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

 

Orbian_1

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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5 Opportunities as Lending Marketplaces enter hyper growth 

By Bernard Lunn

Marketplace Lending

Image courtesy of Ethos Private Wealth 

Thesis: hunger on origination side from small business + hunger on investor side starved of yield by prolonged ZIRP + banks withdrawing due to balance sheet and capital ratio issues = window of opportunity big enough to drive a truck through.

Evidence:

+ Lending Club valued over $5 billion in public market after their Netscape moment for Fintech IPO.

+ Prosper $5 billion loaned to 250,000 people.

+ Funding Circle going global. 

+ $1 billion raised by SOFI.

+ 2 year old Avant raising $325 million at a $2 billion valuation.

= investors willing to write really big checks to back the big winners.

Prize:

These businesses are scaling like crazy and are still no more than 5-10% into the market. This Morgan Stanley report has the data.

5 Opportunities: 

It looks like the big marketplace winners have already been declared. Before the SOFI and Avant announcements, I would have said the same thing. If there is another strong team with great traction out there, expect to see open check books being waved around. It is certainly too late to start a marketplace from scratch – those days are over. I also see the end of niche plays. SOFI may have started with student loans but all marketplaces win on network effects and volume. So whether you are consumer or a business and within consumer whether you are a Millennial Student or a Baby Boomer refinancer does not matter.

However here are 5 second order impact type of opportunities. Moving into a hypergrowth market is great if you have a unique proposition. You don’t need to worry about market demand, only about how you get traction with a new service.

  1. More innovation on originations front. Today we are seeing relatively simple digital data entry by borrowers and basic data science as the key innovation. That was enough to get traction in the early days simply because the lumbering paper driven process at banks was so bad. Now that a digital origination service is the baseline, we can expect to see more innovation on both the data capture side and the data science part. Innovators that we are seeing on this front include Kreditech and IWOCA. It is likely that some of these innovators will be acquired by the big marketplaces.
  1. Serving entrepreneurs in the “markets formerly known as emerging”. These entrepreneurs have been even more badly served by banks than their peers in the West and they have high GDP growth economies on their side. For example, see what this entreprenur turned VC turned entrepreneur again – Alok Mittal – is doing in India.
  1. Banks will find a role to play by being the low cost capital provider. This is what Banks do in Corporate Lending – a low margin high scale game where cost of capital is the primary issue. They will mostly exit the originations business; some may decide to be a player in originations by buying one of those innovators. Banks never liked serving small business anyway. Now they can just lend to bundles of small businesses as if they were one large Corporate.
  1. The Wealth Management industry reshapes around this new reality. They will work with the emerging breed of micro asset managers who know how to process the data streaming out of lending marketplaces using their APIs to offer their clients a better risk adjusted return on capital.
  1. The move from short term lending to term lending. Nobody wants to repeat the Wonga debacle. Merchant Cash Advances are not much better. Term Loans at transparent APR is what any prudent small business owner wants. That is why we highlighted Dealstruck a year ago. The firms offering short-term loans will move more into term loans as competition and transparency puts the focus on APR. The short-term lenders making that transition will have one big advantage – data. The data on who repaid short-term loans and how much revenue and cash flow coverage they had to do that is key to assessing their credit worthiness for term loans.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

$225m into AvidXchange shows the American B2B paper payment dam maybe breaking

AvidXchange just closed a $225m round. Why would a bunch of very smart investors put $225m into something as boring as Accounts Payable software for small business? These are top tier investors:

  • TPG

TPG is a leading global private investment firm…

  • Square 1 Bank

entrepreneurs serving entrepreneurs

  • Keybank

Cleveland-based KeyCorp is one of the…

  • Nyca Partners

FinTech Venture Capital

  • Foundry Group

Foundry Group is a venture capital firm focused…

  • Bain Capital Ventures

Venture Capital & Growth Equity

Visitors to America, the source of so much of the technological innovation that drives our world, are often amazed by how backward B2B payment processing is. Accounts Receivable in a Supplier sends printed invoices by snail mail to Accounts Payable in a Buyer who keys in the data and then prints and sends a check and then….

Working Capital Finance is one of the biggest market opportunities in Fintech and none of those dreams are realizable unless invoices travel digitally.

New working capital finance models are getting traction today when the buyer is a big company which tells its small suppliers to issue invoices digitally. This has enabled Supply Chain Finance (SCF) to take off.

However small suppliers selling to a big buyer is only one part of working capital finance. Most small suppliers sell to small buyers.

That is where AvidXChange comes in. They are automating Accounts Payable processing for small business. The main way to automate Accounts Payable processing is to get your suppliers to send invoices electronically. If that starts to happen the great American B2B payment dam may finally break. When it is perceived that the norm is to send invoices electronically, the laggards still using paper will quickly follow. Then working capital finance will finally be revolutionized. My theory is that $225 million is the vote with the wallet from a bunch of smart investors that this is about to happen.

3 reasons banks are missing the massive opportunity to service small business

By Bernard Lunn

Small business lending is a market window of opportunity big enough to drive a truck through. It is also a perfect fit for “rebundling“; business finance is too complex for point solutions. Small businesses need banks and banks need small businesses as digitization disruption hits their consumer revenue line.

Massive need on both sides and still nothing…

Serving small business would also be a big PR win for those “evil bankers”. If there is one thing we can all agree that bankers should be doing, it is lending to small business. Banks could get regulators off their backs and polish their faded brand.

There are three things stopping banks from seizing this huge opportunity:

  1. Banks don’t see themselves as being in the service business. Who can blame them? Good service is harder than simple transactions. The trouble is, digital disrupters are taking those simple transactions down to zero price using Moore’s Law….
  1. The middle child organization vacuum. Banks have units and scalable business models to sell to Big Corporations (oldest child) and Consumers (youngest child). Small business is stuck in the middle and ignored. The way to overcome that is creating an Intrapreneurial venture within the corporate ownership structure but freed from the constraints of “this is how we do things around here”.
  1. The lack of a simple executable strategy. This is what we address in this post.

Banks are not the first to find the small business a difficult market to crack. It used to be a big problem for the IT business as well. In the olden days, IT meant selling technology to big companies. This meant long expensive sales cycles but with a big reward at the end. Then we had the Internet driven B2C revolution – lots of tiny transactions with short/cheap sales cycles.

Small business was the problem market for IT. Sales cycles were still long. Small business owners still viewed each decision as critical and complex and so insisted on taking their time. Yet the reward at the end of that long sales cycle was far less than in an enterprise sale.

Then along came the Cloud and Software As A Service. This dramatically changed the economics of delivery. Then Social, Analytics and Mobile changed the economics of marketing. Suddenly small business IT was viable and forecast to grow faster than overall IT spending according to Gartner.

A few weeks ago, Rick Huckstep covered Zenefits, one of the fastest growing SAAS ventures ever (a staggering 30% month to month). Their innovation was to offer the HR software free and monetize via a 5% finders fee from Insurance companies. This is also happening in the market around e-invoicing and Accounts Payable Automation, where the monetization is coming from a slice of the short term working capital financing.

Free financial software monetized through financial transactions – that sounds like a scalable business model. It requires banks to think outside the box, but that is actually quite cheap. Banks need to stop thinking of their IT as simply enabling a banking transaction.

Banks need to see a banking transaction as a bye-product of a software solution that solves a problem for small business.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies written about here. Contact us to start a conversation.

 

SMB Financing is a window of opportunity “big enough to drive a truck through”

The last market opportunity “big enough to drive a truck through” that I witnessed was the difference between time spent online and ad $ spent online.

SMB Financing is in that class now because of four mega trends:

  • Banks are lending less (due to balance sheet constraints) just when business is recovering and needing new capital to grow.
  • Large business continues to shed workers (forcing many to create or work for small business).
  • Networks and platforms lead to frictionless commerce that makes it easier for small firms to compete. In other words, small business is getting bigger.
  • The rise of the Rest where most people are self-employed.

Most Banks don’t even have an organization dedicated to SMB Financing. They nibble at the edges of this massive opportunity by:

  • Letting Corporate Banking sell to the M in SMB as if they were a smaller version of a Corporate.
  • Letting Consumer Banking sell home equity lines that business owners use to finance their business.

The startups that are “laughing all the way to the IPO” like Lending Club and Ondeck figured out that you don’t need any ground-breaking innovation. All you need is “better, faster, cheaper” credit evaluation using digital data.

Small business credit evaluation is complex and very expensive if done manually with paper and human bankers.

SMB is one of the biggest categories in the Fintech 1,000 Innovator Catalyst Database.

I have already reviewed the following SMB Financing ventures:

LendingClub

OnDeck

Kabbage

CAN Capital

Dealstruck

Funding Circle

Iwoca

Zidisha

The last two are interesting. Iwoca go after the really, really small businesses, what might be called Micro Business. Zidisha is doing the same in the developing world. In America which is a developed country with an almost brutally efficient economy, nearly 40% of workers will soon be self-employed by 2020. In the developing world, that % is far higher.

So the market is really MSMB – Micro Small Medium Business.

I created 6 Sub Categories in Fintech 1,000 within MSMB:

  1. Efficient loan processing through analytics. This where the big money is today with the companies I have already reviewed including two that are IPO scale unicorns – LendingClub and OnDeck. This has got so big that it could have a sub prime type blow up.
  1. Digital trade finance. This has lots of ventures some them quite mature, but is not as high profile as the first segment. These go via various names such as Supply Chain Finance, Payables Finance, Receivables Finance. These offer lower APR for companies that have invoices from customers who pay reliably (or have a good credit rating). Ventures include:

Orbian

Prime Revenue

Taulia

C2FO

Remitia

Oxygen Finance

Receivables Exchange

Platform Black

Market Invoice

Tradeshift

Tungsten Network

  1. Asset based lending. This is not as mature and still ripe for innovation. True Accord could fix the currently messy business of asset recovery post default and this could bring efficiency to asset based lending.
  1. Innovation Capital aka equity for Baby Unicorns or Unicorn Food (aka Flips). This is the world of VC and Angels and Angel List is the disruptive player, but other interesting plays are around secondary markets and private deal rooms such as GUST.
  1. Patient Capital for Butchers, Bakers & Candlestick Makers. It is hard to do equity funding for main street businesses, because is no exit, but it maybe that this simply requires innovation around portfolio construction and payout via Dividends. Crowdfunding networks, such as Seedrs, may morph into this space as the Innovation Capital space gets increasingly crowded during this stage of the macro cycle. Dealstruck offers long term loans that are an alternative to equity.
  1. SMB services for finance (payroll, tax, AP, AR etc). Selling SAAS to small biz is tough – the CAC/LTV metrics can kill you. So we may see more Freemium in return for owning the data with an upsell to financing.

Hey SMB CFO Who You Gonna Call?

Who is on the CFO Speed Dial?

It is Friday evening and the CFO and CEO are having dinner. They plan a major initiative but the financing is not in place. They know all the above types of services. Who can help them pull it all together and deliver the best APR in quick time?

It could be the next Fintech Unicorn. Or a Challenger Bank. Or a Big Bank thinking outside the box. SMB Financing is a massive market and we are still in the first innings of this game.

 

 

Small business – not consumer – is driving Alternative Finance

The NESTA study has a wealth of data about UK Alternative Finance, but one fact jumps off the page

“It’s about small business, stupid!

First, the whole market is big and growing fast (all numbers in GBP millions):

2012: 267m

2013: 666m

2014:  1,740m

That 2014 total is $2.7 billion – to make it real for American readers.

That is more than doubling every year! Those are growth rates to go after.

That is not really news.

What is news is that a couple of areas that are “hot” and get a lot of attention are small:

Rewards crowdfunding: 26m (1.4%)

Equity crowdfunding: 84m (4.8%)

The big news is when you add up the two segments that offer lending to small business:

P2P Business Lending: 749m

Invoice Trading: 270m

Total Small Business Lending = 1,019m

Total Consumer Lending = 547m

Small business lending is almost twice as big as consumer lending.

 The story across the pond is similar. Lending Club sounds like a consumer lending venture but the bulk of the revenue is coming from small business and OnDeck is headed to IPO based entirely on demand from small business.

The Micro-Multinational opportunity at the intersection of Consumer and Small Business

Marketers love nicely defined categories. They want to know if you are a Consumer or a Business. This is the same tidiness that bureaucrats seek. Is that kitchen for cooking or for that business you are working on? Are you employed or self-employed or starting a new business? No, you are not allowed to answer “all of the above”.

Entrepreneurs just service a need no matter what the label. Many companies are profiting from serving the “really small business” by helping them to either get to ramen profitability or supplementing ramen profitability with some “income on the side”:

 

  • eBay – who pioneered this by turning the local yard sale into a global business.
  • Paypal – and Stripe and Paystand and any other payment enabler for e-commerce.
  • Amazon – Bezos serves entrepreneurs in so many ways. With AWS he enables tiny digital startups to scale when demand spikes. Amazon is also a way to sell physical goods and creative works.
  • Uber, AirBnB – and all the other sharing economy services that allow you to make some extra cash with your spare resources.
  • Etsy – because they figured out that consumers are also producers and that many of us find mass-produced stuff to be boring.
  • Alibaba – which does all of the above and is more valuable than…

 

That last one – Alibaba – is a reminder that there are two big waves of change happening at the same time – digitization and globalization. They are related because “bits don’t stop at borders”.

That is why this is about Micro Multinationals. In the tidy boxes of big company marketing or government bureaucrats, Micro Multinationals do not exist. Big companies are Multinationals and small businesses are supposed to be local and operate within national borders and within one currency. Entrepreneurs go where the opportunity is and for many that means trading across borders (both buying and selling) and Fintech entrepreneurs see those Micro Multinationals as a great opportunity because they need a new generation of services that the big banks ignore.