Interview with Peter Vessenes, Founder & CEO of ProfitSee

Fiscal management is one of those phrases which, as someone who does not have formal financial training, I would have once found myself nodding my head to in conversation without really understanding what it entailed. I feel OK about that, because I’m sure if I had of said the phrase ‘single-electron transfer living radical polymerisation’, the topic of my honours thesis, most people would have done the same. So quid pro quo.

However last year I did get interested in fiscal management after meeting Peter Vessenes, founder and CEO of ProfitSee, at XeroCon in Brisbane. Peter, you see, is on a mission to make fiscal management accessible and understandable to small enterprises. Using smart algorithms and AI, he and the ProfitSee team want to serve up financial insights that help drive better decision making. The types of insights once only accessible to Fortune 100 companies.

And he certainly has the pedigree to play in the space. Since 1983 he’s worked as a turn-around specialist, assisting corporates and multi-nationals with their fiscal management. Alongside that he’s also contributed to policy development in Washington and somehow managed to learn to code and author a number of books along the way.

With ProfitSee having expanded into over 6 markets globally, the big accounting firms are now coming knocking on Peter’s door in their desire to find value and returns in the SME advisory space. ProfitSee’s white label approach makes it a potential weapon in these sorts of strategies.

But the real magic is hearing Peter talk about what he does and, more importantly, why he does it. His global perspective on the SME advisory space is something no aspiring B2B fintech startup or investor should miss. So when he was in town this week, I made sure to lock him down for an interview, which you can listen to below.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Interview with Tom Dunn of Orbian about the past present and future of Supply Chain Finance

 

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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
  • Transportation
  • Food
  • 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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Financial wellness in the workplace

Workplace wellness is a booming business, especially at the corporate end of town. In Australia, property groups like Dexus and CBRE are embracing wellness initiatives to differentiate themselves in the office leasing space. Not only are they incorporating wellness principles into their building standards (WELL by Delos being one example), a friend of mine in asset management now tells me property companies are developing wellness platforms and portals for tenants, allowing building users to tap into a network of on-site yoga instructors, nutrition experts and chiropractors, as they seek to help their tenants create healthier and more productive workforces.

Of course, many of us know that wellness in the workplace extends beyond the purely physical. Along with mental health, financial wellness is an area that is now increasingly gaining the attention of employers. According to a study published by AMP last year, 1 in 4 Australian workers experiences financial stress, with a lack of confidence in their ability to make ends meet. Business owners and managers are under no illusion that this type of stress has an impact on workplace productivity.

50 percent of stressed workers site bad debt as the trigger for their sleepless nights while 35 percent are worried about saving for their retirement. The study also found 30 percent of females are more likely to experience financial stress, compared to 19 percent of males. In the US the numbers are similar, with a Bank of America report finding 75 percent of employees suffer from some degree of financial pain.

Last year I wrote a post for Daily Fintech detailing a number of companies operating at the edges of the financial wellness spectrum. Companies profiled at the time – PayActiv, SalaryFinance, Ziero Financial, Zebit and Kashable – mainly focused on salary advances.

More true wellness players are now emerging, such as TRUSTIVO, an online hub that allows employees to access a national network of financial professionals, educational tools, as well as other financial wellness support resources. But strong examples of technology led innovation are thin on the ground. It is clear that this is a wide-open space for innovation, supported by a business community that is increasingly receptive to ways to enhance their workplace offering. Sounds like a no-brainer, doesn’t it?

Ask yourself this – when was the last time your employer offered you a product or service that could have a meaningful, positive impact on your finances? If you work for a large corporate, you’re probably more likely to have had some exposure to something over the past year. But if you work for a small business, a retirement fund option when you signed on is probably where your employer’s involvement in your financial wellness started and stopped.

With cloud services now embedded in many emerging small businesses, delivering wellness options and platforms for employees on top of this is now viable. The idea of employers being active participants in reducing employee financial stress is where PFM needs to head. At the end of the day, salary is the primary source of cash flow for the vast majority of workers. So managing this monthly flow of funds in a responsible way benefits both the employee and the employer. There is no question it is a fine line to tread – not everyone will see value in being told how to spend their money. But for those that are lost at sea, it could be exactly what they need to truly start getting ahead.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Symbiotic channel strategies key to making B2B fintech scale

Small business owners tend to be incredibly difficult to get hold of, and, even when you do manage to pin them down, they probably have a grand total of 5 minutes available in their busy day to devote to hearing your meticulously rehearsed product pitch.

That’s why, as those of you who’ve done it will know, selling to small business can be a real slog. You need serious patience, plus a willingness to really get to know their business and the problems they face. After all, that’s what they’re doing for their customers. They expect the same in return. You have to care.

So given this state of affairs, rather than go direct, some of the most effective B2B sales strategies leverage channel models instead. The idea is that if you can get in the ear of a small business advisor or existing technology vendor who is already ‘wining and dining’ your prospective customer, then the ripple effect through to their customers will be a highly cost effective route to market.

It’s a sound model – but also a well-worn one. It also doesn’t help that more and more B2B fintech and banking startups are vying for the same advisors ears. At some point, something will probably have to give.

Pushing business banking products to small business through third parties is notoriously difficult. Primarily because banking products are complex and, given they physically ‘touch’ the finances of a business owner, tend to invoke a far higher degree of caution than a loyalty or rostering app recommendation would. This is mostly because the latter can be easily deleted should it turn out to be less than satisfactory. But changing banks or finance providers? Everyone knows that’s painful. So as an advisor, you need to have a particularly compelling reason to put someone through that sort of open heart surgery.

Business advisors are often also uncomfortable about receiving commissions for recommending banking products. One advisor has mentioned to me in passing that they would far rather use their relationship with a fintech provider to offer preferential pricing to their customers, rather than pocket commissions. Unlike traditional technology vendor channel partners, not all advisors see a commission stream as a ‘valuable enough’ source of revenue compared to preserving the aura of independence a commissions free stance provides in support of their broader client advisory work.

So if channel models aren’t the most elegant distribution channel for small business banking products, what is?

Well, it’s probably less a case of chucking the baby out with the bathwater and more a case of rethinking what banking channel models are. Channel models where no money changes hands, but where a business advisor’s life and a business owner’s life both get better as the product becomes more embedded is probably key.

Taking this from a philosophy to a reality is a huge challenge. As a result there is plenty of smoke and mirrors around the concept of ‘mutual gain’ in B2B partnership pitches today.

But if you can build a product with both sides of the channel equation in mind – customer and advisor – then you are likely to build a highly defensible channel strategy that can make itself heard above the noise of all the rats and mice B2B fintech players pitching into the advisory space.

We often talk about understanding the problems of small business owners. You actually need to go deeper than this – you need to understand the problems of the people that advise to them. There will be commonalities, and your goal should be to uncover these and build your product accordingly. While not really fintech directly, companies like Receipt Bank do this very well today.

In my opinion creating a truly symbiotic product that helps improve a relationship between an advisor and their client is better than tapping an advisor on a per transaction basis. It’s also something a traditional bank would never do.

In all fairness I don’t really know of any B2B fintech startup that has mastered this at scale. Some are certainly trying in the cash flow advisory, bench marking and forecasting space, and could very well crack it. But if you do, I’d love to know about them to further my research!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Xero opens the door for fintech banks to become SME advisors

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Rod Drury, CEO of cloud accounting platform Xero, penned a blog last week discussing the impact Xero’s financial web is, and will continue to have on the small business community. For those of you who aren’t in the know, Xero’s financial web provides banks with access to Xero customer data via a suite of APIs. Use cases include direct bank feeds into Xero, payment instructions initiated out of Xero for AP, payment buttons on invoices for AR and sharing of financial data for lending decisions.

These are only a few financial use cases. The opportunity for banks to innovate around how this data is used is endless. In my opinion, the big opportunity for banks is in tapping into this data to become true advisors to small business, beyond the financials.

Banks realise this, the execution is just extremely difficult. In Australia, CBA is the only bank who has come close to implementing a business analytics function for its customers, as an advisory conversation starter. The product, known as Daily IQ, delivers ‘unique insights about your business and customers, helping stimulate ideas that can enhance success.’

Xero’s success is built for the most part on the back of the accountant and advisory community. So Rod naturally sees accountants and bookkeepers as the natural conduits for SME banking advisory as well. Helping SMEs move from that ‘now what’ moment that occurs once business insights are revealed, to taking action. He sees banks partnering with this advisory channel to deliver the goods, as per the extract below.

“Accountants are an amazing channel for banks. In the majority of situations, a small business owner who is a cloud accounting platform user is connected to an accountant. Across all these accountants and small business owners, there are hundreds of thousands of conversations about financial services happening every month. Banks need to educate accountants on their services, and accountants are open to this training. Accountants want to know how they can take banking services and add value to small businesses.”

He’s not wrong. But it’s also not necessarily the only option all banks have at their disposal. Thank’s to the emergence of fintech, banking is swiftly moving to being more than just a numbers conversation with an SME. Banking is now a technology + numbers conversation.

What will be interesting is if very focused, tech first, SME only banks emerge as advisors in their own right, not necessarily removing the need for a traditional advisor, but plugging a niche hole that exists to day – namely advisors lack of knowledge about fintech services. This will be an extremely natural place for tech banks to play, as given the nature of their business model, forming relationships with tech vendors embedded in the SME community has been critical to their success from day one. They’ve been advising on tech and banking since their inception.

Understanding how technology knits together with banking is not a natural space for an accountant to enter, yet. But for a tech bank to understand the best practice way banking should and can work with cloud accounting is not a stretch at all. So when a business owner calls into to discuss best practice AP and AR practices for their 4 hospitality venues, the tech bank expert can quickly map out the tech add ons and banking plug ins they need to make everything work.

Legacy banks will struggle with this for years to come. It’s just not in their DNA. It’s not impossible an SME could easily equate tech advisor with bank in the near future. Xero has made this possible. It’s up to tech first banks to now grab the opportunity at hand.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

No score, no problem. The lenders opening up access to SME credit in China

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Many of us in the West like to romanticise about our respective ‘underserved and overcharged’ SME markets as being ripe for fintech disruption. The reality is, when compared to their small business peers in China, they have a well-stocked buffet of banking options at their disposal.

Consider for a moment the following. Only 300 million entries exist in China’s centralised credit scoring database. That’s a mere 22 percent of the country’s 1.38 billion inhabitants who can potentially access credit. Now take the US, where some sources have the percentage of the population with some credit history at 86 percent. The difference tells us a lot about the propensity of the market for disruption.

In a market like the US, the motivation remains low for incumbents to innovate for the masses, who for the most part can be adequately assessed. This drives alternative credit scoring to the fringes of the financial system, to smaller fintech’s servicing niche parts of the market. Disruption therefore remains low.

However not so in China. A lack of good quality data on individuals and businesses is just one of the many dilemmas giving rise to a technology driven upheaval across the financial sector. And in today’s data rich environment, China is taking full advantage of the tools at their disposal to build a world first score that maps both financial and social behaviour – the Social Credit System (SCS). For those of you who have watched Black Mirror on Netflix, you might have an idea of what this could ultimately look like.

In the interim, companies like PINTEC spinoff Dumiao are taking scoring into their own hands. At Next Money in Hong Kong, CEO Jing Zhou highlighted the company’s ability to leverage 40 independent data sources to process an SME loan application in under 15 minutes, with finance available in half a day. The company receives over 1 million applications per month. This type of scale is only possible in China, or possibly India. With Zhou’s Chinese bank competitors struggling to turn around a like for like application in under 2 weeks, then it’s relatively clear who has the upper hand.

Alongside Dumiao, the so called ‘Lending Club of China’, Dianrong, is one to put on your radar. In 2014 it struck up a partnership with The Bank of Suzhou targeting small enterprises.

It’s not just speed where fintech startups like these are winning. Innovation and better experiences are translating into small business trusting tech providers over and above traditional institutions. A recent EY report, The Rise of Fintech in China, co-authored by James Lloyd, EY’s Asia Pacific Fintech Leader and Sachin Mittal from DBS pointed to the rapid explosion of users trusting non-banks to manage their finances, up from 35.1 percent of the population in 2007 to 54.5 percent in 2015. As a point of reference, another EY survey found that only 20% of customers globally plan to use non-bank providers in the future.

The market opportunity in China for SME lending and banking solutions is unquestionably huge. With SMEs receiving only 20-25 percent of bank disbursed loans, there will continue to be expansion in the non-banking sector for years to come. Whether non-Chinese originated companies will be able to penetrate this market and take advantage of this is the great unknown. Other non-Chinese tech companies seeking to establish footholds outside of the financial services space have not been great success stories. It seems far more likely that Chinese firms will come to displace incumbent services in the West. And that is when things will certainly get interesting.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Gazing into the crystal ball of Australian fintech

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As I write this I’m working out of the Brinc co-working space in Hong Kong, in the heart of the trendy SoHo district. The guys very kindly offered me a hot desk for the day,

One side bonus is that when you work out of a hub there is no shortage of people to chat to.

This morning I met Antoine Cote, co-founder of Enuma Technologies, who showed me an early stage prototype for a credit card that could display your latest transactions via a small screen on the card itself.

The company is also working on an app based digital identity solution for consumers that allows users to only release the identity points they want to when requesting access to services.

Exciting and distracting stuff, and not helpful when I’m supposed to be putting the final touches on my presentation on Australian fintech for tomorrow’s Next Money event. In the final slides I’ve been asked to gaze into my crystal ball and try and envisage what the local market will look like in 2020. No pressure.

EY FinTech Australia Census 2016

While past performance is not indicative of future results (excuse the pun), there really is no better place to start than to recap where the local fintech scene has landed after an incredibly active few years. And the EY Fintech Australia Census 2016 is the perfect place to begin.

Late last year the FinTech Australia, the peak body established in 2015 canvassed the sector and compiled a number of great statistics and insights on the local fintech scene. The infographic below is perfect for a quick overview, otherwise you can read the full report here.

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Highlights/Lowlights

It’s heartening to see that out of the 57 percent of companies who claim they are post-revenue, 27 percent have a customer base larger than 500.

However only 9 percent of companies post-revenue generate over $1M per month. The majority, 41 percent to be exact, generate $50K or less on a monthly basis. And only 14 percent of fintech companies are profitable.

It’s interesting to note the average age of fintech founders is 41 – only 10 percent are under 30. Innovating in financial services is not for the faint of heart, and a deep, intuitive understanding of the complexity of the problems in finance, garnered from experiencing them first hand, is no doubt a huge advantage.

Where to next

37 percent of companies surveyed have less than a year to go until cash reserves dry up, so unless the money fairy visits them over the next 12 months, or they crack the biggest external problem listed by startups in the survey – customer acquisition – my crystal ball tells me, as it would most, a few will fold. However this is a short term prediction, and hardly that insightful.

However what could significantly shape the market over a 3 year horizon are a number of legislative and policy interventions by the Australian Government, who have already made a firm commitment to want to position the country as an APAC fintech leader.

Backing Australian Fintech

In what it claims to be a world first, the Australian Securities and Investments Commission (ASIC) announced in late December of last year that it would begin to exempt fintech businesses from requiring an Australian Financial Services Licence (AFSL) before launching their product. Fintech companies now have a grace period of 12 months and the ability to service up to 100 customers. This will go a long way to helping startups validate their business model before an inordinate amount of money is committed to an idea.

Just prior to this, in September the Australian Government also amended the Anti-Money Laundering and Counter-Terrorism Financing Rules to allow for reporting entities to now gather Know Your Customer (KYC) data on their customers rather than directly from. The distinction is significant, as sourcing information on is easier and cheaper than from, and can possibly be done relatively indirectly.

Finally the biggest event on the fintech horizon will be to what degree fintech companies can access an indviduals banking data. A draft report released by Australia’s Productivity Commission has recommended 3rd parties be given access to financial data, and that a future API framework be developed. If the government ultimately supports this recommendation then the game could significantly change.

My crystal ball is pretty clear – policy changes and government support are now required to really drive the fintech agenda forward. While inroads have been made, there is significant opportunity for improvement. Government procurement of fintech services is a great start, and something they have publicly committed to. But that’s a topic for another post altogether.