Why 2016 is Not Proving to be a Transformational Year for Business Finance

If you build it, he will come. Field of Dreams, 1989

Basware’s CEO Esa Tihila made the comment that 2016 will be a transformational year for business finance. And yet midterm results indicate that prediction is not living up to expectations.

With more than $2 trillion of business credit outstanding at any time, most cloud-based financing over B2B networks that offer just-in-time financing is only doing a trickle of that volume.

 Tungsten released their recent finance results. I will let you make your own conclusion. In the financial year (FY) that just ended, Tungsten financed invoices for 79 suppliers totalling over £100mln, compared with £32mln for 38 suppliers in FY15. While the percentage increase is impressive (300%+), actual numbers are small.

Tungsten is one of a very few P2P and SCF vendors that actually lift their kimono to show results.  If others did so, I imagine it would be more of the same for many.  That is not to say we do not have some vendors generating some volumes and certainly PrimeRevenue, Orbian and Taulia are originating billions for bank and non bank investors to fund.

But as Jason Busch says, today, what Taulia or many of the other p2p vendors are largely selling from a trade financing perspective is a rounding error on the balance sheet of corporates (and suppliers). Jason states, "assume that 95%+ of the payment terms in the Global 2000 are between 30-90 days. With an approved invoice as the financing trigger, reducing days payables outstanding (DPOs) in exchange for a discount or creating a synthetic means of maintaining DPOs and also getting discount/rebate/other income barely moves the broader working capital needle, especially when its largest customers/deployments are only committing roughly $50mm to facilities (and smaller ones are between $1-$10MM). This is smoothing – ad-hoc transactional financing. And most important, it’s not financing that suppliers can rely on to grow their business."

But what will it take to make this market more substantial? And what is holding it back?

Perhaps this market is much more complex than simply applying analytics and new underwriting methods to business and p2p networks to offer early pay on 30, 60, 90 day or longer dated invoices.

Certainly predictive analytics will enable smarter financial decisions. And also as B2B networks enable new financing options, suppliers will have greater opportunities to get paid faster through more favorable financing options and maintain a healthy cash flow.

Maybe there is a limit to where we can go, but I get a sense we can do more. Some ideas:

  1. Perhaps what we really need is for the Governments to kick start this market. The Government is the largest buyer in most if not all countries.   We know initiatives like SupplierPay have had very little impact, and while Late Payment Directives in certain markets have been helpful, they have not provided real finance opportunities. The U.S. government (in line with the EU) has recently mandated e-invoicing for all its suppliers by 2018 and a major push is also underway by many other governments around the world to promote e-invoicing. If they can go one step further, and develop a market for these government invoices to get financed, that could be a big boon to finance. There are certainly hurdles. For example, when the account debtor is the US Government, the question arises as to the effect of the failure of the secured party to comply with the Assignment of Claims Act. The Federal Assignment of Claims Act, or “FACA” as it is often known, establishes the way lenders may arrange for payments under federal contracts to be irrevocably paid to them in support of loans made to the contractor. But these and other hurdles can be overcome.
  2. More Fintech vendors need to aggressively explore partnerships with specialty finance companies – most of this fintech has been more tech, than finance. And believing you have something special with a “Pay Me Now” button without truly understanding how companies finance their business leads to poor results.
  3. An industry group that supports any data collection that could be helpful for lenders, companies, and others. Today there is none for the Payable finance space.   For the asset based lending and factoring market, we have the Commercial Finance Association. For Payday Lenders, we have the CCRF. But no industry body really provides any real value or insights for the early pay space other than vendors self-promoting their capabilities with statements such as we have grown by 200% since last year.
  4. P2P networks that deal with direct spend.  Most P2P vendors cover indirect spend very well, but have little understanding of direct material spend and direct material vendors or cross border trade and the complexities here. There are exceptions, such as GT Nexus (now Infor) but it tends to be where most p2p networks play.
  5. More neutral experts that can bring together a deep understanding of legal, accounting, liquidity, technology, credit and capital markets and other issues to assess what is doable for working capital results. The Big 4 accounting firms do some of this, but accountants are not originators and while some have working capital practices and work with software vendors, I have found their level of deep understanding here to be self-serving, accounting focused, and dominated by the lead partner in charge of the account.

Agree?  Disagree?  What ideas do you have?

I am currently in Orlando at the Exchange Summit and I certainly welcome others input here.

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Voices (6)

  1. Robert Kramer:

    David, good post, I think you’re asking a very important question here. To look at it in another way, where is the Supply Chain Finance market in Gartner’s Hype Cycle? Has, or even can, SCF “cross the chasm” as Geoffrey Moore would put it.

    Back in 2012, when I was with PrimeRevenue, I thought Supply Chain Finance was at the “Peak of Inflated Expectations” and now it seems like the market is in the “Trough of Disillusionment”. Rather than looking at providers like Tungsten, I think you get a better feel for the market by looking at the leaders in SCF like the banks, PrimeRevenue, Orbian and, perhaps more importantly, results achieved by corporates.

    Corporate results are a mixed bag but show that SCF will become “more substantial”. Having implemented successful Supply Chain Finance programs, I’ve seen firsthand how getting it right provides strategic value. Kellogg’s said they generated at least $300 Million in cash flow from their “SCF” initiative in a single year and DuPont generated $2.3 Billion. That’s a lot more than a rounding error! Unfortunately, success stories like these are all too rare and, as you noted, recent market entrants like the P2P providers have very little to show for their SCF investments.

    I think you’re getting at the heart of the matter when you discuss the complexity and the lack of expertise among SCF providers. There is a huge gap between what most are selling and what corporates want to buy. Despite the marketing pitches, most vendors provide only a supplier financing solution. However, corporates want a payment term optimization solution. This has a host of implications for how you sell, design and implement Supply Chain Finance.

    So, what will it take to “make this market more substantial”? As both Moore and Gartner would tell us, Supply Chain Finance will remain in the Trough of Disillusionment until suppliers have a “whole product solution”, a complete solution that meets the corporate’s buying objectives. This includes changes in both go-to-market and implementation practices. We’re not there yet, but the value proposition from Supply Chain Finance is so compelling that it’s just a matter of time.

    Bob Kramer
    Partner, Capgenta

    1. David Gustin:

      Thanks Bob,

      Very thoughtful.

      No doubt, reverse factoring benefits big buyers directly by extending their payment metric of DPO. Many companies will measure how much spend per cost of good sold has been successfully extended terms through the program.

      But the impossible data to collect or measure is how does term extension come back in higher prices.

      A vendor told me, “We tried to do that and its really, really hard.” Another vendor told me that while they have analyzed well over $1 trillion in corporate spend, they were not able to do this.

      1. Bob Kramer:

        Hey David,

        Yes, I was just looking at that post. I think it’s farily easy to obtain the data required to examine the impact of term extensions on pricng, “Buyer’s” know which suppliers received extended terms and they can analyze the pricing impact, if any, experienced with those suppliers.

        Most current SCF vendors won’t have the data though because they don’t have pricing data, unless they get it secondarily from the buyer as part of the provider’s implementation process.

        Bob Kramer
        Partner, Capgenta

  2. martin mccann:

    Though Provoking article and great market update, thank you David. I can’t help thinking that the issue is lack of lateral thinking. Most solutions originate from either the finance or the technology perspective and inherit the existing constraints of that approach.In essence no one is designing a cashflow solution specifically for growth businesses. Everyone appears to be shoehorning existing trade finance strategies into this new opportunity.

    If you broaden the scope to include supply chain procurement processes and organisational design, specifically in AP, finance and Procurement (as noted by Michel’s comment) the focus becomes very different. I’m 100% certain we can design a technical solution that is scalable, but market adoption may well require a broader coalition of the willing as you state. This would become essentially a massive cross-industry change program and that rarely happens without disruption or legislation.

  3. Pierre Mitchell:

    Excellent post David. I think you nailed it. I would also add that Finance are not exactly early adopters and the CFO is likely chasing the squeakiest wheel, and this one isn’t squeaking too loud relative to other priorities (and relative to myopic metrics such as DPO rather than EVA/etc). Hopefully the proverbial pay-me-now ‘easy button’ will become a mindset rather than software functionality.

  4. Michel Kilzi:

    The market dynamics are changing with time. Fintech players are contributing to such change, but the business world, need more awareness in terms of really prioritizing Working Capital Optimization and accordingly differentiate between a simple financing mechanism, and a strategic track that will reshape the company entire working capital and thus it’s cash flow. More synergy alignment is essential between procurement, Finance and treasury….

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