Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance
Today, banks are by far the dominant player in providing supply chain finance, and do so in four ways:
- Direct credit facilities to their customers (corporate buyers) who can then use the facility for early payment to their supplier ecosystem.
- Provide an uncommitted credit facility to their large buyer and then the bank will on-board their suppliers and also sign a Receivable Purchase Agreement with their client’s suppliers if they want to discount their receivable.
- Provide the funding for dedicated supply chain finance automation vendors such as PrimeRevenue or Orbian.
- Provide funding as part of a Fintech solution (for example, supply chain collaboration vendor, Treasury management solution vendor) where the company using the vendor brings their house bank as part of the supply chain finance solution.
Many Fintechs that offer source-to-pay (S2P) and other supply chain collaboration solutions still have a strategy of using their clients’ house banks for supply chain finance. While it makes things easy if the customer can bring their own bank, it does not come without risk.
Is Reliance on a House Bank-Only Strategy Wise?
The regulations coming out of the Great Recession around capital and leverage have made it more difficult for banks to lend to NON-investment grade companies. In addition, onerous compliance rules such as Uniform Beneficial Ownership and Know Your Customer have made it very difficult for banks to deal with non-customers with the exception of those with the largest of names, or well-established suppliers to large corporations.
Fintechs are subject to a bank’s credit policy, and many banks are not comfortable lending to companies that are not investment grade or near investment grade given the capital, leverage, etc.
In addition, capital is scarce within a company. There is an internal demand for credit capacity at a company and having your bank provide facilities to fund your supplier ecosystem may not be the best priority relative to other lending options. Using it in this way means you may not be able to use in it in other ways, all things being equal.
Renegotiating Credit Agreements
Many companies are also renegotiating their credit agreements. We have been in a long-term cycle of interest rate reductions that started with the Volker era in the early 1980s. Many of you were not around professionally then, but I swear rates were above 20%. This benign credit cycle could be ending. Companies are certainly feeling it as their rates are renegotiated upward when current loan contracts end.
All these factors speak to S2P platforms to think hard about relying only on banks as their funding provider. With the potential for early pay finance to mushroom through marketplaces and source-to-pay platforms, non-banks can help fill the void.
In the next post, I will look at some of these non-bank options.