There are some people who do more than they tell. Tom Dunn, the Chairman of Orbian, is one of them. He has quietly built a big and profitable Fintech business that is delivering low interest finance to SMEs and better risk adjusted returns to investors. I have witnessed Tom building this business for many years, having first met him in 2013, before I started Daily Fintech. It was great to sit down with him and get his take on this interesting but often misunderstood segment of Fintech.
Fintech before it was called Fintech.
Orbian is no overnight sensation. Orbian began as a joint venture between SAP and Citibank in 1999. In short, Orbian is the offspring of Fin and Tech parents. In 2003, Orbian became an independent company through a buyout led by a group of private investors. Between 2003 and 2006, Orbian focused on being a white label provider to Citibank. In 2007, just as the financial crisis was getting started, Orbian started developing its own financing capabilities and separated itself from Citibank.
Sumitomo Bank bought a 15% stake in 2014 and offers services based on Orbian on a white label basis.
Growth as an independent business got going after the Global Financial Crisis. Orbian is another example of businesses that get their major traction in tough times.
Orbian currently operates in 60 countries (while keeping operating overheads very low because they are not having to assess credit risk) and has 73 buyer programs. Orbian targets investment grade or other corporates with high quality financials. This is not a business that aims to get financing for troubled companies.
Orbian provides supply chain finance (SCF) working capital services. They focus on the largest corporate buyers and their most important strategic vendors – what Tom calls the big intersections. They focus on a wide range from $50k pa in spend to their largest to date at around $1.1 billion pa in spend. The financing model is bank agnostic (ie anybody can be a lender).
SCF works on a simple and elegant principal. The credit is based on the Payable (not the Receivable) of the Corporate buyer (not the SME seller). Let’s say the Buyer is a AAA rated Corporate (Orbian will go as far as BBB) and an approved invoice from a Seller is being financed for 3 months. What is the risk that a AAA to BBB rated Corporate will not pay an invoice that they have approved? The risk is comparable to developed country sovereign debt, but with a much better risk-adjusted return on capital. So it works for investors, particularly in a world starved for yield for investors who don’t want to pile on the risk in the hunt for yield.
Tom pegs the SCF market today as about $50 to $70 billion pa of assets.
The results, for SMEs who have corporate customers, speak for themselves. They get an APR that is LIBOR + 1.5% for a BBB rated buyer (about 2.5% with LIBOR at 1%). Contrast that with alternatives such as Receivables Financing, or term loans through Banks or AltFi. Even better for the SME is that the lender has no recourse on the SME. That is because the investor is NOT lending to an SME. Also the seller/borrower gets 99% of the receivable amount (vs around 70-80% for factoring).
To understand how that works, one needs to dive a bit deeper into how Orbian does it. They buy the confirmed Receivable (aka Approved Payable as seen from the Buyer side) on a “true sale” basis. Orbian is not a marketplace that matches on a best efforts basis. Yet Orbian is not taking credit risk. Orbian buys the confirmed Receivable asset and send the money; financing is assured. Orbian then sells Notes secured against that payable into the Capital Markets. Investors never have to look at the SME. Investors simply look at the credit rating of the Corporate Buyer and the length of the loan and price it accordingly.
Investors can be anybody who wants high credit quality, short term self-liquidating assets priced at LIBOR Plus. Typical investors are Banks and Corporates. Orbian does not run auction processes. They experimented with that but found that it was better to manage it on a relationship basis so that investors can be confident of getting enough volume on a consistent basis. This is a market where the supply of borrowers is more of a constraint than the supply of capital.
Orbian view themselves as a financing company enabled by technology rather than a technology company with application in finance. It is a subtle difference as both models tend to converge on the same end result.
What will drive future growth?
SCF clearly works. It has been around since 1999. What I wanted to know was what will drive future growth? Tom uses one word to describe this, which is “execution”. The SCF concept is simple to understand and the technology is no longer leading edge. There are almost no barriers to entry. That has brought in many market entrants who have confused the market. What matters is:
- Confidence from Buyers, Sellers and Lenders that they will be paid correctly.
- Ability to onboard new Buyers quickly (a few man days max).
- Ability to onboard new Sellers quickly (software as a service via a secure portal).
The last two points are why a third party such as Orbian does well. Many banks offer SCF and the payment part can be licensed on a white label basis. However, the last two points are about customer service and that is where banks have usually struggled. Customer service is that intricate balance of people, process and technology that Tom sums up as “execution”. It is easy to say, but hard to do.
That is why growth is now coming from corporates who have long understood the conceptual value of SCF but have struggled to realize the benefits due to weak execution.
What about Blockchain and SCF?
Tom’s team at Orbian has spent time and resources looking at Blockchain and how it could apply to SCF. There are some interesting similarities on an abstract level. SCF and especially Orbian’s offering rely on a collaborative effort between the participants of every SCF programme they offer. In a similar way, distributed ledger technologies rely on collaboration between participants to reach a mutually beneficial result.
Tom understands how Blockchain works and what it could do. He can see the potential application to physical supply chain and therefore to Trade Finance. However for Orbian’s business, Blockchain is not a game-changer. The SCF model does not rely on knowledge of where something is in the supply chain. The Corporate Buyer needs to worry about that, but Orbian gets involved at the point in time when Corporate Buyer has approved an invoice. By that time the Corporate Buyer must know where goods are in the supply chain.
It is theoretically possible to envisage a decentralized market without any intermediary, however there are more obviously broken markets to go after. The relative efficiency of SCF evidenced by the 150 bp spread over LIBOR means it fails the Jeff Bezos test (“your fat margin is my opportunity”).The main parties of the SCF model (the buyer, the supplier and the funders) need Orbian to play an intermediary role. Without it, the efficient aggregation and dissemination of necessary receivable information would be impossible.
Distributed ledgers, irrespective of their permission type, rely on a network effect to both be able to reach transaction validation consensus, secure the immutability of the platform and protect it against malicious attackers. Although some new organisation can very well develop the next Blockchain platform, if social consensus does not enable it to be adopted by the intended users, it will not succeed.
Some parts of the capital markets are hyper efficient but rely on certain constraints – such as regulation, legal jurisdiction. It is unclear that Blockchain brings a lot of value in return for all that risk. Code-is law is an interesting concept but big hyper efficient markets don’t like experimenting with interesting concepts (translation = “unknown outcome”).
Or, as Tom Dunn puts it, execution matters.
Orbian is not following the Bank’s lead in spending $ millions on Proof Of Concept projects. They prefer to analyse the risk/reward on a fundamental basis and for them today Blockchain falls into the watch and wait category.
What markets have been early adopters of SCF?
Markets that are active include:
- Industrial Manufacturing
- Renewable Energy
Markets that are less active than anticipated are Services and Government Sectors.
What global corridors are the most active in SCF?
The biggest market today is US domestic i.e. US to US trade. While there is a lot of attention on cross border trade, the market today is primarily domestic and follows GDP – so after America come markets such as Germany, UK and China. While supply chains are global, the last link to an investment grade corporate buyer, is more often domestic.
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