How Fintechs Can Use Non-Banks for Supply Chain Finance
In my last post, Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance, I discussed how source-to-pay platforms and other cloud software providers still rely on their clients’ house banks for supply chain finance and why that might not be the wisest strategy given the times.
Just to repeat the main point, relying on a bank’s credit policies to fund anything other than investment-grade clients is risky. The non-bank market is still evolving and in early days.
With all the talk about how trade is an asset class, you would think investors can just go to a Bloomberg screen to buy trade finance or invoice finance assets. But this talk of “asset class” is mostly marketing, as the market for non-bank investors in trade finance, invoice finance or trade receivables share three characteristics:
- It is small — My market discussions tell me almost all investment-grade supply chain finance distribution is sold to other banks, with very limited exceptions.
- It is a private placement market — These assets are not traded like public stocks, bonds, notes, etc.
- Investors are challenged to assess risk/return — An example here would illustrate my point. Say I could buy a two-year Vodaphone note with a yield of 3.25% on Bloomberg OR had the opportunity to purchase a higher yield two-year synthetic note backed by a pool of Vodaphone (+ other?) receivables, through a trust structure. The latter might provide a higher yield (40bps, 75 bps, etc.) but the differential in risk versus the increase in yield is something few people can properly assess. Most “investors” do not have the staff to assess the bespoke nature of these investments from an operational risk perspective. There are very few asset managers that understand this space as well.
Herein lies the paradox. The potential for early pay finance to mushroom through source-to-pay platforms, marketplaces and other networks is large. SAP alone has 24% of the ERP market share, and some procurement and AP automation platforms have tens or even hundreds of billions of approved invoices running through their system that can be financed by third parties.
So if you are a Fintech and want to offer supply chain finance, what are your options beyond a house bank strategy? I see three options beyond relying on your client’s house banker to fund an early payment initiative.
- Balance-sheet lending facility — A platform can get a line of credit with a bank or banks to fund themselves, but this comes with the hassle of securing a credit facility, utilization issues, credit oversight by bank(s), etc. A root canal is less painful!
- Use of some securitization structure with an asset arranger — Given that these invoice assets are short term and generally less than 90 days, this becomes an exercise in structuring and tends to have limited transparency, especially between what investors receive in yield and what is charged for early pay finance. Depending on how this SPV is manufactured, what an investor owns will convey certain rights. The devil is in the details.
- A marketplace-lending model — Investors can manage their investment through a platform in terms of choice, accounting, reporting, etc. but still have an SPV structure. This method appears to offer great promise because, through automation, investors can view the assets they own, they can set the parameters for investing in these assets (credit quality, currency, min yield, etc.) and they can manage these investments through an automated platform.
The marketplace lending platform holds great promise. Just to be transparent, we at IFG have built a marketplace model that funds suppliers’ early payment requests. Our Digital Invoice Finance Marketplace Platform provides suppliers with multi-currency capital offered by a pool of vetted Institutional Investors.
Yes, there are many ways to skin a cat. Investors will have increasing options to invest in trade receivables through one form or another. And Fintech providers have more options than just their clients’ house bank.