Trade Financing Disintermediation: Get Ready For the Accelerating Decline of Banks
There’s a storm of “new" finance brewing on the horizon. I’ve even seen it myself as a business owner. On the supplier side, new lenders (and investors) are emerging and taking the place of traditional banks in the areas of receivables financing (and payables financing on the buyer side). It’s often far easier to work with these types of providers than it is traditional banks to gain access to working capital. In an example with our business, after investing 40 hours with paperwork and meetings, one large U.S. bank focused on growing its SMB market agreed to put in place a paltry line of credit (albeit at a good rate — just over prime).
Moreover, new banking models (including what Tungsten is up to in the U.K.) as well as the alternative lending and venture debt models (think Silicon Valley Bank) are beginning to shake things up from within. As I am betting man — as my wife will attest to after pulling me away from the Blackjack table in Vegas recently — I have a strong feeling that traditional banks are going to face a rising tide of disintermediation from alternative lenders that leverage technology (both their own and third-party tools). And factoring lines of business, especially the ones that fail to make the transition to technology-enabled finance leveraging visibility into trade documents and approved invoices from buyer systems, are in for perhaps the rudest awakening of fall.
The perfect disintermediation storm that is brewing is not just the result of one or two shifts in the market. A combination of factors is driving us into a brave new lending world. For one, near zero interest rates are causing investment-grade firms and investors to seek out new sources of opportunity to put their burgeoning balance sheets to work. Second, purchase-to-pay (P2P), e-invoicing, accounts payable automation, EDI, and supplier network technologies are finally starting to cross the adoption chasm and provide new levels of automation and visibility into trade documentation and invoice status. This can reduce risks for lenders at all stages of transaction, from initial PO to sign-off on approved invoices net of dilutions. And third, non-banks are, simply put, 1,000 percent more nimble than banks in investigating and are embracing new models. Oh, the stories I could tell in this regard from our own advisory work in the field!
I could go on — there are far more points to add. But one thing is for sure: Disintermediation is coming to the banking world.
This is a topic I’ll be debating with my colleague David Gustin at SIBOS in early October. More on this later. But if you’re in town, join us.