Even McKinsey Does Not Fully Understand Supply Chain Finance

Yeah, I knew that headline would grab attention.  And it can come off as arrogant.  But look, I have a right to be critical of consultants (yes I was one many eons ago with Booz Allen & Hamilton).  And in Mckinsey’s latest Payment newsletter (Oct 2015) the article Supply-chain finance: The emergence of a new competitive landscape they confused the market by how they lumped vendors together.

How so?  Well it gets back to the fact that everyone is racing to cover all thing fintech as it relates transactional finance and doesn’t fundamentally understand the different business models.  So companies get lumped together that should not be.  And this confuses the market and it ultimately confuses buyers.

I will give you an example in the piece.  The graph below talks about Fintechs offering solutions across the Procure to Pay cycle.

McKinsey graph

You can see companies like PrimeRevenue and Orbian are thrown into the same sandbox as Demica and Taulia.  While Demica has a supply chain software product called Citadel, Demica licenses software to the banks to run supply chain finance.  With their new owners (recently bought by investment bankers JRJ Group, TomsCapital and 76 West Holdings) they are moving to a non bank funding model that competes with banks.  Taulia is an einvoicing vendor that has been a marketing genius at creating a financial supply chain company out of their dynamic discounting offering and relationship with Greensill Capital.  But both PrimeRevenue and Orbian have been creating large corporate assets out of approved invoices for bank and non bank consumption for a long time for very large suppliers.

The next horizontal is even more interesting with TradeCard and Tradeshift.  How those two got together I’ll never know. First TradeCard was acquired by GT Nexus which recently was acquired by Infor.  Second TradeCard would never describe themselves as an einvoicng platform but brands themselves as a supply chain collaboration platform. Their platform enables companies to run Direct Sourcing and Import programs through a cloud-based platform connecting forwarders, suppliers, large Corporate buyers, financing banks, etc.   And of course I would like to see Christian Lanngs response to being called einvoicing, when his whole mantra is platform as a service.

Finally the general purpose vertical where Ariba and Basware are shown.  Personally I am not sure what that means in terms of finance, but Basware has built a model around pcards, dynamic discounting and non approved invoice finance with Arrowgrass Capital.  Ariba and supply chain finance has been the enigma for many years, but with the Discover relationship brings both security aspects around payment, bank account verification, and remittance details and of course Discover Bank that can help with finance solutions.

I am trying to help with this confusing world and I get that in the rush to produce content, we can get confused.  So therefore I have begun this journey with the Alternative Business Finance Index to help the market better understand this complex space.  You see, even McKinsey can get confused!

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Please contact me at dgustin at tradefinancingmatters.com with anything you would like to share around this space.  And don't forget to follow David Gustin on Twitter @TFMatters

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Voices (6)

  1. Yap Tat Yeen:

    The report stated that revenues captured today is $2 billion. The asset size (financed outstanding) would have to be $200 billion, assuming a 1% interest rate. If utilisation rate was 50% across all SCF programs, approved lines would have to be $400 billion. I wonder if bankers feel that this is a sane number?

    1. David Gustin:

      Truthfully, I have no clue where Mckinsey gets their data. One would have to go back to their source, which states Source: Capital IQ; McKinsey analysis and expert interviews. They claim to have spoken to 70 treasurers, 250 suppliers and 10 experts.

      Since there is no League Table for Buyer Led Payable Finance programs, its all a guess. And because it is McKinsey people tend to believe it. Your 1% net spread appears high given the pricing of these programs, many at Libor + 20, 40, 75 bps.

      In the same report, they even stated that globally, an estimated 10 to 15 percent of this $20 billion (revenues) supply chain finance market is with nonbank tech innovators, and this number is expected to rise. I am from Missouri on that one, if you know what I mean.

      They even talk about Syncada as a fully automated supply chain platform in the same piece, which a) does not exist anymore and b) is not a fully automated supply chain platform.

      1. Yap Tat Yeen:

        I guess the key problem is that market estimates are based on surveys and anecdotal inputs.

        BCR Publishing in their World Supply Chain Finance Report 2015 estimated funds in use (financed outstandings) of EUR 37 – 49 billion (based on their survey of SCF practitioners in Nov-Dec 2014). I compare this to an ACCA report produced by Aite Group that estimated the market size for reverse factoring to be between US$255-280 billion – I guess they meant the volume financed in a year., if we make an assumption of average financing tenor being 60 days, the average financed outstandings would be about US$45 billion.

        McKinsey mentions $2 trillion of ‘financeable highly secure payables globally’ and a potential revenue pool of $20 billion, and a current SCF revenues of $2 billion. I find the figures hard to makes sense of – what is the factor they use on payables to derive their estimated revenues.. potential revenue of $20 billion is 1% of $2 trillion, and if 1% was the financing margin assumed, that would mean an average of $2 trillion of balance sheet for financing! If we applied the net spreads of 20-75bps mentioned in your reply, then the financing amounts to make the revenue numbers would need to be even larger.

  2. Daniel Cotti:

    I loved this article……

    Can you send me the McKinsey report?

    I hope all is well with you…..


    1. David Gustin:

      Thanks Dani

      Use Google my friend!


  3. Robert Kramer:

    Good points David, thanks for pointing out this newsletter.

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