With a surge of new fintech start-ups in the last few years, all looking to carve out a share of the supply chain finance market, is there is a risk of overcrowding as the newer players jostle against established providers and banks?
In early February, GLI Finance said it was closing its subsidiary Sancus Finance – which offered supply chain finance services in the UK – blaming a below-expectations performance last year. It said the SCF division was due to report an operating loss of £1 million and had been hit hard by exposure to a supply chain finance borrower that entered administration. Could this be an early sign that we have, in fact, reached ‘Peak SCF’?
“Is the market saturated yet? Maybe to some degree on the top end,” says Steven van der Hooft, CEO at the consultancy Capital Chains, which advises corporates on supply chain finance programmes. Yet van der Hooft believes that there is still plenty of room for growth outside the crowded large corporate space.
“What I am seeing is that even more and more players are trying to get into the market. If you are a smaller corporate, the market is less focused on you. But that is where the market needs to go to add real value. We’ve got all the big names, but the real need is in the market below that.”
In recent years, there has been a flurry of new start-ups emerging into the SCF space, armed with the latest digital technology and data analytics capabilities. In the UK, tech firm Previse raised its seed funding in 2017 and is offering a service that uses data analytics to offer instant payment of invoices to suppliers. In Germany, TrustBills was founded in 2015, offering an auction platform for the sale of international receivables.
There are also e-commerce entities such as Tradeshift and Basware, already active in the procure-to-pay space, looking to add a potentially lucrative financing element to their product range. All of these are, to some extent, targeting that relatively under-served mid-market.
At Atlanta-based PrimeRevenue – set up in 2003 – CEO PJ Bain is also looking to stay ahead of the competition by targeting the mid-market corporate rather than relying on its traditional investment grade, publicly-listed client base.
“We are specifically targeting clients and looking for funders that can help support companies with annual revenues between $100 million and $2 billion, and that includes private companies, non-rated companies and sub-investment grade companies,” says Bain.
Last year, more than 50 per cent of PrimeRevenue’s new customers fell into this category. “These companies are the lifeblood of the economy and where jobs are created. To support this segment of the market, we’ve added 30 funders over the last two years.”
Van der Hooft welcomes efforts to target these smaller firms: “There is a real need for liquidity in that mid-market segment and the suppliers in that mid-market segment.” He cautions that platforms need to ensure they bring their funders with them who are happy with the credit rating of the mid-market firm.
So, there is plenty of growth yet to come for those companies willing and able to offer services to the mid-market. But are the host of fintech start-ups a threat to more established players?
“We don’t see so much competition as we see noise in the market,” says PrimeRevenue’s Bain. “The market is filled with a lot of new players that depend on investors to raise capital to continue growing their business. A lot of these companies’ strategies from the beginning are to be acquired. There are some companies that tout that they are a unicorn or that the goal of the business is to be a unicorn – whereas our goal as a business is how much cash we unlock for our customers and how many jobs does that translate to.”
“PrimeRevenue is very well-positioned – and it is part of our growth strategy – to be an acquirer or consolidator of the market at the appropriate time.”
PrimeRevenue isn’t alone in keeping an eye open for strategic acquisitions. At the end of January, MUFG Union Bank, a subsidiary of the Japanese-owned MUFG Americas, announced its acquisition of GE Capital’s Trade Payables Services. Elsewhere, Tradeshift has made an offer for Basware with an acceptance deadline at the end of February.
Ronan O’Kelly, a partner at consultancy Oliver Wyman and co-author of its 2017 report on the SCF market, agrees the market will evolve as newcomers grow and seek to be bought out. “Many fintechs are unprofitable, as their primary focus has been on building scale, and they will be seeking exits or fundraising from banks or will be forced out of the market,” he says.
If we can expect consolidation, then, where should we be looking for the next wave of opportunities?
For O’Kelly, the next frontier for the supply chain finance market will be in the better use of data analytics to create new products for different parts of the physical supply chain.
“Banks and other players such as logistics companies sit on a vast array of rich data on companies’ supply chain, payments and receivables behaviours. They can use this to better assess creditworthiness, better identify opportunities, and to create new, data-rich products,” he suggests.
Van der Hooft similarly urges vendors to consider opportunities further along the supply chain. “Much earlier in the chain, not just focusing on approved payables, but why not unapproved payables? Why not pre-shipment or purchase order financing? There will be concerns about performance risk, but if you go that way then you go away from the discussion that supply chain finance – approved payables finance – is just the practice of extending payment terms.
“Ultimately that is where you add real value, financing based upon physical supply chain data held on that supply chain prior to the creation of that invoice.”
If these observers are right, we’re not so much at peak SCF as at the end of its first wave – with plenty more opportunity to come as technology and rich data allow us to offer smarter finance to an ever-wider range of companies.