Fintechs and banks are increasingly collaborating to develop and launch solutions for corporates that leverage each other’s strengths.
Fintechs may have looked to eat bankers’ lunches a few years ago – some are certainly still looking to do so – but collaboration and partnership between the two looks to be more favoured now, with the payments and working capital space generally proving to be fertile territory for them to engage for mutual benefit.
Gulru Atak, Global Head of Innovation, Treasury and Trade Solutions (TTS), Citi, sums up the prevailing environment between fintechs and banks: “Collaboration between fintechs and banks is very important, particularly when looking to new methodologies for product design and analysis. There are great values and abilities fintechs bring to the table, but banks too have an awful lot to offer. Citi for instance has been in some markets for 200 years, we have client relationships going back over 100 years. And we have the scale and expertise to deal with global regulation and licensing.”
With responsibility for innovation across Citi’s TTS business, which shifts trillions of dollars around globally for corporate and institutional clients, Atak says her innovation team works very closely with Citi Ventures, the global investment arm of Citi, to identify fintech partners through multiple channels. “Once we identify partners, Citi Ventures will assess the fintech. They always do their own due diligence ahead of any decision on investment or partnership. Fintechs that become part of its portfolio will be introduced to all constituencies at Citi to best help them add value across the group.
“Our approach is always to solve pain points for clients whether they be corporate or public. My role is to talk to both product and sales teams so we are fully informed, sharing information on common pain points for organisations and then working on a solution. On that basis we can begin searching for potential fintech partners.”
Citi considers hundreds of fintechs a year. Those that are short-listed will be interviewed by phone or visited depending on where they are based. It also arranges annual fintech demo days, where a select group of fintechs will present their propositions to a panel of judges. “After a very rigid assessment of their proposition we may decide to work with a few of them to develop a proof of concept solution which then may progress to pilot stage and thereafter the fintech could become a strategic partner or maybe a vendor.”
Looking ahead, Atak sees collaborative efforts expanding dramatically. She points out that more and more companies across multiple industries are now coming together to develop solutions that address consumer demands and cites the car sharing industry as an example: “It’s the beginning of a cross industrial ecosystem because to develop car sharing the industry’s players have to talk to government, payments providers for novel payments solutions and software developers.”
Atak adds: “If we can get to a situation where fintechs and banks are more involved in these new cross-industry collaborations, you can imagine very rich industrial ecosystems developing in the future.”
A major current focus for Citi’s TTS innovation team is e-commerce and real-time payments – faster payment rails generally – in multiple countries. “These are areas of very rapid development and as a result the treasurer’s role is becoming much more complicated. The big question for treasurers now is how to evolve themselves to manage real-time funding and real-time liquidity management – we are definitely looking at that area.”
Win-win market
Citi’s strong focus on payments and liquidity management is long standing and is reflected in Citi Ventures’ 2016 strategic investment in C2FO, an online market for working capital. The fintech is a standalone company independent of Citi but is also the technology provider behind Citi Early Payment Programme, which allows suppliers to request accelerated payment of an approved invoice. In practice, suppliers determine which invoices they want to accelerate and what their early payment offer (payment date and associated discount) will be. For accepted offers, the C2FO platform initiates early payment and the buyer receives the discount from the supplier. In turn, the supplier receives early payment to improve their cash flow while also reducing their financing costs.
Sandy Kemper, Founder, Chairman and CEO of C2FO – which bills itself as “the largest working capital market in the world” – is clear about the merits of his firm’s proposition: “A big lesson learned from the global financial crises was how critical free cash flow can be for corporates, their customers and their suppliers. As businesses seek to unlock cash flow from day-to-day operations, savvy treasurers have discovered vendor payments as a means to generate significant benefit for their suppliers and in turn for themselves.
“Part of what we are trying to do is get back to the original mission of banks and create benefits for our customers. By looking at the quality of their accounts receivable, could I find better advancements, could I find better interest rates? But the only way to really validate AR is to match it to the AP.
“The fundamental basis of our solution is we aim to match all the world’s accounts payable with all of the world’s accounts receivable. We’ve really just begun but we do have over 1.2 trillion of accounts payable matched to accounts receivable.”
It is estimated that business transactions globally total about US$260trn per year, but at any point in time, about US$43trn in receivables and payables are outstanding. “We’ve studied it and no more than US$3trn to US$4trn of finance is available to create liquidity against that US$40trn, which explains why most small and medium-sized businesses and start-ups find it very challenging to finance loans.” This represents a hidden finance cost and also risk in the supply chain. The aforesaid savvy treasurers, however, recognise that it also represents a significant opportunity.
Post crisis regulation coupled with the need to repair their balance sheets have made banks risk-averse, which is another big drag on financing for SMEs. “In the banking industry you have to look at risk underwriting of working capital and because of that we have to detail the amount of credit we make available against these assets.
“But just turn that on its head and think about not the asset, and not the account receivable, but rather the account payable. If you then engage in a marketplace where those accounts payable can be matched to the accounts receivable, you can give priority to the account payable owner to pay that payable sooner at a rate that is good for the account receivable holder. The result is a completely new way of looking at working capital. In many ways you have taken the risk out of the working capital which means you can get more working capital into the hands of companies that need it.”
The C2FO working capital platform therefore aims to meet the needs of both sides of the platform, allowing customers to set a target reward for every order, but also allowing suppliers to offer early payment discounts, an incentive for them to be paid quicker. The greatest benefit of this approach, says Kemper, is not only that it improves capital utilisation efficiency, but also reverses the original unbalanced model where the buyer decides when the payment will be issued. “A customer that has sufficient funds can receive a discount for paying in advance and receives a return on their investment, while a supplier in urgent need of funds receives the working capital they need in a timely manner. It’s a win-win situation. Having a strong, healthy supply chain is in everybody’s interest.”
Best of breed
Now boasting hundreds of thousands of customers across 171 countries and able to handle 60 currencies, Kemper is confident about the outlook for the company. As a former banker himself, he is acutely aware of what Citi brings to the partnership with C2FO and vice versa: “Banks often have very deep, loyal strong ties with their customers, not to mention very strong branding. So what the banks can offer in partnership with the fintechs is a complete solution – powerful customer relationships and innovative, best in class fintech solutions. And that is what we have with our partnership with Citi.”
In considering the outlook for the fintech sector more broadly, Kemper foresees “a little separating of the wheat and the chaff”, with banks increasingly in the position of being able to pick best of breed providers and take them to their best customers. Echoing Citi’s Atak, he says: “You’ll see more partnering between fintech and banks but quality will increasingly be key. Banks will want best of breed, want them to be tested, want them to be strong and accretive in any relationship.
“We picked Citi because they gave us an extraordinarily strong global relationship footprint. And I think they picked us because we gave them exactly what I have just described – a tested, well created and very robust solution for their customers.”
Parvais Dalal, EMEA Head Supply Chain Finance, Treasury and Trade Solutions, Citi, echoes Kemper, saying that the bank’s partnership with C2FO has been an integral part of its overall agenda: “It allows us to combine both Citi solutions and the solutions offered by our partners, to provide a complete product offering to clients addressing their varied needs.”
Dalal adds: “Our product capabilities around supply chain financing are now offered on a fully automated basis, delivering working capital efficiencies through the Citi platform and dynamic discounting via the C2FO platform. This structure offers better returns for clients’ excess liquidity, and assists with payment efficiencies to a large universe of beneficiaries in an automated and digitised way.”
Indeed, Dalal sees the C2FO solution as helping Citi to complete its overall offering in the payables space, specifically its client supply chain, to control cash flow and improve financial metrics on demand. “It allows accelerated payment of approved invoices at a rate that works for our clients, in a fully automated and unique fashion.”
Mission possible
Bottomline Technologies is another long established fintech focused on cloud-based working capital and automated payments solutions. Having been in business for 30 years, the company is, says Ed Adshead-Grant, General Manager, Payments, “in that interesting space of not being a trendy start-up fintech nor a 300-year-old legacy, bank-driven financial services technology company.”
He is clear about Bottomline’s unwavering mission: “Our purpose is to help businesses pay and get paid. Over 80% of FTSE companies and over 60% of the Fortune 500 are our customers, so we have some very rich insights into how corporate payments work and that helps us develop novel solutions for customer pain points. It’s the intelligence we gather and our speed of response in addressing customer needs that explains our longevity as a fintech.
“We’ve got multiple types of payment solutions but we’re not tied to any one financial services organisation. Payments is our core focus but our footprint extends to areas like cash management, fraud checking and compliance.”
Currently Bottomline is investing heavily in areas like open banking, PSD2 and GDPR and is registered both as an Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP), which means it is fully authorised to use open banking APIs. Such expertise, combined with it being a fully accredited SWIFT service bureau, provides Bottomline with an edge in the market, says Adshead-Grant.
As well as offering its services to firms directly via its platform, the company also works closely with banks to develop ‘white label’ solutions. This entails Bottomline, as technology provider, powering banks’ corporate payment solutions. Referral arrangements, whereby banks will refer their corporate and business customers to Bottomline to help them on payments, collections, compliance and solutions, make up another important element of the company’s relationship with banks.
“Working with banks makes up a large part of our business. We’re always looking to collaborate with banks to combine the best elements of their offerings with our own to try and help businesses pay and get paid, in line with our core mission.
Bottomline’s institutional partners include UK’s digital, mobile-only Starling Bank. Here the focus of the collaboration has been on real-time access to the UK’s Faster Payments Service (FPS). The partnership has led to the launch of a new ‘Real-Time Payments Express’ solution that will allow banks, payments service providers and corporates to access the full benefits of 24×7 real-time payment rails without the need to become an FPS scheme member themselves or wait behind the sometimes-challenging service levels of a larger sponsoring bank.
Adshead-Grant says the Starling solution is delivered as a plug and play SaaS cloud model that “offers full visibility of payment transactions and provides a portfolio of open banking and PSD2 solution sets that allow customers to improve their propositions and service their business more effectively in a digital world”.
Bottomline also works with a number of major banks, including Unity Trust Bank, a specialist in banking services for trade unions and charities, to provide a white label bank-branded BACS payment solution to their customers. The Unity Trust branded solution, called ‘Unity e-Payment’, provides full BACS credit and direct debit payment services in the cloud, enabling the smooth operation of payroll, accounts payables and account receivable functions for their customers.
Keep it simple
So how does Adshead-Grant sum up the key benefits of the Bottomline platform for corporates? “What immediately comes to mind is expertise. Yes, the technology is important, but there’s never been such a need for expertise as now because the landscape is changing so much. Consider the plethora of initiatives corporates have to contend with right now: open banking, request to pay, confirmation of payee, PSD2, new payment architecture – the list goes on and on.
“There’s a tsunami of compliance changes coming through, but the key benefit for those corporates partnering with cloud-based solution providers, is that all that compliance is ‘gone’ for the corporates – we are the ones that invest in compliance so that firms don’t have to worry about it. Our international payments module, for example, makes that task as simple as making a domestic payment. All the complexity is hidden, taken care of, the compliance is checked and it’s all done. Or there’s the account visibility module that we offer, so companies can see all their bank account information in one place, no matter where they are in the world.
“Using a combination of open banking and the SWIFT data flows, we can ensure that all of a corporate’s real-time data is at their fingertips. And again, no complexity, no compliance issues, it’s just a smart, secure solution that you plug into. These are probably the key conversations we have with our customers, where they end up saying, ‘Oh, wow. That makes life easier’.”
