Earlier today, Ariba announced it was partnering with The Receivables Exchange, an online service that provides suppliers with the ability to sell their receivables at rates which will cause your typical lending factor to turn to organized crime to make ends meet (well, maybe not, but they'll be looking for a new line of work, at the least). The Receivables Exchange, which has only been in operation since April 2007, lets suppliers sell receivables to a variety of buyers including hedge funds and asset based lenders. This new offering provides Ariba suppliers for the first time with the ability to initiate the sale of receivables through the Ariba Supplier Network (previously such activity had to be buyer initiate).
The minimum quantity of bundled invoices -- which are sold as a tranche to a single buyer -- is $10,000 (though multiple invoices can be bundled to achieve this amount). Buyers on The Receivables Exchange value invoices at a discount to face value based on criteria including the length/maturity/term of the receivable, the credit rating of the obligor (i.e., the payer), the history of payment between the parties in general and on the basis of their transacting over the Ariba network. They extend more favorable receivables valuation to Ariba Supplier Network users because the data and suppliers are perceived as "less risky" because the information is coming directly from the Ariba supplier network (which, by extension, is coming from the buyer's ERP system). With this transparency and unaltered information, the risk level goes down. In other words, suppliers should, in theory, get a better rate selling their receivables through the Ariba network via The Receivables Exchange than going direct to the exchange itself.
So isn't The Receivables Exchange just another take on factoring? No, according to Ariba. It's different than factoring because of the types of lenders (e.g., hedge funds) that are involved and because they have significant committed capital and do not require require asset leans or personal loan guarantees. Since TRX provides a competitive process, the financing costs should be less than that of a factoring company, fitting in between the lowest rates that an Orbian-type of supply chain finance solution provides and that of asset based lending, p-cards, etc. I reckon the rates would amount to somewhere between 10-15% APR on average if a supplier goes through the Ariba Supplier Network (my guess, not Ariba's statement). Moreover, initiating the sale of a receivable via The Receivable Exchange appears much more painless once an account is set up than via other means provided there is adequate liquidity on the exchange (something I have not been able to confirm).
Ariba will get a cut of each transaction, an amount that could be significant based on the tens of billions of annual invoice volume that is currently going through the Ariba Supplier Network. When I spoke to Drew Hofler who is responsible for Ariba's working capital management solution, he noted that he believes that the "uptake for this solution should be bigger than usual because of the current environment in which suppliers are credit constrained." As suppliers are desperate for financing in today's climate, Drew hopes that penetration might hit as high as 10% on the supplier side, comprising, most likely, small and medium-sized suppliers versus larger ones (who have other means to access capital).
Drew also mentioned to me that in certain categories, the penetration could be much higher. These supply markets include temporary services and construction which are both areas where suppliers typically need to pay their sub-contractors before receiving payment from their own customers. Not surprisingly, both of these supply markets are feeling the acute pinch of the credit crunch.
My initial take on this concept, provided it technically works and that there is enough liquidity on the exchange, is very optimistic. However, parties like The Receivables Exchange (and by extension Ariba) will have to think about their role in policing transactions given the fact that some buying organizations forbid suppliers from selling receivables. What happens, for example, when a buying organization that uses Ariba Sourcing, Ariba Contracts and Ariba P2P has a policy against having suppliers sell receivables or release information about a debt (in both its bidder agreement and its contracts) yet has a supplier turn around and sell its invoices via The Receivables Exchange after an introduction made by Ariba?
Today, Ariba would tell you -- as they told me -- that their job is not to police the network for this type of activity. Rather, in Drew's words, they "facilitate" information and transaction exchanges. According to one legal opinion that I consulted, this is not an issue for Ariba because the underlying transaction is already completed and the financing or securitizing of the receivable is separate from the goods or services that were originally part of the contract. Specifically, the potential issue ties to whether or not the supplier was authorized to disclose the debt to The Receivables Exchange and -- by extension -- the ultimate buyer of the receivable.
Ariba believes they are in the clear in this regard because they have no control over whether a supplier breaches the confidentiality clause of a buyer/supplier contract. If a supplier breaches, well, it's on them. Ariba can make the case that they have nothing to do with the breach unless, of course, they played a part in it by breaching their data policy. But since Ariba is not disclosing any information -- they are merely making an online "introduction" to the Receivables Exchange -- it appears they get around this potential issue.
There is still, in my view, a potential line between what is legal and what is clearly above board from an ethics perspective. One could argue that in cases where Ariba is working with customers by providing solutions across the Spend Management value chain (e.g., sourcing, contracts, P2P), that they have full visibility into not only the sourcing activity and the buyer/supplier contracts but also the P2P invoicing exchange. Granted, Ariba is not an agent of the buyer or the supplier and is only facilitating an introduction via the network, but given today's financial climate, such an introduction might be a bit like taking a friend who you know is in a bad marriage to an after hours singles bar (and providing the transportation, car and booze to get them to that point). Sure, you might not be responsible for breaking up the marriage, but the former spouse is not going to send you a holiday card, either.
Food for dating thought with this new offering (which has a further tie-in below). Don't get me wrong. It's a great idea and could be just what the doctor ordered for cash strapped suppliers. I suspect that if The Receivables Exchange has adequate liquidity, this could be a boom business given the state of the credit markets. And unlike eBay, which recently lost a court case surrounding their role in policing counterfeit products, Ariba is not facilitating a transaction. They're merely arranging an introduction, serving as a B2B Yenta if you will. But just as a court recently ruled that eHarmony must facilitate same-sex introductions -- in addition to the male/female ones the site is known for -- perhaps Ariba might be pushed by customers or other parties to be selective in the types of introductions it chooses to make.
- Jason Busch