The fintech revolution is changing the banking industry. Some fintechs nibble away at legacy banks’ market share. Others collaborate with banks because the fintechs have the cutting edge technology that banks aren’t nimble enough to develop themselves while the fintechs need the banks because they have the customers: the route to market.
It’s no different in supply chain finance. Originally it was a bank-driven service enabling corporate clients to put early-payment mechanisms in place for their suppliers. But the market has evolved over the last 15-20 years to the point where today, in Europe, bank proprietary platforms account for a little less than half of supply chain finance platforms (according to the PwC/Supply Chain Finance Community SCF Barometer published in December) while fintech platform suppliers such as Taulia and PrimeRevenue have 12% of SCF programmes. (‘In-house’ platforms account for 21% – a finding interpreted as referring to own-cash dynamic discounting programmes.)
When tacked onto new technology, the emergence of new funding models seems to be making it even more likely that banks’ SCF market share will continue to come under attack: if the rise of fintechs means that corporates don’t have to use a bank’s own SCF technology, the arrival of new funders means they don’t even have to engage a bank for the finance.
So is the erosion of the banks’ role a foregone conclusion? Are the advantages that newer players can offer as cut-and-dried as they seem? And where does this leave the corporate: how should businesses decide which model is right for them?
“My view is that the banks will continue to play a role in servicing their clients, whether that’s through participation in funding of a tech provider or offering up solutions specifically to their own clients,” says John Monaghan, New York-based global head of supply chain finance at Citigroup.
In fact, as Monaghan points out, the symbiotic relationship between banks and fintechs in supply chain finance goes back at least as far as the late-1990s, when Citi itself became a founding investor in Orbian, one of the first digital SCF platforms, alongside co-investor German technology group SAP. (The company has been an independent private company since 2003.)
“The banks will always have a place”
“The models are changing but there are always opportunities for banks,” Monaghan says. As far as Citi is concerned, Monaghan points to the bank’s own technology platform, its cash management capabilities and its global reach. While a tech platform business may have the funding component sourced from capital market financiers, “we have both,” says Monaghan. “We’re a financial institution providing funding, able to do it globally, and we’re also able to offer the technology as well.”
“My view is that the banks will continue to play a role in servicing their clients, whether that’s through participation in funding of a tech provider or offering up solutions specifically to their own clients.”
John Monaghan, Citigroup
Nathan Feather, CFO of technology platform PrimeRevenue, has seen a lot of change in the SCF market since he joined the company 11 years ago. “Back then, the first discussions with prospects were around, ‘What is supply chain finance? Why would I want to do this? What are the benefits for me?’ Now, most treasurers, I think, are fully aware of it. The first conversations are about the differentiation between bank or non-bank providers, or between non-bank competitors, or even [prospects saying] ‘My programme has stalled: I want to replace it. Can you help me out with that?’ The market has advanced a long way in 10 or 15 years, which is very exciting.”
He adds that smaller companies – or perhaps more accurately, ‘less big’ companies: those with turnover below $2bn-$3bn – are starting to implement SCF. “They’ve seen their large customers implement it and they see that it’s a win-win for the participants,” says Feather.
As the market evolves, he shares Monaghan’s view in at least one regard: “The banks will always have a place in supply chain finance,” he says. He adds, however, “but their place will be reducing over time. You’re already seeing a lot more technology providers coming into the space. Banks have traditionally had to play two roles in this market: a technology provider and the dominant source of financing – but that’s changing.”
“If you look at a company like us, this is all we do: it’s supply chain finance. All of our resources are focused on providing the best possible customer outcome, because we have to. To compete with the banks, we and companies like us have to be better.”
Nathan Feather, PrimeRevenue
Investors from outside the banking sector – insurance companies, pension funds, hedge funds, even corporates with large piles of spare cash – are looking at supply chain finance as an asset class. “They’re really intrigued by it, and they like the yield for the risk,” says Feather. “So, they’re starting to really come into the market and put pressure on the banks on that funding side.”
Feather also argues that not only can fintechs tap alternative sources of finance but that, in general, they “provide a better solution to the customer than a bank will.”
“This is all we do”
There is a simple reason for that, he says: focus. “If you look at a company like us, this is all we do: it’s supply chain finance. All of our resources are focused on providing the best possible customer outcome, because we have to. To compete with the banks, we and companies like us have to be better. It’s easy [for a corporate] to choose a bank – so if we’re going to win, we need to provide a better and more robust solution.”
Daniel Pfeiffer, managing director, supply chain finance sales at Wells Fargo in Fort Lauderdale, Florida, welcomes “healthy competition”, he says. “I’m glad to see specialist providers coming to the market to put pressure on [the banks].” But when he looks at the economics of it, he says that with the third-party technology platforms, “You’re inserting a middleman. It’s extra cost: there’s no two ways about it.”
The real question he says, is, “Can a separate provider somehow improve the value of those services [over and above funding] – the legal contract, the technology, the onboarding – all the things that sits around an SCF programme.”
Know your client
One of the issues that is raised time and again by corporates and by the fintechs is the perception that the onboarding process is more difficult with banks because of their onerous ‘know your client’ (KYC) requirements.
“The fundamental reason that a bank performs KYC on a supplier is because, effectively, the bank sees the supplier as their customer,” says Pfeiffer. “They sign a legal agreement which says, ‘I’m buying this [receivable] asset from you.’” The critical point is that the bank wants to ensure that, from the sponsor’s point of view, the trade payable doesn’t wind up getting reclassified as debt as a consequence of the deal between the bank and the supplier. The bank has to ensure that “the bank is taking over the receivable exactly as it was originally committed,” he says.
“Truthfully, no supply chain finance programme succeeds only on the basis of availability of funds. It succeeds on the ability to onboard suppliers, for the technology to be stable and attractive, for the legal documentation to be fluid and secure.”
Daniel Pfeiffer, Wells Fargo
In contrast, some bankers have argued that third-party platforms don’t see the supplier as a customer, but, rather, as the recipient of an early payment. The alternative funding structure, they say, hasn’t been so rigorously tested from an accounting perspective, potentially putting the buyer’s balance sheet at risk of having trade payables reclassified as debt.
“Show me the money”
Funding is another point of heated debate. At PrimeRevenue, Feather argues that the banks’ strategies restrict the amount of funding available for an SCF programme “because they have a particular line of credit that they would like to get filled, and once it’s filled they’re happy,” he says. “They don’t have an unlimited capacity for that corporate. They could syndicate and bring in some other partners, but there’s no great incentive for them to do that.”
Technology platforms, on the other hand, “have virtually unlimited capacity,” says Feather. “As much as the market will bear.”
“Truthfully, no supply chain finance programme succeeds only on the basis of availability of funds,” counters Pfeiffer. “It succeeds on the ability to onboard suppliers, for the technology to be stable and attractive, for the legal documentation to be fluid and secure.”
As for whether banks are well placed to provide finance to a corporate’s smaller suppliers – which, arguably, are proportionately more expensive to bring through the KYC requirements given their reduced earning capacity for finance providers – Pfeiffer says that smaller suppliers might be willing to pay slightly higher interest rates than larger ones. “With the right rates, a bank could still make a good business,” he says.
“The issue is, the corporate also has to do a lot of work: it’s not just the bank. Rolling out an SCF programme takes a fair bit of effort on both sides to be successful. So, if the corporation is committed to going to the smaller suppliers then a bank could probably build a profitable [business] even with the KYC burden. I just don’t know if a tonne of corporations are interested in that kind of broad rollout. Some are, but not all are.”
Feather, on the other hand, maintains that, in reality, banks aren’t very interested in smaller suppliers. “Banks don’t typically want to go and onboard hundreds and thousands of SMEs and go through all the paperwork and compliance – whereas the technology providers build tools designed to have mass enablement of SME suppliers, reducing the friction in that process.”
One funder or many?
Debate rages, too, on the issue as to whether the multi-funder model of the tech platforms is superior to the single bank-funded model. Some of the largest global banks aren’t as large as they used to be, having retrenched because of the double-whammy of regulation and business economics. Geographies and service lines have been cut from their footprint, and corporates are concerned about their suppliers being reliant on a single source of funding.
This funding risk, says Feather, “is a fantastic opportunity, because it highlights some of the value that we bring. Because we are necessarily going to have a multi-funding solution, if one bank happens to step out, it’s not a problem. We just plug in a new funder and continue on.
“If it’s a bank-led solution and a bank is either reducing their exposure to a certain customer or exiting a certain market or geography, it can be somewhat of a fire drill for the customer, the buyer, because now they need to replace an entire solution.”
“More and more of the non-banking money is now finding its way to supply chains. Many of those [new] investors have ties with those supply chains because they are from the same industry, so they know exactly how things work and therefore feel comfortable investing cash in it.”
Bart Ras, Greensill Capital
But bankers point out that the larger bank-led SCF programmes are multi-funded anyway, because the deals are too big not to be syndicated. “It’s not really a multi-funder versus single-funder debate,” says Pfeiffer. “Both sides of the equation are multi-funder. I think whoever runs a big SCF programme, no matter who they are, is multi-funding.”
The emergence of non-bank funders is a key part of how the market is changing, however. Without SCF technology platforms of their own, they effectively become partners with fintechs to provide a rival offering to that of the banks.
“Liquidity is, of course, available in massive amounts and it’s looking for some yield,” says Bart Ras, managing director of the specialist supply chain finance group Greensill Capital. Vodafone, which has long-standing supply chain finance arrangements in place with both Citi and Deutsche Bank, more recently entered into an award-winning arrangement with platform provider Taulia and finance provider Greensill Capital. “More and more of the non-banking money is now finding its way to supply chains,” Ras says.
He adds that a growing number of those external funders are, in fact, corporates with spare cash, looking to invest in SCF programmes. “Many of those investors have ties with those supply chains because they are from the same industry, so they know exactly how things work and therefore feel comfortable investing cash in it,” he says.
The market is changing, says Ras, in that corporates are looking for three things: ease of use, efficiency and trust.
“How easy is it to get suppliers on-boarded? That’s a clear need,” explains Ras. “When [SCF] programmes got started, people were used to filling out endless forms and everything took weeks or months or even longer. As SCF has become a more mainstream product, clients are expecting things to be easier to use. Fintech, I think, played a really important role in speeding up that entire process, enabling thousands of suppliers to join programmes instead of tens.”
By “efficiency” Ras is referring to liquidity: “At what cost can liquidity be provided to the programmes, and what are the costs of running the programme as a ‘maintenance fee’?” he says. “Again, if that is highly automated and is making use of a source of funds that is actually more efficient because of pricing, it ticks the box.”
As for his third point, trust, Ras argues that the issue is about being able to trust a finance provider to remain in situ, to not exit a territory or product line because of the pressures of economics or regulation. “It’s what we hear from corporates today,” Ras says. “They are thinking about who should be the finance provider for their total operation. The ‘single source-ness’ of banks is being rethought. The supply chain is, of course, the lifeline of your business.”
Would you credit it
Where does this leave the banks and their SCF offering? Ras identifies three groups of corporates according to their creditworthiness, each having their own type of relationship with their banks.
- The largest corporates with the best credit ratings, Ras says, “are generally even better credit-rated than their own banks. These corporates decide who funds them and don’t mind saying, ‘Sorry, you’re no longer my supply chain finance partner.’”
- At the bottom end of the market, “Banks have never shown interest in that lower-end category,” Ras says. “Now they’re being offered fintech e-solutions and they feel loved for the first time.”
- In the middle group, corporates are “a bit handcuffed” by their relationship banks, who cross-sell a suite of services that these corporates can’t then try to split out and source from other providers because, he says, the banks are seeking to optimise their total returns from their balance sheet commitment to the corporate.
“So I would say the place where banks will probably be longest able to offer supply chain finance solutions is in the middle ground,” Ras says.
He adds that the SCF market is widening and deepening: “It’s widening, because it’s no longer just for blue-chip corporates. The solutions we’re offering are also available to the category of corporate clients that have never been offered these kinds of solutions. And it’s deepening because of fintechs and the ease of supplier onboarding, so it’s now being offered not just to the top 100 suppliers but to the top 10,000 or 50,000 suppliers.
“This is injecting liquidity into the smaller firms that need it,” Ras says.
The banks still clearly have a significant market share, however, though rivals claim that that’s partly because they’ve been in the SCF business longer than the fintechs have.
Questions for corporates
Whether corporates choose to go with a bank-led SCF programme or a fintech-led solution with perhaps a broader portfolio of funders will depend on any one corporate’s own particular circumstances, says Citi’s Monaghan. “There is a variety of questions: What’s the size of the company? How complex are they [in terms of] how many subsidiaries are they looking to connect into a supply chain finance programme? What is the size of benefit they are looking to achieve in working capital? How many suppliers do you want to include?”
“Today, everybody thinks of supply chain finance as a single product, but it’s not: it’s part of a trade finance continuum that includes FX, documentary services and financing earlier in the cycle – for example, financing of purchase orders and inventory.”
Lex Greensill, Greensill Capital
If a corporate wants to inject liquidity into its SME supplier base, then a highly-automated solution might be more suitable, he says. For a company looking for a high-value working capital benefit for themselves by extending payment terms to their larger suppliers, “that requires more of a need for credit,” Monaghan says. “If I’m a global corporation with vendors that supply in multiple regions, I want a SCF provider that’s going to have global connectivity.”
“I don’t think one [type of solution] has a natural advantage over the other, says Wells Fargo’s Pfeiffer. “I think [balancing] the pros and cons on both sides is the calculation everyone has to make when they’re selecting a provider.”
Tip of the iceberg
But Lex Greensill, chief executive of Greensill Capital, sees a different picture on the longer term horizon. “Today, everybody thinks of supply chain finance as a single product, but it’s not: it’s part of a trade finance continuum that includes FX, documentary services and financing earlier in the cycle – for example, financing of purchase orders and inventory. It also impacts duration. My firm has done significant transactions in the last two months using supply chain finance rails to finance assets and corporate cash flows of a duration of up to 25 years. And so, those technology rails that are upsetting the apple cart are also going to upset more products than just the supply chain finance – it’s the tip of the iceberg.”