaries. That’s why you have heavy working capital needs in the industry.”

As more dollars flow toward programmatic, these resource constraints are getting worse, said Michael Barrett, CEO of Rubicon Project.

“What was a problem for [publishers] historically is now becoming a problem for more people,” he said. “When buys are being confirmed at the millisecond level, it hardly seems fair that these payment terms should be standard for the industry.”

The Squeeze

Slow payments leave DSPs and SSPs without working capital, so many seek equity or debt financing to stay afloat, Paparo said.

“In ad tech, if a company is growing fast, they find they’re constantly running out of money,” he said. “Their accounts receivable grow every month as revenue grows, and they get to Q4 and can’t pay the payroll anymore. It stunts innovation and growth.”

While DSPs are pressured to pay exchanges on time or risk being shut off, SSPs have to wait the longest to receive their money and usually pay publishers before they get paid. In September, the SSP Yieldbot laid off a third of its staff and took a $15 million credit line because it was unable to pay publishers on time.

“The publisher isn’t going to wait 100 days to get paid,” Barrett said. “That’s a real tax for anyone who has to float the money.”

Independent exchanges are especially hamstrung when competing with companies like Google, whose balance sheets can withstand slow payments, Barrett said. Not that it’s too much of a problem – because big platforms like Google have more leverage, marketers pay up faster.

“If you’re an independent guy trying to provide alternatives to working with Google, it becomes a strain on your business model,” Barrett said.

As these pressures build up, vendors can look to make up losses by charging buyers and sellers hidden fees.

“Someone is going to have to absorb that cost, and it probably adds to an inflation in fees when it’s all said and done,” Barrett said. “Your expenses get baked into the expense of the transaction.”

The pressure to pay before getting paid also puts a similar strain on agencies, said Oscar Garza, head of media activation at Essence.

“All of these things cause vendors and agencies to seek revenue elsewhere,” he said. “This is why they run to take a position, make interest on the float or otherwise obfuscate how money is made.”

Blame Game

Players across the supply chain agree that everyone involved in the transaction contributes to slow payments, but they have varying explanations for why the problem has become exacerbated.

Garza said the issue starts when marketers pay their agencies more slowly than agencies have to pay their vendors.

“If I have net-25 terms with my vendor, I have to pay them before the marketer pays me,” he said. “We have to manage that difference.”

But vendors argue some agencies intentionally slow down the process even more to make interest on the billions of dollars flowing through their bank accounts. With thinning margins and increased pressure for transparency around fees, agencies can grow their margins by taking interest on the float, Paparo said. Because the DSP market is so saturated, agencies have the leverage in payment negotiations.

“They’re like banks,” he said. “They get $1 billion of interest-free money. They only keep it for ten to 15 days, but that’s enough when you have $1 billion dollars.”

But with interest rates rising and pressure from procurement intensifying, sitting on clients’ money can offer more liability than upside for an agency, FastPay’s Simon said.

“With the rise of procurement, agencies are under a microscope,” he said. “Marketers don’t want anyone sitting on their money.”

Reconciliation Headaches

Bid reconciliation between buy- and sell-side ad server logs also slows payments, said Chip Schenck, VP of programmatic and data solutions at Meredith.

“Between a DSP and an SSP, numbers don’t always match,” he said. “When numbers don’t match, billing disputes occur.”

Resolving bid discrepancies is manual work that’s become even more arduous with the rise header bidding, which increases the bid density on a single impression by making it available through multiple SSPs at the same time. When discrepancies are consistently an issue between publishers and SSPs, publishers may impose a discrepancy fee on SSPs with recurring issues to mitigate the manual reconciliation work, Schenck said.

Reconciliation is also an issue when marketers’ budgets suddenly disappear. Marketers often find out their budget has been cut after a programmatic campaign already ran, causing everyone in the supply chain to scramble on reconciliation.

“Budgets in real time are really fluid on the marketer’s side,” Schenck said.

What’s The Fix?

Vendors can relieve slow payment pressures by working directly with marketers to bypass the agency. Garza said that many Essence clients are moving toward this model anyway as they seek more transparency from their marketing partners.

Vendors can also charge agencies late fees to ensure they get paid on time, Barrett said.  But not many have leverage when competing against big platforms like Facebook and Google.

As for the reconciliation issue, advances in header bidding, adoption of first-price auctions and supply path optimization will ease manual constraints by decreasing bid density, Schenck said.

Blockchain has potential to eradicate long payment terms by only allowing transactions to occur at the same time goods are moved. But while some blockchain experiments are starting to take off in ad tech – Unilever, for example, is working on a blockchain-based programmatic payment solution with IBM – it will probably be a while before solutions become mainstream.

All parties agree that for now, there’s not much they can do about slow payment terms imposed by marketers at the top of the chain.

“If payment terms haven’t gotten faster when [the economy is] good, it’s hard to imagine them getting faster when times aren’t good,” Simon said. “My inclination is we’re going to be stuck with this for a while.”

This post was syndicated from Ad Exchanger.