Gleaning through Tungsten’s Interim Financial Report

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My colleague Peter Smith covered Tungsten's financial result earlier this week-  see Tungsten’s Half-Year Results: Short-Term Disappointment, but Long-Term Promise

Okay Tungsten is losing money. But so are Lending Club, OnDeck, and many others that are trying to change the way finance is done, in Tungsten’s case, transactional business invoice financing.

I read through their interim report the other day, and a couple themes stuck out beyond the financials:

Potential Market Size is huge

With Tungsten’s current network, if all buyers were enabled to provide Tungsten Early Payment to suppliers for invoices shown as "approved to pay", the annual value would be $2.7 trillion. The report says that is 12% of traded goods and commercial services (note: according to World Trade data).

You gotta Walk before you can Run

There are a lot of new products ideas -non confirmed finance (to compete with factors), purchase order finance, etc. but Tungsten must prove out their existing model.   But as a bank, they have lots of opportunities to do things with that bank license.  For example the report mentions that Tungsten Bank has received regulatory passports for Germany, France and Italy as a key step to offering invoice finance in Continental Europe.

Whole big culture change going from a tech provider to a bank with an invoice proposition

I mean, moving from an einvoicing technology play to a bank play centered on funding your own network is a major shift. People that were good fits in the prior organization may not be so in the fast world of finance. If they want to grow big outside of the UK, you need the right staff to suit the new organization.

Tungsten mentions this in the report.

Technologically, Tungsten is on the verge of completing the transformation of Tungsten Network, our global electronic invoicing platform.  We have over 100 new staff to help deliver continuous improvements across the Tungsten Network and market Tungsten's products and services. These include solutions that encourage and make it easier for suppliers to join the Network, grow the number of buyers on the Network, deliver more services to our current customers, and so increase the volume and value of invoices transacted over Tungsten Network as well as the development of Tungsten Early Payment.

Some Big Fish are hooked

Tungsten Network is setting themselves up in North America to make some dramatic growth steps in the next few years. They already signed up GE, Siemens, Caterpillar and with signed business alone should have 350,000 suppliers on their network in the next 18 months, doubling what they have today.

New Pricing Model to be tested

Tungsten claims their new pricing structure will lead to increased supplier adoption:

The new pricing provides 52 free invoices annually for small suppliers and 520 free for larger suppliers.  Tungsten expects over 80% of suppliers will now transact for free on Tungsten Network. The simplified fee structure is already leading to increased adoption from suppliers, which in turn is anticipated to result in increased net revenue and improved working capital for Tungsten, as well as increased volumes across the Network.

I think most readers know how we feel at Spend Matters around charging suppliers, but revenue is addictive and hard to take one step back to take two forward.

Regulators like to see a stable source of Funds

Outside money is critical to Tungsten and mainly because you need liquidity to fund receivables especially if your bank cannot raise them fast enough. Tungsten’s deal with BNY Mellons Investment Management Asset Management fills that void and also provides a stable source of liquidity. Tungsten explains,

By end-December 2014 the Group had advanced over £10 million, which substantially absorbed the available capital in Tungsten Bank at that time.  Tungsten Corporation plc cash resources have been deployed to meet the requirement to continue to finance suppliers that have used the Tungsten Early Payment service and ensure suppliers can access finance.  After the period end, Tungsten signed an agreement with Insight Investment through which Insight will finance eligible invoices originated by Tungsten in Europe and in North America.  Insight, part of the BNY Mellon group, manages £318 billion of assets under management, including short-term funds.

While they mention they are working to attract deposits to Tungsten Bank, there is a liquidity mismatch that can be handled by third party funds.  If their receivable penetration is higher than modeled, the concern Regulators would have is that the financing is always available. Recall the 2008 financial crisis was driven by liquidity – no financial institution wanted to lend to each other because of the opaqueness of balance sheets.

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