event driven finance where are we now, where are …...©2017 global business intelligence. and...
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©2017 Global Business Intelligence. and Trade Financing Matters
David Gustin
President, Global Business Intelligence
CoFounder, Trade Financing Matters
Event Driven Finance –
Where are we now, where are we going?
@davidmgustin
https://ca.linkedin.com/in/david-gustin-cfa-285561
Source: Tiger Hawk Blog
Vancouver
12 Disruptive Technologies according to Mckinsey
Impact Working Capital
1. 3D Printing
2. Mobile internet
3. Automation of knowledge
work – Machine learning, AI
4. Internet of Things
5. Cloud Technology
Others
1. Energy storage
2. Genomics
3. Advanced materials
4. Autonomous vehicles
5. Renewable energy
6. Advanced robotics
7. Advanced oil and gas
exploration and recovery
The world is changing our game.
Source Bob Solomon
Access to the Network Changes the Lending Game!
OEM- Dealer – National Account Model
Network Types and Spend Coverage
• Source to Pay
• Order to Cash
• Treasury Management solutions
• Supplier Management solutions
• Invoice Finance as a service
• OEM-Dealer-Customer networks
• Dedicated supply chain finance platforms – NOT A NETWORK! More a managed service provider.
Percentage/share of spend in
different categories:
– Direct Material
– MRO/catalog
– Specialized: print, telecom,
marketing, logistics, IT, etc.
– Services (simple +
complex)
– Contingent labor
– T&E
– Other indirect/catalog
Where Are We Now?
We see various ALTERNATIVE finance techniques being offered to companies by size:
Technique
Merchant Cash Advances
eFactoring - Single Invoice Finance or group of invoices
Buyer self funded Dynamic Discounting
Purchase to Pay and Other Networks – Third party finance
Marketplace Lenders
Single use Virtual cards or pcards
Working Capital platforms where sellers name their price of funds
Supply Chain Finance
Receivable Auctions
Small
Companies
<$20M
Large
Corporates
>$2bn
Middle Market
Corporates
$20M to $2bn
“Disrupters OR Wannabes”Business Banking
• Checking Account
• Cash Management
• Lending / Credit
- Commercial Purchasing cards
- Line of Credit (Letter of Credit)
- Loans
> Small Business Installment
> Commercial Mortgage
- Working Capital Loans
> Asset Based Lending
> Factoring
> Invoice Discounting Line
> Distributor finance
> Supply Chain Finance
Summary analysis: comparative coverage/capability
New Partnerships... Bank Strategies to Compete SMB Lending
Source: Karen Mills, Brayden McCarthy, HBR.org
Event triggered finance is still all about the Approved Invoice
1. Signed
Contract
4. Shipping
status
verified
2. PO issued 3. Material
ordered
6. Invoice
approved
5. Invoice
issued
Pre Shipment Finance Post ShipmentIn transit
Inventory
Triggers: • Signed
contracts
• Order
confirmation
• Transport
documents• Invoice
issued
• Buyer
approval
• Purchase
Order
Early pay off of an invoice approved comes in two flavors:
• Invoice matched by Buyer and approved to pay and Buyer signs agreement to pay regardless of credit
note adjustment, thus straight buyer risk.
• Contractually committed payables, whereby the invoice has been approved by the Buyer but no
agreement has been signed for credit notes. This is the space P2P and Supplier Networks play.
Other events or triggers, such as purchase order, or ASN released, have seen very little activity with P2P or
Supplier networks.
Low Hanging Fruit –Most Activity centered around Approved Invoice Finance
• C2FO — Undisclosed.
• Basware – Undisclosed.
• GT Nexus (now part of Infor) — Undisclosed.
• Orbian – Undisclosed.
• PrimeRevenue — Actual invoices financed is not
disclosed.
• Taulia - company reached $75 billion in short-term
financing provided to suppliers -the total value of invoices
customers PAID EARLY (as of Jan 2015)
• Tungsten – Publically disclosed. Very small.
Prominent Reverse Factoring Vendors (Non Banks)
Summary analysis: comparative coverage/capabilityS2P OEM- Dealer O2C TMS Supply Chain /
ERP
Dedicated
SCF
Early Pay – Buyer signs
agreement to pay
Early pay – Approved Invoice
(ie, N-way match)
Buyer Self Funded Dynamic
Discounting
Efactoring – Invoice issued, not
approved (ie, Invoice Fin)
Shipping Status (ie, ASN, Bill of
Lading)
Purchase Order Issued
Procurement – Pcard or Virtual
card capability
Third Party Finance option(s)
Sellers able to fund across
buyers (eg, need 100K)
Indirect Spend Coverage
Direct Spend coverage
No Offering Planning Some
functionality
Full
functionality
Types of Networks and Working Capital Coverage
Where Are We Going?
Amazon and the Fly Wheel
$1,100 per year avg. purchases
Amazon Fly Wheel
Global
Expansion
?
Increased
Content /
Services?
The Infrastructure is Maturing to tie Networks with Funders
API’s
Low Code
Platforms
Marketplace
for Risk
Distribution
Artificial
Intelligence
Networks &
real-time
dataInfrastructure
• Move B2B underwriting to as near to 100%
automated as can be.
• Use real-time data as opposed to third
party data that is static.
• Build decision engines that predict high
ability to pay and manage losses to
reasonable levels.
• Use marketplaces developed for investors
to buy assets based on risk / return models
and distribute risk.
• Build applications quickly by business
people, without writing any computer code.
Specialty Fintech lenders are starting
to take advantage of the maturing
infrastructure to:
Analytics as a Service
23
Example datasets:
1. Network data + predictive analytics = supplier take-up of different
early pay options, Third Party v. Own Cash, etc.
2. Traditional AP / Invoice data alongside contract terms/information,
3. Based on invoice-level data, develop smart algorithms that predict
a range of risk parameters, such as the probabilities of default or
expected timing of invoice payment = setting of Dynamic Credit
Limits
4. Warranty/claims data (for both products bought and those sold,
commodity markets information, demand data, etc.)
5. Mapping Structured data and combining with Unstructured Data
Invoice Finance as a Service
Selective invoice finance is becoming more technology oriented and also much
less focused on auctions. This is true receivable finance (or non confirmed
basis)
New models are trying to automate traditional factoring by applying new underwriting
tools via one of three invoice sources:
• integrate via accounting software and have a button to request finance or,
• integrate with einvoicing platforms so when you issue an invoice, can be financed
or
• suppliers can also manually upload and submit invoices to platforms.
Specialty finance lenders playing in this space can establish dynamic credit limits
based on network data or key company information, like a registration number.
Seller
Request
funds
XYZ
Supplier PortalFunder
New Infrastructure enables B2B underwriting to move to 100% automation – an example from a Supplier Portal.
Buyer
Accelerated Cash
Request
Supplier Details
Decision
If yes, change
payee to funder
and inform ERP
of buyer and
PortalAutomated Decision
Engine (Y/N)
Automated Decision Engine assigns
cumulative score based on:
• Business score - liens, taxes, credit,
accounts receivable, etc.
• Personal Value score- personal
credit
• Social Value score - social activity
family data, military
• Trust Fraud score - Fraud Threat,
and compliance
• Loyalty Value score – partnership
history
• Historical Success score - level of
education, career history, etc.
The funder will establish a dynamic credit limit that gets adjusted when invoices are paid.
Accelerated
Cash
Confirmation
Working capital solutions are being added to specific industry sector cloud-based invoicing and payment platforms.
Many of the common elements of
these industries are:
• Complex approval processes
• Fragmented suppliers
• Suppliers with a much higher
cost of capital than buyers
• Regulations or complex
contracts
Sectors or Spend Types which
show promise are:
• Construction
• Logistics and Transportation
• Contract Staffing
• Healthcare
• Oil & Gas
• Media
Specific Sector Solutions
Construction SaaS platforms are now tapping into supply chain finance, a multi-trillion global, untapped market.
Typical Construction Supply Chain
Total annual construction value in the US alone is about $1 trillion. Construction has all of the
desired elements: small, fragmented contractors and subcontractors, big GCs, complex approval
and payment processes, and different rules in every state for how liens work.
So What are Finance Innovators Going After?
• Convergence of data & events
• Working with Networks to apply risk models and
algorithms
• Predictive Buy-side Analytics
• Link the borrower’s accounting system with the
lender’s software (ie, SMB stuff)
• Multi-tier SCF (with Blockchain + Tokens)
• Still early days – looking for scalable volumes to
combine with Capital Markets
Middle Market
What percent of your receivables are funded via: Bank
credit lines? Factoring? Invoice discounting? Adhoc
finance programs like DDM and SCF?
Do MM companies envision moving to more adhoc
financing techniques? For incremental needs?
What does that do to their lending relationships?
Small Business
Speed – but
really confusing
and tiny print!
FinTech Proliferation
Certain extinctions are unpreventable …
but we can learn from what survived
during the last major one on Earth!
Bringing it together
The dislocation of credit and capital markets is bringing massive changes.
Financing is a “hard nut to crack” beyond approved invoices.
The connected commerce world is not going to stop.
What is the next “Black Swan” event – Living in benign credit world for some
time.
Speed – expect a rate of change like nothing else we’ve seen before.
Q A&
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