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.”