The FinTech explosion continued apace in 2016, hitting $15 billion in global funding by mid-August. According to a report by McKinsey, it has attracted over $23 billion of venture and growth equity over the last five years. And it shows no sign of slowing down. Its high growth potential and the seemingly endless opportunities it presents for disruptive innovation have led PricewaterhouseCoopers to predict that FinTech companies could attract more than $150 billion over the next 3-5 years.
These FinTech companies fulfil a number of functions in a diverse range of areas, in everything from account management to payment processing. The tools being developed are helping to streamline operations and cut down on inefficiencies that slow down processes. One of the most fruitful areas FinTech is to be applied is in supply chain management, where it resolves a number of key issues.
FinTech in the supply chain is an area that has until recently been relatively neglected, but it is gaining ground. According to McKinsey & Company’s ‘Supply-chain finance: The emergence of a new competitive landscape’, FinTechs already control an estimated 10-15% of the SCF market. Author of the report, Ganaka Herath wrote: ‘Supply-chain finance (SCF) receives surprisingly little senior management attention for a market that presents such large and growing opportunities. Traditionally dominated by banks, the market has more recently been entered by FinTechs: specialist financial technology companies that provide platforms and software-based services to support SCF operations. These challengers are changing how buyers and suppliers think about the market, disrupting incumbent financial systems and providers, and starting to command a sizeable proportion of value pools. Success in this new environment will depend on understanding what banks and FinTechs are offering, working out what customers value, and quickly planning—and acting on—an appropriate response.’
One particular issue that FinTech startups have resolved to find a solution for is supply chain finance. Late payment can be crippling for SMEs in particular, where margins are already tight, a missed payment can be the difference between life and death. Indeed, recent research by R3, the Association of British Recovery Professionals, found that over a fifth of corporate insolvencies were the result of late payment for goods and services, while a study by US Bank found that 82% of businesses fail due to working capital management issues, much of which is the result of buyers trying to extend payment terms and squeezing companies they depend on for materials. This is not just damaging for suppliers, though. Late payments force them to raise prices and reduce offerings - the knock-on effect of which is that both buyers and their customers lose out. The relationship also suffers which leads to less trust, less innovation, and all the other negatives that come from a weak supplier/buyer relationships.
FinTech puts a stop to this by enabling buyers to reduce accounts payable invoice processing by an average of 60%. One solution that has been been greatly encouraged in America and Britain is a new lending mechanism that exploits a large buyers’ low credit risk to pay suppliers’ invoices promptly. The buyer will approve a supplier’s invoice and send it to the FinTech lender, who then pays the supplier on the agreed date or even earlier if necessary, minus a negligible discount. The lender will then collect the money from the buyer, thereby providing more certainty of on-time payment for the supplier without shortening payment terms for buyers.
Banks have offered similar programs before, but the expense, time, and resources involved meant that early-payment programmes have meant they are restricted to all but the largest suppliers. In this sense, FinTech firms are not taking business from banks, they are expanding the market to include smaller companies by using platforms. The benefit of this is tremendous for society as a whole, freeing up working capital to drive business growth in areas where it is desperately needed. By reducing the number of late payments, businesses can continue to remain solvent and thereby provide jobs across the country.