Options to Buy Trade Finance and Trade Credit Assets are Growing – Part 2

The disruption occurring around working capital business banking is in the early days, but between “information advantaged” finance models and more expensive bank equity, start-ups today can be major threats tomorrow.

For trade credit, or what banks call open account, the largest potential threat to banks is not other banks, but third-party funding models. This definition of third-party funding can apply to a number of early pay techniques, including:

  • Bank Approved Trade Payable programs (or Bank Supply Chain Finance)
  • Factoring
  • Dynamic discounting / early pay techniques
  • Pcards

A lot of this can be understood by the following formula:

Big networks + lots of data + new underwriting models + zero short term interest rates = huge interest by non banks

Networks have valuable data. For example, the combination of a purchase order, invoice and invoice approval and payment history provides a combination of invaluable information to a lender. Networks also have data on dilution, and as they tie in payments, payment history as well.

Networks can increase the time invoices can be financed - The time period that receivables can be financed is limited today by current paper A/P processes, but networks can improve that by up to 50 percent.

At the moment, partnering propositions are going after the low hanging fruit of  “Buyer Approved Invoices.” Recent examples of banking/funding/payment providers partnering or buying platforms include:

  • Demica / JRJ Group
  • Nipendo / Integrated Finance
  • Crossflow / Eaglewood (and others)
  • Tungsten / OB10
  • Mastercard / Basware
  • Orbian Capital Markets program
  • PrimeRevenue / Electronic Draft program
  • Taulia’s TED program
  • Tradeshift / CapitalAid

To read more about the above list, see additional articles below.

These “adhoc, on demand, online factoring” models are leveraging the above formula. While it is still early days for many models, these are exciting times. For banks trying to take trade finance assets off their books, working with pension funds, insurers, etc., the work effort is hard, complex and lacks transparency. For non banks playing in the above space, they “get” the new digital world. While there will be hiccups along the way, and there is still much for many of these propositions to understand given they are moving into new areas – credit markets, capital markets, regulatory and compliance, accounting, etc., the horse has left the barn on market adoption.

We can be thankful for trailblazers like TheReceivablesExchange, PrimeRevenue and Orbian that developed innovative supply chain finance and auction models that helped pave the way for future solutions.

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