EXCLUSIVE: “Chain Reaction” – Martin McCann, Trade Ledger and James Binns, Barclays in ‘Discover Money20/20’
Lack of trade finance for SMEs threatened to bring supply chains to a halt in 2020. Martin McCann from Trade Ledger and Barclays Bank’s James Binns consider how a more collaborative approach could keep them moving in future
“You need to get out of the way of the juggernaut or you’re going to get flattened by it.”
That’s how Martin McCann, CEO and founder of lendtech platform Trade Ledger, would suggest banks view the fast-approaching epoch of ‘non-linear banking models’: a collaborative ecosystem of organisations delivering financial and other related services in a variety of circumstances and using multiple digital mechanisms to do it.
Follow the silk thread that binds this web together, and it leads back to banking. McCann therefore suggests banks exercise imagination in ‘thinking about what the next three years could look like’. And nowhere is creativity needed more than in re-imagining working capital flows for SMEs.
Ponder this: SMEs play a critical role in trade – responsible for between 20 and 40 per cent of exports from OECD countries. And yet, when it comes to affordable trade finance, they face the biggest barriers, with more than half of trade finance requests by SMEs rejected, compared with seven per cent of multinational corporations’, according to the WTO.
The prejudices against extending credit to SMEs by less forward-thinking banks – the kind, perhaps, who aren’t actively looking at banking-as-a-service models as a way of correcting this imbalance – has been exposed by recent events. The OECD, reflecting on the experience of SMEs in the international supply chain during 2020, said short-term trade finance in all its forms (intra-firm financing, inter-firm financing, or more dedicated tools such as letters of credit, advance payment guarantees, performance bonds, and export credit insurance or guarantees) was critically hard to come by – but not because the cost to banks of providing that liquidity had increased.
Rather, the International Chamber of Commerce reported a retrenchment of bank lending because they simply deemed this segment ‘high risk’, even when the cash to oil the wheels of trade was never more desperately needed. That forced SMEs to fall back on government agencies to stay in business: the Export-Import Bank of the United States, one of the largest providers of short-term government export support, for example, reported a 112 per cent increase in working capital guarantees and a 12 per cent increase in short-term export credit insurance during 2020.
According to an OECD survey, 64 per cent of export credit agencies took measures that year to increase working capital support because private liquidity simply wasn’t forthcoming. So, you can understand why McCann is excited by the prospect of open finance creating what he calls a ‘digital CFO’ for SMEs, which isn’t an individual but rather a community of providers that exchange data on an SME and can work together to present the business with financing options that weren’t available to it in the past.
“I’ve a concept in mind, where, as a business owner, I can go and run my business, and get the capital I need to make an impact on the world just by letting the ecosystem of partners recommend how my business can be optimised. I trust them and have consented for them to use my data,” says McCann. “I think there are too many people who have a passion for things that they want to do, but, because they’re in creative industries, perhaps, or they’re from backgrounds where they haven’t had access to financial education or capital, they don’t have that on-ramp.”
As global head of trade and working capital for Barclays Bank, James Binns deals with a wide range of organisations, from SMEs to the largest international companies. Big supply chains are multilateral, often with thousands of small businesses in the different supply chain tiers. And, as we saw during the pandemic, if there is an impact to funding which restricts the liquidity SMEs need, orders can go unfulfilled, causing wider disruption and empty shelves.
For Binns, partnering with providers in an open finance network allows banks to keep trade moving by gathering business intelligence on parts of the supply chain that banks have had no transparency on before, thereby reducing their risk exposure while better facilitating trade between those smaller enterprises.
“We can also look at different purposes, different types of services that we couldn’t imagine three years ago,” he says. “We’ll be able to offer a more simplified, more focussed solution set and processes, which will enable much faster decision-making.”
And that isn’t just within the banks, but also among client businesses themselves, an obvious case in point being how quickly they can approve invoices and make payment decisions. Faster decision-making will drive quicker time to money, which will drive down the cost of funding in supply chains and help close the financing gaps within them, says Binns. McCann sees strong signs of change happening. “In our business, we’ve seen a huge increase, across the board, in demand for the solutions we provide,” he says.
In September 2020, for instance, Trade Ledger helped ScotPac, Australia and New Zealand’s largest non-bank SME lender, to create a market-leading origination and underwriting experience for business funding. ScotPac is using Trade Ledger’s data-driven lending platform to unlock all types of working capital and business lending products for SMEs, and, according to the two companies, it’s slashed application turnaround time by 90 per cent, which has driven an increase in new business volume of 300 per cent.
Data-driven lending takes a lot of the friction out of the process, and creates significantly more automation – a development already being seen with the proliferation of APIs impacting both business and banking systems. It’s not necessarily about adopting bleeding edge technology, though, says McCann.
It’s more about connecting existing technology intelligently.
“What we’re seeing is the adoption of best-practice technologies, patterns, architectures, and use of digital data sources that we’ve seen developed in other industries,” he says. It means moving workloads to the Cloud, making core systems more modular, and having the flexibility to make new use cases. It also means ongoing development of APIs.
“Pretty much every banker in the world now knows about APIs, and expects any solution/change they’re driving to be based around the availability or the development of some type of API, and, a Cloud-based architecture,” says McCann.
Binns agrees that it’s all about ease of connectivity. “Once you’ve got the connectivity, then you can start adding the different data feeds you need to make decisions,” he says. There’s an irony that, in adding more and more complex data sources – examples in a trade and working capital context being not just invoice and payment data, but also logistics and shipping data associated with the movement of goods and services – the trade finance process is simplified, giving a better picture of how funding can be earmarked for working capital cycles of supply chains.
“When you start to optimise the working capital cycle at a supply chain level, you can really drive significant benefits in terms of the cost of delivering product to end users, because every product requires funding and financing, which is part of the cost of that product,” says Binns. “Ultimately, I think the way this is going to go is supply chains will start to compete against each other on the basis of how efficient their funding is, from end to end, because that will become a substantial cost driver of that funding, particularly if we move back to a higher interest rate environment.”
Self-evidently, all this means greater ecosystem collaboration.
“In my view,” says McCann, “this is the only way we’re going to solve the significant supply and demand gap at the smaller end of the market.”
Banks shouldn’t feel threatened by that, says Binns. Rather, it’s an opportunity.
“A large buyer may have 6,000 different suppliers. There’s absolutely no way that one supply chain finance solution fits all of those; it’s probably going to be six or seven solutions. In future, they could all, potentially, be delivered through a single platform by multiple providers. When you think about the access that gives suppliers, in terms of more efficient, more consistent, quicker funding, that’s really powerful.”
As Binns says ‘we’ll end up with a far more open technology structure, far more connectable’, the bank taking its place among a host of different players, adding value for each other and for the end user’.
“For me, banks only have two choices at this point; disrupt or be disrupted,” says McCann. “And we’re already seeing banks who are making brave choices, ahead of the tsunami that’s coming at us.”