E-financing: a new market on the shoulders of e-invoicing
E-invoicing: banks looking for a serious role
A wide adoption of e-invoicing has been a promise for many years. Also for banks. So far real benefits for banks have been few. However, consensus is growing that the combination with financing mechanisms (e-finance) will bring new value to the market (and for banks). In a period when capital is short (Basel III), new techniques of allocating capital efficiently will make the difference for banks’ profitability.
E-Finance means different things to different people. We use the following definition: “e-finance is the provisioning of financing instruments to businesses using electronic technology for the end-to-end process. This includes the use of e-channels for providing e-finance services, and electronic ways to establish proper finance conditions and manage the risk related to the finance.”
E-finance is not the same as supply chain finance
Supply chain financing is often run by a big buyer and its bank, where the buyer bank finances the suppliers against the credit rating of the buyer. As such, supply chain finance operates in a three-corner model. One bank services both creditor and debtor.
E-finance on the other hand operates in a four-corner model, where buyer and seller choose their own lender. Risk management data is exchanged between the buyer and the seller bank (or other service provider). Such a model could operate in a four-corner banking model, but also in a network consisting of e-invoicing service providers in combination with lenders. Various business models are possible.
New ways of risk management made possible by e-invoicing
The key to this is the exchange of risk management data in a trusted network of players. Banks are used to this way of working for other businesses such as payments and securities. A similar opportunity arises, now that e-invoicing techniques become readily available in combination with existing concepts such as ERP, e-payments and other risk management techniques.
Other markets will open up
Improved risk management throughout a chain of trading parties will open up new financing markets, where the SME market might prove to be the largest opportunity. E-finance will enable financing of lower values, because of the lower cost of transaction in combination with sophisticated risk management, thereby addressing a more retail oriented high volume financing market.
E-finance requires a collaborative space
In such an ecosystem, a number of issues need to be resolved on the level of the collaborative space. This includes:
- Establish a network of service providers and lenders, including the definition of a compelling business model for such a network.
- Exchange of data for risk management purposes, including invoice data, status, risk profiles.
- Liabilities, obligations: the level of obligation per status (e.g. ‘payable/received/dispute’).
- Connectivity with ERP/accounting systems: all relevant information (payment, invoices) originate in ERP or accounting systems.
Already a developing market for e-finance services
There is already an ongoing trend of specialized lenders collaborating with e-invoicing operators, as can be seen with Ariba and FundTech. These developments may disrupt existing financing business models of banks, and push traditional financing proposition in the 'commodity space'. Also other parties enter this area with lending propositions that enable SME’s to get to financing ranging from invoice discount specialists, receivables exchange and platforms that bring together lenders and businesses.
Banks, (e-invoicing) service providers and financing parties, have an opportunity to collaborate to define and establish a networked e-finance solution based on the principles outlined above. However, such collaborative innovation cannot be driven by one single party, only by a group. But that group needs to have a common perspective, before innovation can take effectively. Will current situation in financial markets speed up the development of this common perspective?