21 October 2014

Innovation in banking

Jaap Jan Nienhuis - Innopay

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Innovations in SCF: Learnings from EPCA summit 2012 in Rome

02 May 2012  |  2896 views  |  0

On the 18th of April I organised an expert session during the 11th EPCA summit in Rome. The conference was held in the Palazzo Altieri, a beautiful place with a rich history in the heart of Rome. 

The topic of that session was “Supply Chain Finance: unlocking the SME”. Speakers contributing to the program were Liliana Fratini Passi (CBI), Reinier Weerman (Flinqer) and Lars Rolf Jacobsen (Tradeshift).

This is what I learned:

1. Banks are lending less money in general, and in particular to SME’s as a result of the growing risk-aversion resulting from the financial crisis, and the increasing capital requirements banks are facing due to regulation (BASEL3). Due to this, SME's are seeking for alternative ways to optimise their working capital. 

This takes place in two different ways: (1) reduce the need for working capital (for example by reducing DSO). This is were dynamic discounting and other initiatives come into place. And (2) optimise cost of capital, effectively reducing the cost for SME’s to finance their working capital (this includes reverse factoring, peer2peer lending, etc).

Due to these market dynamics, the industry of Supply Chain Finance services is being revolutionised: new, innovative, non-bank players enter the market of enabling SME’s to optimise their Working Capital.

2. These new innovative players such as Tradeshift and Flinqer, challenge the banking financing business along two dimensions: (1) they disintermediate the long term relationship lenders currently seek with SME borrowers and (2) more and more non-bank lenders enter the marketplace (peer-to-peer lenders, but also dynamic discounting providers). See picture below.

3. One of the interesting innovations offered by Flinqer is what I would like to call “dynamic-dynamic discounting”: it is the ability for SME’s and corporates to dynamically optimise their discount percentage, effectively bringing together requested (by buyers) and offered (by suppliers) dynamic discounting rates. In addition, Flinqer challenged our intellectual capability by drawing a mind-bending future where multi-lateral netting is applied between parties in the supply chain, not only reducing the need for finance, but also for payments. 

4. There are also companies such as Bilbus, that offer services towards SME’s and lenders by acting as a matching engine between an SME’s business and a lenders risk appetite. Such initiatives help both SME’s in managing liquidity and efficiently seek finance, whilst helping lenders to find SME’s that match their risk appetite and manage the associated risk during the lifecycle of the relation.

5. Most banks do not have the capability themselves to onboard the long tail of SME's into a lending service and monitor the risk associated to the SME. Companies such as Tradeshift could help banks to address this problem by providing risk and KYC information about SME's and their supply chain to the actual lender / bank.

6. Despite the challenges banks face, they still have a unique 4-corner model, where information about the risk of a trading party is communicated between banks. SWIFT & ICC are developing such a concept called the Bank Payment Obligation (BPO). The challenge however is to apply this concept into a SME focussed and compelling value proposition, rather than a “replacement of documentary trade”.

7. The Italian market has very challenging payment terms, with sometimes DSO rates of over 1 year. As a result, the financing business in Italy is potentially very big. CBI (the Italian customer to bank infrastructure) maintains an ecosystem that enables banks to offer innovative SCF services to SME, enabling SME’s to initiate financing requests that are tightly linked to invoices (and possibly other documents).

For addressing the longtail SME market, low-cost deployment infrastructure (read cloud) is key. Later in 2012 CBI will offer a cloud-based version of this infrastructure, which can be incorporated by banks in their services towards SME's. This will allow banks to develop their own innovative SCF propositions (amongst others).

Closing remark: SCF is a complex topic, with many faces and dimensions. The main challenge for banks and innovative service providers is to translate the complexity of Supply Chain finance into an easy to understand and communicate proposition for SME’s. Tradeshift is a good example of that, labeling their Supply Chain Finance services as “Instant Payments”.

Thanks to everybody who contributed to this inspiring session, and hope to see you next year on EPCA 2013 (details will follow).

 

Figure: challenges in 2 dimensions TagsPaymentsWholesale banking

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name

Jaap Jan Nienhuis

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Consultant

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Innopay

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2011

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Amsterdam

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As a consultant I am involved in the development of payments, e-invoicing and related services fo...

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