Tradeplus24 CHF100m Fintech raise in Switzerland signals Insurance move into SME Lending 

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Note: the deal was done in CHF which is about parity with USD, so you can read that as $100m.

When I first started looking at the Swiss Fintech scene in 2014, my post was called: Zurich Fintech fans look jealously to London (I did point out that while London might have more VC, the Swiss trains and mountains were better).

A lot has changed in that time. A more updated view of a much more vibrant Swiss Fintech scene was captured here two years later:

In the two years between those two posts, four things happened:

  1. Swiss regulators drafted perhaps the most progressive Fintech License anywhere. That took almost everybody surprise. A prediction along these lines would have got only cynical laughter in 2014.
  2. Bitcoin became respectable because it is legal tender and can be bought at any train station and used to pay taxes and other government bills. The legality was known for a long time thanks to the strange history of the WIR (as we reported in March 2015) and that legality led to respectability and both are prerequisites for mainstream adoption.
  3. London suffered Brexit (what soccer fans call an “own goal”) making other places in geographic Europe more attractive.
  4. Some potentially great ventures are starting to emerge from Crypto Valley. Lykke is one to watch in our view – a proven entrepreneur using disruptive technology to execute on an ambitious vision.

A $100m Fintech raise in Switzerland in 2014 would have been inconceivable. In 2017 it is noteworthy as another sign of a rapidly maturing Fintech community in Switzerland.

The Tradeplus24 news has a big number to get our attention. However, it is the innovation behind that number which gets our scrutiny today.

I could only find the Tradeplus24 news on German language sites, so if that is an issue for you, here are the key facts:

– they raised CHF100m debt

– The debt is for lending to Swiss SME (note: they refer to KMU which translates to SME). This makes them a balance sheet lender, like Avant, not a marketplace lender like Lending Club. This means they have assured capital to offer rather than simply matching on a best efforts basis (our take is the latter is the better model long term but that you need balance sheet based lending to get a market going).

– The lender is a boutique investment firm called OceanoOne that connects lenders to what they describe as “sourcing engines” (which is how they categorize Tradeplus24). Lending platforms consistently tell us that the demand from lenders far outstrips the supply of good quality borrowers. Lenders are hungry for high quality debt with a good interest rate. OceanoOne’s proposition is having relationships with the sourcing engines that deliver that high quality debt (what OceanoOne calls “short duration, secured working capital finance”).

– Kessler & Co AG, a Swiss Insurance broker, is listed as a partner

– AIG, the global Insurance carrier that got into trouble in the Global Financial Crisis is also listed as a partner.

It is the role of the last two that is interesting. This is Insurance getting into SME Lending and that could be game-changing.

A Credit Rating for SME?

Classic Supply Chain Finance (see this interview with Orbian for an example) works very well if the buyer is a credit agency rated corporate. That gets something like 150 bp spread over LIBOR.

That is great for an SME who is at the final stage in the supply chain that supplies to a credit agency rated corporate. What about an SME that is further down the supply chain or that only sells to other SMEs?

The rest of the SMEs currently rely on one of two types of solution:

–      Receivables Financing, Factoring, Invoice Discounting. Whatever you call it, the credit rating is based on the seller not the buyer and the APR % compared to Supply Chain Finance is massive.

–      Credit approval based on bank processes. Lots of ventures have made this process more efficient by digitizing it, but it still relies on the data that banks have traditionally asked for such as tax returns and audited financial statements which are at best one input to a credit model. That can work in America and Europe where that data is easily accessible in digital format, but it is not game changing. It is far harder in the Rest of the world.

All of this goes away if SMEs can get a credit rating as easily as a corporate.

In the interview with Dianrong, we see an approach to this problem in China.

The Tradeplus24 approach is different. It brings Insurance into the mix. AsOceanoOne put it “An insurance or equal protection of investment grade quality against credit loss and fraud is in place for all pre-financed receivables. The purchase of the receivables occurs only when a credit insurance or an equal protection is in place and confirmed by the relevant protection provider.”

The role of AIG is critical. We cannot see the details yet, but credit market work with Insurance. Think of the Credit Default Swaps (CDS) that are credited with the Global Financial Crisis and in which AIG played a much criticized role. A cynical knee jerk reaction might be “here we go again, this must end badly”. Our take is that there is nothing wrong per se with securitization or the insurance of securitized debt. Both can lead to more efficiency and lower cost financing. The issue is data transparency and now, nearly 10 years after the GFC, we have had the Big Data revolution and that transparency is now possible. If that makes financing cheaper for millions of SMEs we can all cheer.

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Bernard Lunn is a Fintech thought-leader, investor and deal-maker. 

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