The Euro Crisis and Supply Chain Finance: New Players Enter the Game

Synopsis

In recent years, a new breed of non-bank players has emerged in the European Supply Chain Finance (SCF) marketplace, offering solutions particularly well-suited to the needs of small and medium enterprises (SMEs). Looking ahead, I believe that a November 2009 change in EU financial regulations positions yet another group of highly entrepreneurial non-bank players — Payment Service Providers — to take SCF for European SMEs to the next level.

The Dilemma: How to Bring SCF to European SMEs

Around the world, there is growing awareness of the potential for improved profitability offered by effective financial supply chain management. In Europe alone, a recent estimate puts the amount of working capital that could be released through better management of the financial supply chain at $475 billion[1].

SCF is seen by many as an under-exploited way to tap into this potential. As a result, corporations large and small are increasingly interested in exploring and applying SCF solutions. Unfortunately, viable SCF solutions aren’t readily available to all.

Why? Because to be viable, SCF solutions require timely action from multiple partners. For larger corporations with top-grade credit ratings and high volumes, some banks are prepared to set up customized mechanisms that allow SCF arrangements to be put in place quickly as opportunities arise. Few, however, are prepared to set up these mechanisms for SMEs. The tightening of credit caused by the ongoing Euro crisis makes this especially true in Europe. If we add in the fact that Europe is only recently beginning to catch up with the Americas and Asia in the application of SCF, the enormous potential for SME-friendly SCF solutions in Europe becomes very clear.

New Players Enter the Game

Recognizing the opportunity offered by the under-served SME sector, several non-bank players (see Examples below) have already entered the European SCF marketplace. Combining innovative technologies with novel service models, these providers facilitate timely setup and approval of ad hoc SCF arrangements in ways that meet the needs of both the SMEs and the funders. Some take SCF-facilitation a step further by allowing multiple funders to pool their resources and share out risk in mutually agreeable ways. This can make SCF solutions available to SMEs who might not be able to obtain them from a single funder.

The new players described above might previously have been satisfied to provide SCF-focused software to the banking industry. In the face of the European banks’ reluctance to act, however, they are now providing SCF services directly to the SME sector — potentially establishing long-term client relationships those banks may one day wish they had not spurned. And now, even as these new players continue to define and establish their role, the European SCF marketplace may be about to witness the entry of yet another highly entrepreneurial group of non-bank players: Payment Service Providers (PSPs).

Payment Delivery and SCF — A Natural Fit

Around the world, PSPs such as PayPal and Moneybookers provide online services for accepting payments via payment methods ranging from credit cards and direct debits all the way through to prepaid cards, vouchers, cash, and even paper or e-check processing. While PSPs have proven their value in the retail market, they have not yet found a solid foothold in the world of B2B payments. That may be about to change.

Until recently, EU regulations prevented PSPs from operating in the European financial market. This obstacle was removed with the introduction, in 2009, of the European Union's Directive on Payment Services (PSD). The PSD was designed to make cross-border payments as simple and secure as payments within a single country. However, it had the incidental effect of opening the door to participation by PSPs in the SCF marketplace.

PSPs are all about innovation. And with the new regulations in place, PSPs are well-positioned to introduce a new and more robust B2B finance model to the marketplace. Specifically, by combining SCF with payment delivery, PSPs could offer end-to-end support for the purchase to pay process — an offer that has, until now, been out of reach for European non-bank players.

Conclusion

The jury is still out on whether or not banks serving the European market will develop SME-friendly SCF services. They might do so by adapting their existing services to the SME sector. They might partner with one or more of the new players. Or, in order to free themselves from restrictions they face as full-service banks, they might even explore the possibility of launching independent, non-bank PSP/SCF offerings of their own.

Understandably, banks may fear that pursuing any of these options would cannibalize existing, profitable business lines. Should they fail to act at all, however, their “share of wallet” in the vast SME sector is likely to suffer meaningful erosion.

Regardless of the banks’ response, the stage is now set for entry by PSPs into the rapidly evolving B2B-finance marketplace. If the PSPs see and seize that opportunity, the result will be a whole new level of financial supply chain support for European SMEs.

Examples

Though they are still few in number, companies such as the ones described below serve as examples of the new breed of non-bank SCF provider described above. We expect them to inspire additional entrants into a market that looks extremely lucrative.

Oxygen Finance (UK) enables a buying organization to offer invited suppliers consistent, accelerated payment in return for early payment fees. Oxygen’s dedicated platform and best-practice processes bring greater efficiency, flexibility, and transparency to this exchange than would be possible without its involvement. As well, because Oxygen’s intermediation allows the early-payment fees to be paid as rebates, rather than as a pricing discounts, the savings are returned to the buying organization as income —a direct input to the bottom line that can be directed as required by the business. Suppliers benefit from fast, reliable access to early payment on better terms than they could obtain through traditional factoring.

The solution offered by Taulia (USA, Europe) is based on the concept of dynamic discounting. It encourages suppliers to opt in for early payments. Dynamic discounting allows buyers and sellers to dynamically change the payment terms to accelerated payment based on a sliding discount scale. The buyer allocates a “pool” of liquidity, determines liquidity limits, and establishes the interest rate for early payments. Once invoices are approved, the suppliers are automatically informed about new early-payment options. Through the portal, suppliers are able to view their approved invoices and trigger payments prior to the nominal due date, accepting the corresponding discounts.

Corporate LinX (CLX) spans the entire purchase-to-pay process, offering a solution that automates purchase order management; invoice issuance; generation and management of credit notes; and tracking and reconciliation of remittances.

Notably, CLX claims that its workflow offers buyers benefits related to regulatory guidelines regarding the accounting treatment of supplier financing. Typically, with bank-provided portals, the buyer has to firmly commit that the bank will not suffer any risk consequent to a non-payment. This commitment to act as the guarantor of the financing can be seen as the opening of a new credit line with the bank. The CLX workflow is designed to shift the request for financing from the buyer to the supplier (and avoid various other regulatory pitfalls), allowing buyers to make financing available to their suppliers without being penalized for undertaking new bank debt.

Lighthouse BCS (Europe) offers a sort of “online dating website” that connects funders with buyers and suppliers seeking supply chain financing. The funder (e.g., a financial institution, investment fund, or private equity firm) establishes the rating criteria against which it elects to provide its funding capital. There is no funds transfer from the funder to a portal account; funders just commit to the pool.

Funders can participate in more than one pool, and can choose among the various pools based on their risk appetite. Buyers are assigned manually into appropriate pools by Lighthouse, based on the funders’ agreed-upon rating criteria. As invoices are approved by these buyers, their suppliers are automatically notified whether early payment is available, subject to funding pool limits. Suppliers can use the Lighthouse web portal to track invoices and invoice status, review dynamically calculated discount quotes, and request early payment. Buyers use the portal to manage and approve invoices, and funders use it to add to and fine-tune their pool commitments and funding rates.

Global Supply Chain Finance (GSCF- Europe) claims that distributor finance represents an attractive product for funders, as well as an efficient funding alternative for corporations seeking to release working capital across the supply chain. A dedicated team of GSCF financial analysts that collects, reviews, analyzes, and rates buyer financial statements. The resulting analyst reports are made available to GSCF clients —funders, credit insurers, and suppliers — via a web-based platform. Funders and credit insurers typically only purchase receivables that meet certain eligibility conditions.

The GSCF platform automatically applies these eligibility conditions to each invoice downloaded from the supplier and only processes invoices that meet these conditions. The platform automatically calculates program fees and late payment charges. The platform is electronically connected to funders’ bank accounts, allowing funders to track payments of outstanding invoices and to automatically reconcile paid versus invoiced amounts.

Of all the new players, Advapay is the closest to incorporating the PSP model. Advapay’s shared e-invoicing/e-finance platform integrates basic payment options with effective management of working capital and order-to-cash processes. The platform has been developed for Hungarian and EU-based small and medium enterprises (SMEs) actively engaged in the international trade. For a majority of internationally trading SMEs that do not yet use e-invoicing, the Advapay platform offers the convenience of saving costs on invoice administration. Corporations that already use an e-invoicing system can get substantial additional benefits with the supplemental e-financing service that supports, for instance, handling of non-mainstream currencies, transactional financing (e.g., to finance trans-border account payables, or to conduct factoring of accounts receivable), and tax agency requirements.

In the best example to date of a bank-based automated-service model aimed at SMEs, Rabobank’s Bizner Bank opened for business in February 2007 as the first direct SME bank in the Netherlands. Bizner Bank aimed to provide “everything that SMEs need” without human intervention, including savings accounts, term deposits, credit and debit cards, bank guarantees, and small credit facilities. On top of this, it built several innovative cash management and reconciliation products.

In the end, although Bizner Bank grew from zero to more than 15,000 customers in just 18 months, Rabobank closed the business in 2010, declaring that “the decision to end the service [was] purely commercial.” It remains to be seen if this initial bank-based entry into the European SME marketplace will be followed by others with greater longevity.

[1] Annual European Working Capital Study, 2009, PriceWaterhouseCoopers