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Greater choice as new meets old in receivables finance

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Fintech was the hot topic at a recent industry conference on trade receivables finance. With banks rumoured to be reviewing their product offerings in certain markets, will your future supply chain finance solution come from a tech company instead?

One big theme dominated the Receivables Finance International (RFIX) convention, hosted by BCR publishing in Lisbon earlier this month. That theme was the growth of fintech and, in particular, how young, agile technology companies are now challenging the banks by bringing something new to the table in an industry practically as old as trade itself.

Right from the onset the conference was awash with rumours that some banks may be about to drop certain financial supply chain products, allowing fintechs to move in. Asked by a delegate whether there is substance to the rumours, Anil Walia, Head of Financial Supply Chain in EMEA at Deutsche Bank, told the conference that the old model in which a bank provides every solution to every company in every market is indeed changing. Syndications with other banks and alliances with new entrants may be the way forward.

“It is a matter of efficiencies,” Walia explained. “There is a place for the banks and there is a place for the non-banks. Is it efficient for a large bank to deal with the smallest SME in a market where they have only one branch? Is there a market for the smaller more agile providers in that particular space? I think the answer to those questions is clear.”

Fintechs are, undeniably, already enjoying great success in delivering receivables financing solutions to the SMEs Walia speaks of. Listening to the corporate speakers in attendance, however, one sensed that the fintechs may not find the corporate market as easy to break.

Tech start-ups in the receivables financing industry typically share one big selling point. Instead of going through a lengthy and complex audit process with an institutional lender, fintechs offer SMEs the ability to finance receivables on a platform quickly and without fuss. However, convenient as that may be, some things evidently matter a great deal more to corporate customers than being able to access a service quickly and cheaply.

“We do not use any fintech companies yet,” Jörgen Holmgren, Director Corporate Finance at Volvo Group told the conference. “We have our core banks and we stick to them because being quite a big company we get a lot of support and we have good products and services. As a large corporate, there are other competencies we need as well - it's not one deal it is repetitive business to customers we have had for many years.”

That was not the only time the value of strong relationships came up. Earlier that day another panel discussion on the influx of newcomers in the factoring industry brought a heated debate on the so-called ‘commoditisation’ of the trade receivables finance product.

Many fintechs pride themselves on their ability to deliver better prices to their SME clients. But if a business chooses a solution purely on cost might it regret that decision later should it find itself in need of the sort of advice banks at least claim to really excel at? Perhaps knowledge should be made available to SMEs about the “right way to choose the right partner” one delegate in the audience even ventured.

Louise Beaumont, Head of Public Affairs & Marketing at GLI Finance, a firm which invests in alternative finance companies which focus on SME lending, told delegates that she considers this to be a very paternalistic attitude. Given that banks are barred from advising on any products other than their own, Beaumont believes a more aggregated model is fitting for the SME sector; a model in which business customers can articulate what they need by way of answering a series of questions and then looking at the options presented.

“It should be down to the SME in question to decide how valuable or not any given relationship is, and whether it really is a relationship, and what it is worth in monetary terms,” she reasoned. “I think commoditisation is inevitable. Of course, there are some parts of the industry where that high price – arguably high value – service is something the SME chooses. But if their choice is for faster, cheaper, more suitable finance for them, that is their choice.”

But an example cited in a later session illustrated the problem-solving power of traditional bank relationships that larger organisations, in particular, value so much. Sean Edwards, Head of Legal, EMEA, Sumitomo Mitsui Banking Corporation UK told a story about Phones 4U, the UK high street mobile phone retailer that collapsed into administration back in the autumn of 2014. After being in difficult territory for a long time, the company approached its bank hoping to raise finance through selling its receivables portfolio. The challenge, however, was that the contract receivables the company wished to finance carried a large degree of performance risk. Initially, at least, the transaction appeared not to be feasible.

Then one of Phones 4U’s banks – Barclays – came up with a solution which allowed the company to continue operating, albeit for a short period of time. Phones 4U drew a bill of exchange on its network customers which was then purchased by Barclays acting as the agent for a group of banks, and £150m was extended on a committed revolving basis. This was quite a significant sum as receivables transactions go.

The solution did not change the fate of Phones 4U, but the transaction was paid off without the loss of a single penny nevertheless. “It was taking a very old product, the bill of exchange, and using it today to make the un-bankable bankable,” Edwards commented. “All of these techniques that are around can be married to solve the problems and using the right techniques to arrive at a solution for the client”

And crucially, he added, this was not in his opinion a solution fintech could come up with by itself currently. Indeed, for all the talk at RFIX about the power of new technology to solve long-standing problems, here the right solution for the client was arrived at by a banking institution hundreds of years old using a product – the bill of exchange – that has also been around for hundreds of years.

In today’s regulatory environment banks may well need to become more selective about which products they provide to which customers and in which markets. Fintechs are certainly coming up with some exciting new ideas and solutions to bring receivables financing to those companies whose business banks no longer want. But as the Phones 4U example demonstrates, banks are very capable of creating their own imaginative solutions to bring receivables financing to the so-called ‘un-bankable’ too.