Reader Email Bag – SWIFT’s BPO, Marketplace Lending, and more

A few readers have asked is there anything SWIFT can do to revive the Bank Payment Obligation?

One senior banker I spoke to recently commented:

“The focus should be more on corporate awareness. Force the banks to recognize there is sensitivity at the ICC  this is not a solution that will bring someone back from open account unless they see it as a  means to do supply chain finance in a 4-corner model. 

I would have lobbied to make the rules more UCP like with the beneficiary and the applicant covered by the rules rather than bank to bank. A customer I talked to said they don’t feel like they know where they stand with the current rules.

The feedback from banks is the cost of entry is too high. I don’t have customers asking for it.  In SWIFTs perverse logic, the bigger you are, the less you pay.  A bank in Vietnam or Pakistan can’t justify the start up costs for the BPO.  We are approaching SWIFT with recommendations to change.

Where banks are reducing Correspondent networks globally, here is a solution that can help with preshipment finance. It's a strong value proposition.”

A reader asks, what is the core difference between factors and supply chain finance offerings?

The core structural difference between factoring and supply chain finance is that supply chain finance structures are based on unsecured credit from the buyer that is used to fund a segment (usually the larger) suppliers. In SCF structures the confirmation is normally from the buyer of goods explicitly stating the amount with no right of set off.

In factoring, companies convert customer accounts to cash without putting additional liabilities on the balance sheet, thus avoiding triggering financial ratios and avoiding contractual restrictions on the seller’s ability to borrow against accounts, passing to the funder the buyer risk, and fixing the sellers finance cost. With factoring, the Factor undertakes credit management and collection of its clients’ book debts whereas with invoice discounting, a business collects its’ own book debts.

A readers ask, in light of Marketplace lenders recent troubles, can they still compete with banks?

With the recent stumbles of OnDeckProsper, Lending Club and other marketplace lenders and the fact that many are concerned about their underwriting techniques, potential higher defaults, lack of transparency and probably most importantly increased regulation and oversight by the CFPB and Office of the Comptroller of Currency, it is not the best of times for Marketplace lenders.  Many are questioning the online marketplace lending model.

If one is an optimist, with the various scandals, operating losses, higher than expected default rates, and a loss of stock market investor confidence that neatly mirrors the diminishing confidence of platform investors, various online lenders are looking at more transparency of both their secret sauce underwriting as well as stress testing their portfolios.

Forbes stated Treasury has raised concerns that “while data has the ability to make fast and blind credit assessments; it also has the potential to capture unintended correlations that lead to disparate impact and fair lending violations or penalize customers without a large digital footprint.” Expect regulators to look more closely at the lending portfolios of marketplace lenders to see if the new lending algorithms have discriminatory outcomes.

But TFM is seeing more partnering arrangements and licensing arrangements. Scotiabank just teamed up with fintech provider Kabbage to offer small business loans ‘in as little as seven minutes’.  Fundation and Regions, JPM and Ondeck, and any of the banks want to get closer to these platforms to learn more about their algorithms and models and how they deploy big data to make credit decisions.

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