In the past couple of months, there have been two major acquisitions in the world of supply chain finance and EIPP (electronic invoice payment presentment). Chase announced its acquisition of Xign and American Express closed on its acquisition of Harbor Payments. Clearly, this is a train that has left the proverbial station, and at a rate which may catch the remaining software and supplier network-based approaches to payables financing and the broader EIPP sector off-guard. But Ariba has a trick up its sleeve with its ASN -- which already offers such capabilities as dynamic discounting on receivables and broader EIPP integration with the rest of the Ariba suite (not to mention the ERP providers). And today Ariba expanded its suite of capabilities into the supply chain finance realm a step further by partnering with Orbian, a somewhat unique finance intermediary in the payables market.
For decades -- maybe centuries, in developed economies -- supply chain finance has existed in various forms. In the past, the most basic legitimate form of supply chain finance on the payables side was called factoring. Factoring is essentially a loan-shark arrangement where a financial institution or third party buys receivables from a supplier at some material -- read: often outrageous -- discount relative to the face value of the obligation.
Other forms of factoring and early payment in the past have involved sending in Guido to harass the buying organization into paying early (and paying often as the case may be). I hear that in the New York restaurant and waste management businesses, this is still the preferred form of supply chain finance, despite the fact these businesses operate in the shadows of the world's biggest, most legitimate financial institutions. Alas, even though Bob Calderoni is one tough looking CEO and has close ties to New York City, I highly doubt this is a market he'll decide to enter. Drat.
But I digress. According to the announcement, ASN users will gain "access to Orbian's third-party financing ... The bank-neutral financing solutions will help buyers and suppliers who use the network optimize their working capital and minimize risk." Orbian's approach to supply chain finance is not to take their own position in the transaction, but to "enable a supplier to leverage the buyer's cost of capital to significantly reduce financing costs in the supply chain relative to traditional bank and card offerings" by allowing investors to take the position. These investors might be pension funds, mutual funds, hedge funds, etc.
Down at Ariba LIVE, I had the chance to catch up earlier this week with Ken Roche, Orbian's CEO. In our conversation, I learned a number of interesting tidbits about his company and how they're serving the market. Clearly Orbian's major point of differentiation is their role as a neutral originator of payables-based securities, allowing investors to purchase the payable "debt". Depending on the credit rating of the organizations involved in individual transactions, this debt trades at a premium of 15 or so basis points above commercial paper. And the real advantage for the original parties is that involvement with Orbian does not detract from the commercial paper pricing for suppliers. In other words, it's a legitimate form of off-balance sheet financing which does not limit the ability to borrow in other ways.
So far, Orbian has been involved in over $7 billion in financing in the last year (and over $15 billion since its inception). That's some serious volume, although the potential is absolutely huge. I'd speculate that the global supply chain finance market opportunity will top a trillion dollars annually in the next decade (in deal volume). Given this potential market size, it's clear Orbian is not alone in its ambitions. Their -- and now Ariba's -- competitors in this arena include major financial institutions with their own capabilities gained through acquisition and those using third-party supplier capabilities from competitors such as Prime Revenue, who sell their solution directly to banks. Ironically, Prime Revenue is run by ex-FreeMarkets head of sales Joe Juliano. And like Bob, Joe is not the kind of character you'd want to see on a street corner in the earlier hours of the morning.