Top 3 Drivers of Innovation in Working Capital Financing

Working capital financing is in high gear, with multiple players tapping into the $17 trillion trapped in accounts payable globally. COVID-19’s impact, market dynamics, and emerging technologies are driving innovation in this field and digitizing the financial supply chain.  

The transformation of working capital financing has shifted from low to high gear in recent years. Many players are finding new ways to tap into the opportunity presented by the $17 trillion trapped in accounts payable globally. The demand for working capitalOpens a new window financing is strongest in the small and medium enterprise market, representing approximately 90% of suppliers but less than 25% of the spending by large buyers. The quest to deliver financing to this underserved, long-tail, deep-tier portion of the market is giving rise to innovation. A confluence of macro-level factors boils down to three main drivers of innovation.

1. COVID-19 — Accelerating Go-to-Market

A groundswell of changes was underway well before the world began responding to COVID-19. The repercussions of COVID-19 have been both negative and positive. In the short run, the negative impacts have been a rise in traditional trade finance defaults, a sharp revenue decline in commodity trade finance globally, and a drop in invoice volume. The long term impact will be positive. 

The pandemic threw a harsh light on the growing gap between the demand for and the supply of working capital, thereby amplifying attention on the financial well-being of suppliers. Those banks that provide supply chain financing report a growing interest by buyers in extending supply chain finance programs beyond strategic suppliers to a wider set of suppliers in need. Beyond supply chain finance, proactive banks have moved swiftly to support customers by delivering digital credit offerings to mitigate disruption.

2. Market Dynamics — Expanding the Addressable Market

The prominence of working capital financing platforms has grown significantly over the past two decades. The past five years, in particular, saw vigorous competition, as marked by the rise of players that use blockchain and AI. Overall, the market dynamics are split along two paths: banks have been grappling with the tug-of-war between regulatory requirements and growth while non-banks have been in pure growth mode.

The previous financial crisis brought a wave of regulatory scrutiny and requirements related to capital and compliance (including AML, KYC, and sanction screening). The cumulative impact has been a lower risk-adjusted return on capital (RAROC). As a result, banks have faced hard decisions regarding where to grow and where to retrench. Banks, however, are not in harvest mode. Instead, some are determined to be innovation pacesetters and are investing heavily in select expansion or in the digitization of operations, from front to back offices. 

On the other hand, the growth mode of non-banks (B2B, working capital, and asset distribution platforms as well as alternative funders) has been not only filling any funding vacuum left by banks but also expanding the addressable market, often with banks as participants. These non-banks serve new segments (the long tail and deep tier of suppliers) while responding to corporations’ demands for multi-bank platforms.

• B2B platforms include supply chain, procure-to-pay (buyer-focused), and order-to-cashOpens a new window (supplier-focused platforms) to bring buyers and suppliers together to digitize the financial supply chain. 
• Working capital platforms can provide a one-stop-shop for corporations that want greater ongoing financing efficiency and lower upfront time and cost spent on integration. Consolidation also helps a corporation improve visibility into financing transactions and diverse financing sources. 
• Asset distribution platforms are poised to expand rapidly. These platforms enable funding originators—both bank and alternative funders—to upload trade finance assets, borrower profiles, and performance data and share broadly or selectively with investors. The platforms allow originators and investors to then communicate and transact.
• Alternative funders are receptive to these platforms, as they support the diversification of their financing portfolios. 

Innovations in both mature and emerging technologies help digitize the financial supply chain while optimizing working capital financing. 

3. Tech Advances

The innovation pacesetters are applying both mature and emerging technologies, alike, to digitize the financial supply chain. Mature technology (including web-based platforms, cloud technology, SaaS solutions, and APIs) drive streamlined integrations and adoptions, as well as interoperability. 

Building on these, they are leveraging emerging technologies to accelerate optimization in multiple ways, chief among them:

• Artificial intelligence/machine learning (AI/ML) extends the addressable market to long-tail, deep-tier suppliers and financing upstream of the invoice. This may make financing available up to 9 months earlier than traditional receivable financing, enabling trade transparency and cost efficiencies along the way. Due to their repetitive and consistent processes, underwriting and approval processes, in particular, are excellent candidates for AI/ML.
• Blockchain adoption is growing across banks; according to the 2020 ICC Global Survey of Trade FinanceOpens a new window , 22% of bank respondents use blockchain, up from 15% in 2018. Blockchain platform components include distributed ledger technology (DLT), smart contracts, asset tokenization, workflow and rules management, and APIs. Blockchain in trade finance may prove to be truly revolutionary; to that end, it must meet challenging digitization demands and achieve interoperability across blockchain platforms.

 

Tech Drivers of High-Gear Transformation

Source: Celent Opens a new window

Working Capital Financing’s Rich Ecosystem

Various innovators are changing the face of working capital financing through blockchain platforms, B2B platforms, working capital platforms, and asset distribution platforms. Innovators include Basware, Citi, C2FO, DBS, Demica, Greensill, HSBC, Infor, Komgo, LiquidX, Previse, PrimeRevenue, Skuchain, Tallyx, Taulia, TradeIX, Tradeshift, Tradeteq, and we.trade. 

Some bridge the primary and secondary markets, and many offer a broad menu of financing types. With the size of the prize being $17 trillion in potential credit origination, it is no surprise that this market is undergoing game-changing innovation. Moreover, by delivering financing to down market firms, the innovators are taking the “S” in environment, social, and governance to an entirely new level.

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