Context
Further context for Digital Innovation:
Data determines destiny:
- Financial institutions and asset managers are harnessing the tools, expertise and infrastructure needed to turn data into actionable insights that can drive growth in lending, investments and their client & investor base.
Digital imperatives dominate:
- Financial institutions and asset managers are trying to harness digital technologies to support a data-centric world while growing and serving their clients & investors/funders with agility;
- The pandemic has forced financial institutions to rethink their operating model. Now more than ever, they recognize the need to digitize and automate as much as they can to reduce risk and improve efficiency.
An open architecture can help financial institutions, e.g. banks and NBFIs (non-banking financial institutions) adapt their existing operating models to meet the demands of the future, realizing synergies, taking advantage of opportunities and minimizing risk without undertaking timely and costly system conversions.
Especially, in the receivables & supply chain finance (R&SCF) space there is a lack of a cost-efficient infrastructure for carrying out R&SCF at scale. Below we illustrate how digitalisation is rapidly solving this problem. Banks and NBFIs are increasingly working with FinTechs to reap the many benefits of digitalisation and ensure they are future proof.
The bottleneck problem
Historically, the primary suppliers of R&SCF were the larger banks, which used cumbersome, human and paper-based processes to manage complex R&SCF programmes. But such processes were unaffordable for mid and smaller banks and lacked scalability for serving the mid-market company sector, which has a higher margin but lower transaction size per ticket.
From the year 2000 demand for R&SCF kept growing in tandem with the explosion of global trade. But growing demand was unmet by the larger banks. This led to a ballooning of the global trade financing gap, which rocketed to reach USD 1.7trillion today. The largest (and most under-served) segment of this gap is mid-market corporates in emerging markets.
Why did this gap balloon? Rather than a lack of financing interest, one of the primary reasons was the lack of suitable processing infrastructure to serve mid-market corporates. Indeed, R&SCF’s attractive risk-adjusted returns, resilience to bad economic conditions and its ability to act as a gateway to cross-sell other products had already made it a profitable and attractive business for larger banks to service. It was a classic bottleneck problem: the lack of a cost-effective servicing infrastructure able to service the mid-market corporate segment and a tail of smaller suppliers in large R&SCF programmes at scale.
Digitalisation leads to a dramatic reduction in R&SCF operational costs for both clients as well as financial institutions
Having identified this imbalance, FinTechs seized the opportunity to resolve it by getting to work on digitalizing the entire R&SCF transaction chain. From origination to funding and ongoing transaction servicing, we are now beginning to see one of digitalization’s primary benefits: a dramatic reduction in operational costs and the upending of the entire R&SCF sector as we know it.
Properly implemented digitalization brings scalability and increased transparency , leading to better risk management. The knock-on effect is an increase in the number of corporates and funders engaging in R&SCF.
Three main driver of digitalisation
First is the mass adoption of digitalization globally. It is now unthinkable for any serious business to not offer its services digitally, at least partially. The benefits of a digital offering that serves a larger audience quickly and efficiently are too high to ignore nowadays. Doing nothing is no longer an option.
Second, as in so many other sectors, the pandemic has dramatically accelerated digitalization in trade finance. The Asian Development Bank Insitute (ADB) reports that the Covid 19 pandemic “led to an acceleration in the rate of digitalization and diffusion of digital solutions into business models and practices across a range of sectors.” A so-called “nice to have” quickly became a “must-have”.
Third, as noted above, R&SCF was ripe for disruption due to its “closed circle” approach controlled by the larger banks. Basel III’s increased capital requirements provided additional disruption opportunities for FinTechs as some larger banks withdrew from R&SCF. With the imbalance between demand and supply worsening further, FinTechs seized the moment and paved the way to enable smaller banks and institutional investors to participate in R&SCF.
Two main routes to digital engagement via FinTechs
Banks have various options when it comes to building and managing their R&SCF operations. Their options will largely depend on their level of R&SCF experience and business objectives.
One route, in particular for mid-market and smaller banks, is to join an R&SCF platform. By doing so funders can quickly access a larger basket of quality deals to finance, sometimes coupled with a cutting edge technology platform to service deals at scale. This empowers a bank to play to its traditional strengths as a funder and leave technology-enabled servicing and risk origination to a platform, the size and variety of which it would be unlikely to reach on its own.
A second route is to manage their own R&SCF platform, at which point they face two choices: to build it new from scratch internally or to license it using a white-label application of the platform.
We look at the first two routes in the next section.
Joining an R&SCF Platform
A very effective way for a bank to begin engaging with a FinTech is to join an R&SCF platform. The best platforms should offer both smart origination (a prequalified deal flow that matches a funder’s specific investment parameters) and smart tech (servicing of transactions at scale). Platforms come in all shapes and sizes, and Qube’s R&SCF solutions, PRI® platform, offers the following industry-leading benefits.
- Access to qualified deal flow via Qube. This mandate-driven service matches deal flow to funders’ pre-agreed underwriting criteria.
- Comprehensive due diligence provided by Qube before a deal is available to funders for review and supported by complete Credit and KYC packs.
- Front-to-backend automated servicing infrastructure resulting in significantly lower operational costs and faster client onboarding time.
- Real-time monitoring of data and transaction status through the technology platform leading to better risk management and fraud mitigation .
- Standardized deal structures for transactions originated and supported by the platform save months of one-to-one negotiations and structuring.
By joining a platform as a funder, banks and NBFIs can focus on their core USP: underwriting and funding a client base that fits their specific credit appetite. A platform with sufficient vetted, structured and relevant deal flow results in lower customer acquisition costs for funders and significantly shortens the origination to execution cycle. It also enables funders to scale up their books much faster than doing it alone.
The more corporates and funders join an R&SCF platform, the more valuable it becomes to its users as the network effect kicks in. Qube’s platform has in-built features that support this not only through access to a wider pool of transactions but also by enabling funders to offer their own deals for co-funding/ risk participation to other funders registered on the platform, thereby engaging with the whole ecosystem.
Partnering with platforms is particularly suitable for mid and smaller banks and alternative funders seeking to provide R&SCF funding to the mid and smaller corporate sector. This represents an attractive cost/benefit option whilst saving on substantial development and maintenance costs. It also offers a relatively easy way to test out a collaboration potential with a FinTech due to pre-made ‘plug and play’ infrastructure enabling funders to join with no upfront costs.
Managing your own R&SCF funding platform
Software development is a very specific skill set. It requires combining a wide range of people, from CTO, coders and Dev Ops to testing specialists, to name just a few. This complex and expensive undertaking represents a large and sunk upfront cost. Once in place, it requires additional ongoing maintenance and development costs. Qube, as an example, has spent EUR10m over ten years in developing its R&SCF solutions.
The alternative is to license an existing customisable SaaS solution such as Qube’s platform . This is ideal for larger banks and NBFIs with a sizeable R&SCF business. The licensing route will minimise disruption during the transition process and enable the bank to offer improved quality of service to its customer base. Processes can be digitalized, designed and implemented to match or build on existing practices at a fraction of the cost and time. However, it is even more suitable for mid and smaller banks lacking the resources to build such complex and expensive systems in-house. By doing so they can compete in the market or validate their business model before investing more time and effort.
Each SaaS provider is different so choosing carefully is essential. In the case of Qube’s SaaS, the main benefits include:
- Ready-made front-to-backend R&SCF/receivables modules at a fraction of the cost and time of building internally.
- Continuous development of software designed specifically for R&SCF. Qube’s licensees automatically benefit from new features, improvements and updates, with no additional development costs.
- An improved client experience through consistent daily and intra-day data collection, full transparency, ability to fully automated daily settlement.
- The collective knowledge and experience acquired from dozens of similar implementations carried out by Qube and fed back into continuous product improvement.
- White label. Clients can apply their own brand identity, logo, corporate colours and customisations to maximise customer satisfaction vis-à-vis their brand.
Bear in mind that adoption and engagement are two very different things. Research by McKinsey shows that anchor buyers (those who often set up an R&SCF programme) consistently rank supplier onboarding as the single most important factor in a successful programme. Similarly, for suppliers ease of onboarding was the most frequently mentioned priority, well ahead of the cost of the facility. The same research indicates that only about a tenth of the R&SCF market potential—USD 2billion of the potential USD 20billion in R&SCF revenues—is captured globally, with poor user experience being a primary factor.
The user-friendliness of Qube’s platform solutions and easy integration into banks’ existing operational models will ensure an elegant way to unlock working capital that serves both buyers and suppliers.
Select your FinTech partner or vendor with care
It’s essential that a funder selects the right fintech partners for its business. This may sound obvious but is often not allocated sufficient attention, given the many options available today. It will be time well spent. Avoiding a careful selection process will likely lead to problems further down the line.
Funders should evaluate fintech platforms and tech solutions based on relevance to their target market, geographical reach and integration suitability into their operating systems, among other factors. Given the innovation taking place in R&SCF and the rise of so many FinTechs, we advise clients to choose a partner that has experience in both offering an origination and servicing platform that funders can join as well as deploying in-house solutions to banks and NBFIs. This means its products will have been tested via both routes. Such a plethora of experience will prove invaluable to clients, who will benefit from day one from this accumulated experience.
At Qube, we believe that the best solution is the one that’s best for the client. We live in a world of increasing specialisation in which time to market is crucial. Which is more important: specialization or time to market? In our view, both are. Collaborations that draw on each party’s core strengths, be that funding by a bank or digitalization know-how by a fintech, are the best way to meet a client’s needs on time and on budget.
Clients come in all shapes and sizes, each with its own specific needs. It is the proactive banks and FinTechs that spend time to find and build the right partnerships that will come out winning. Enabling an R&SCF ecosystem to develop based on collaboration rather than siloed competition is the way forward.
Qube‘s PRI® platform
The PRI® platform is highly scalable and cost efficient as result of the key characteristics:
- Front-to-backend fully automated receivables financing platform, including credit & collection management and supply chain finance solutions;
- Multi jurisdiction solutions with pan–European focus which can be calibrated for the US and other regions very easily.
The cohesion of the PRI® platform consists of the applications:
- PRI® inside , data warehouse and account receivables financing platform ;
- PRI® CrediSoft , credit & collection management application;
- PRI® Supply Chain , supply chain finance application.
And connected with clients via fully automated and easy to implement data connections based on a standardized script.
Added value of the PRI® platform is best explained via client as well as funder perspective, which contributes to the added value of the banks and/or NBFIs joining the platform as funder or having a license, i.e. white labelling.
Client perspective:
- Client will be able to optimize the asset site of its balance sheet, by:
- Optimizing working capital using PRI® CrediSoft
- Monetizing open account receivables through PRI® inside
- And will be able to reduce funding costs
- As part of the trade-off between direct payment of invoices of creditors and payment discount optimizing the credit site of the balance sheet using PRI® Supply Chain
- And creditors will monetize the account receivables and in addition can optimize working capital using PRI® CrediSoft
Funder perspective:
- Funding Partners will benefit from:
- Qube Platform offers full transparency and up-to-date insight based on actual data, see also Qube Financing PRI® inside Pillars
- Embedded risk model as part the risk management framework mitigating the risks