The battle between the banks and the fintech disrupters for a bigger share of the global supply chain finance business is heating up. Both have invested heavily in their platforms over recent years. But who has got the solutions treasurers are really coveting?
Not too long ago treasurers interested in supply chain finance (SCF) all tended to follow the same well-trodden route. Sometimes treasurers would look to finance suppliers using payables; sometimes treasurers would look to raise finance themselves using receivables – but almost all the time they would look to one of their banks to deliver the service.
Then new providers came along, the self-proclaimed disrupters of the fintech world. A multitude of these nimble, bank-independent platforms began to spring up around the globe post-financial crisis, each looking to grab their share of a SCF market now said to be worth $275bn and expanding by 30% annually. The new platforms that brought multiple banks together for large programmes introduced new delivery methods to the market – web applications and Software-as-a-Service (SaaS) – and they introduced SCF to a whole new type of client. As a result, corporate treasurers today are just as likely to access SCF by clicking a button on their cloud-based TMS or e-invoicing application as they are by picking up a telephone handset and calling a bank.
In this feature, we take a look at the conditions, like recent regulation and technological trends, and especially those that allowed new entrants to crack the SCF market, before explaining why the banks, despite the advantages their new rivals currently enjoy, are not going to give up ground in SCF without a fight.
A core bank product?
In the battle for the SCF market, the banks sound confident that they will prevail in the long run. Although they are conscious of the challenge posed to traditional business models by fintech, most corporate buyers, they say, still see their institutions as best placed to deliver SCF programmes. “It is a big threat, because these smaller players have the ability to do anything and everything,” Parvaiz Dalal, Citi’s EMEA Supply Chain Finance Head tells Treasury Today. “But it encourages us to keep up the pace, and we are constantly re-engineering our business to ensure we are offering a very efficient processes.”
A large global bank may not be able to match the ‘lightness’ of smaller technology companies, but there are other persuasive arguments, they say, for sticking with them. Top of the list, of course, is the relationship. At a time when banks are looking to increase their share of wallet with key clients and, at the same time, end relationships that are no longer profitable, is it really wise to be giving away a service that could be delivered by a relationship bank to another, less critically important counterparty? “Some treasurers do see it as like buying a system, and will select a software solution,” says Jeremy Shaw, Head of Trade Finance, EMEA at J.P. Morgan. “But most corporates view it more as a core banking product which they allocate to their key relationship banks, because they know they can rely on them and have access to potentially deeper pockets in terms of investment.”
The long tail
If there were some clients the tech firms knew they would never prise away from the banks that did not matter, however, because there were many more organisations in the market – the non-top tier corporates the banks ignored – that also needed affordable and accessible solutions.
In 2012, Eric Riddle, EVP & Global Head of SCF at cloud-TMS provider Kyriba, was working for PrimeRevenue, at that time the largest third-party provider of SCF. Back then it was the banks, he explains, that seemed to hold all the cards. “At that time I felt the pressure from large global banks and that relationship capital they held was very significant in terms of their ability to influence decisions and win Reverse Factoring business,” Riddle says. “However, there was never any question that reverse factoring through a bank had limited application beyond a certain point.”
What Riddle means is that banks are encumbered relative to third-party competitors, like Kyriba, because of the various Know-Your-Customer (KYC) requirements such institutions now have to manage through as they onboard suppliers to the programme. Consequently, banks prefer to focus on a small subset of the market, the largest volume suppliers, from which the end justifies the means. These suppliers represent the largest materiality of transaction volume to justify benefit to both the buyer and the supplier as measured against the friction to onboard imposed by KYC. These suppliers are considered to be the low hanging fruit and are referred to as the ‘short tail’ of the SCF market; it is those large stock listed international companies that sit at the summit of the supply chain.
Non-banks have, sensibly, therefore, looked elsewhere for opportunities to intermediate. “Truly, the most dire need for capital, and the most significant opportunity for cash visibility and managing cost and risk in the supply chain is with the long tail,” says Riddle. Leveraging Kyriba’s SaaS-based TMS solution when combined with a non-bank lender, a broader set of companies can now access services such as dynamic discounting, reverse factoring and receivables finance in order to optimise working capital and mitigate risks in the supply chain. It is by virtue of not being a bank that gives Kyriba an advantage in delivering solutions to these types of companies. “In relation to the emergence of Kyriba and other technology providers, we are more willing to embrace innovative solutions and as a result can really have an impact on that long tail. In summary, there is a significant move to technology providers that are not banks and therefore not burdened by KYC.”
Onboarding tips from procurement
Whether it is a bank or a technology provider, picking the right solution is not the end of the job for the corporate treasurer. Indeed, very often, it is what comes next that is the most challenging part of the process.
For SCF to be considered an unmitigated success, the buyer must be able to bring on board all of the trading partners it has designated. But even with all the benefits SCF has to offer suppliers, this is not always as straightforward. As hard experience has taught treasurers time and again, when it comes to SCF, there are suppliers out there who can take some convincing.
What steps can be taken to ensure a better chance of success? Since the procurement department is, in most organisations, the commercial link to the supplier base, there are perhaps few better people to go to for insight on that question.
“I think it comes down to how a project is handled,” says David Loseby, Group Procurement Director, at the multinational transport company Arriva. “Even simple things like first piloting a solution before going ahead with a full-blown roll out are now and again overlooked. A more structured and considered approach will have more phases to it and the finance may not come through as quickly, but what it does give you in the long run is something more sustainable.”
When it comes to the specific issue of handling reticent suppliers, Loseby’s advice is simple: put yourselves in their shoes. It is all about communication. First, the treasurer must not keep in the dark counterparties who will be impacted by a project. Secondly, when treasurers do inform suppliers about an SCF scheme they wish to enrol them on, they must make an effort to communicate to them in a language they understand. Financial jargon, then, should be avoided at all cost. “The rules of all these things are actually very straightforward: keep it simple and keep the communication going keep it transparent and there is a good chance of success,” he says.
Finally, Loseby says, treasurers should, at the very outset, consider whether the solution they are looking for fits with the project’s objectives. Noting that there is a lot more to choose from today in the SCF market, he says that the choice between going through a bank proprietary solution or an independent third party, is made a lot simpler when one knows what one is trying to accomplish. “There have been a lot of developments in the technology space and, as a consequence, that starts to open up new opportunities. If there is an objective to ensure incorporation of SMEs, then that might start to drive a different approach in terms of looking at solutions from niche providers more geared up towards solutions in that market. So that is the overarching imperative for me – understand what is driving the requirement and then work from there.”
Escaping that regulatory burden means these companies must be content with being facilitators. Indeed, most do not claim to sell a total solution; they offer platforms, but there are no balance sheet or onboarding capabilities. Another example of such a provider is Basware. The enterprise software company, much like Kyriba in the TMS-world, saw opportunities in the SCF solutions market to build upon its core offering, which happens to be, in this case, Purchase-to-Pay (P2P) solutions. Rather than becoming a regulated financial institution, Basware stands between enterprises looking to borrow and banks looking to lend, utilising the data residing in the network through which millions of companies are using to exchange e-invoices. The middlemen of SCF, if you like.
“Basware does not want to become a bank; we do not want to become a heavily regulated organisation,” explains Ad van der Poel, Senior Vice President, Financial Services, Basware. “So we are not the ones doing the actual financing we are merely facilitating or rather orchestrating between the network, the companies connected to that network and the data we have and the actual funders and financiers. We are actually partnering with the banks. They want to fund SCF, and we want to offer SCF to our clients.”
However, Basware bring something to the table that is invaluable when it comes to delivering SCF solutions to the so-called long tail. Unlike a bank, they already know not only the corporate buyer, but also the supplier, the goods that have been ordered, the amount that has been invoiced, and even when that invoice has been approved. Van der Poel says: “We have the data and we leverage that data by feeding it into risk and pricing assessments allowing us to tell companies, almost immediately, whether they are going to get financing and at what rate.”
All this points to the fact that the market for SCF might not be quite as clear cut as that dichotomous narrative of nimble disrupters versus dinosaur incumbents initially leads us to believe. Even when it is a TMS the customer goes to, it is the banks (together with an array of other institutional and retail investors) that are ultimately the ones providing the capital. Collaboration of this sort between technology providers and banks could be seen as being very beneficial for the corporate end-users of SCF; a means for them, perhaps, to overcome bottlenecks and potential credit inefficiencies found when using single banks.
For that reason, some banks recognise that there is value to them in participating in deals led by third-party vendors. However, significant investments have not been made by the banks in their own proprietary technologies for no reason. They are seeing growing demand for SCF, and they are convinced that their solutions are best placed to meet that demand. “We continue to see more interest from companies [considering SCF],” says J.P. Morgan’s Shaw. “There are companies who may not have had a programme in place previously in industries which, historically, were very cash rich, such as energy commodities, for instance which are now looking at supply chain finance. And there are also companies that have a programme, but now wish to look to expand it in size or geographically.”
“We have the data and we leverage that data by feeding it into risk and pricing assessments allowing us to tell companies, almost immediately, whether they are going to get financing and at what rate.”
Ad van der Poel, Senior Vice President, Financial Services, Basware
For Citi’s Parvaiz, SCF is still a growth engine with opportunities to expand their services now presenting themselves across new regions as well as new market segments. “When you look at companies in developing markets, there is still a big gap between the best performers and the worst performers,” says Citi’s Parvaiz. “The worst performers are not necessarily the small firms, but rather the larger companies that simply have not been able to achieve the efficiency that some of their peers have achieved. Traditionally, retailers used to do a lot of supplier financing but lately we’ve seen a rise in energy segment like oil and gas, power, industrial housing, airlines and shipping. We are seeing new segments that are buying into this solution and deploying it. For that reason, I see a lot of room for growth in this business. There will be no slowing down.”
Meanwhile, the likes of Kyriba, Taulia and Basware are expected to continue to focus their attention in the area where they are seeing most interest, the long tail. But while there may be many more companies in this bracket – relative to those sectors that the banks are targeting – this does not necessarily mean technology providers have the best growth prospects. As Kyriba’s Riddle readily acknowledges: “The largest relationships are often the most powerful because around 80% of the money spent is with 20% of businesses in the supply chain. The banks do very well in the top of the supply chain – that short tail as they call it.”
The entry of new players into the SCF market, and the new ideas they have brought with them, has certainly given the incumbents of the banking world something to think about. But as the comments of Dalal and Shaw emphasise, SCF remains a growth industry. Are the banks likely to now give up on proprietary solutions that they not only have made considerable investments in, but are also now drawing interest from an ever-broader portfolio of corporate clients? Not a chance.
So, however one looks at it, the battle for the SCF market is looking increasingly finely balanced. However, for all the treasurers out there shopping for new solutions, it seems that the choice will ultimately come down to what they are looking to achieve through SCF and, in particular, the parts of the supply chain they are most concerned about supporting. If there is one overriding value the new competitive landscape brings to corporate treasurers, it is the range of new opportunities it presents for them to optimise both their working capital, and that of their suppliers.