Business Development Director Judith Condell took inspiration from a recent tweet by Economist David MacWilliams to speak about how underbanked Ireland, and in particular SME's are right now.
A few days ago, following the news that Ulster Bank were embarking on an orderly exit and that Bank of Ireland were making wholesale branch closures, economist David McWilliams tweeted “Do you get the feeling that bank are sitting ducks about to be destroyed by new technologies, much in the same way as big record companies were washed away by streaming?’
The response from the Twitterati was mixed (isn’t it always?) with many pointing out that big record companies, far from being washed away, had flourished in the post-streaming era. However, most missed the point that David was making in their rush to be clever clog keyboard warriors. His point, I believe, was that the status quo of the music industry was rocked to its very core by the advent of streaming.
It was the day the retail music industry died. A pivotal moment. It fundamentally changed how major acts generated revenue. It was a seminal moment for the industry.
So, how does McWilliams tweet sit in the context of the Irish banking sector? Is there a pivot point anywhere on the horizon? To get a better understanding, let’s take a look at the wider picture.
THE UNBUNDLING OF BANKS
In 2015, CB Insights unveiled this now infamous visualization of just how many Fintechs were picking apart every element of the retail bank offering in the United States.
While this diagram relates in the main to retail banking, it is a good reference point for business banking too. As Anton Verkhovodov of TA Ventures said in 2019;
“I expect the next generation of large Fintechs to appear in the SME and corporate banking sectors.”
The unbundling has now begun to take hold with Technology companies providing core banking functionality that are enabling enlightened Fintechs to launch business banking products. For example, technology providers are enabling Alternative Finance companies to access real time financial accounting and banking data to accelerate the credit decision making process and segment the risk monitoring thereafter.
According to a recent article in Business Insider;
“Unlike traditional lending, alt lenders have the ability to leverage a broad set of data and machine learning — allowing them to reach further into the small business lending market than incumbent banks.”
In the United States, it is reported that 27% of SMEs access alternative finance providers. In Europe, the figure is relatively similar at 25%. However, both Ireland and the UK lag behind at approximately 9% and 10% respectively.
THE CREDIT GAP
What makes this over reliance on the pillar banks even more extraordinary is the very clear emergence of a Credit Gap in Ireland for SME Finance – the gap between demand and supply for credit.
There is huge demand and nowhere near enough supply through traditional means.
The most recent ISME Quarterly Bank Watch report for Q4 2020 is very revealing.
- Demand for credit now stands at 29%, yet loan refusal rates have risen to 37%.
- The majority of SMEs believe that the banks are making were not helpful in their request for finance.
- Even when they were successful in securing finance, almost 1 in 5 had to wait longer than 4 weeks to get the funds drawn down.
SME’s represent 90% of all businesses and 70% of all employment in Ireland, so why are the banks at best underserving and at worst ignoring small businesses in Ireland?
Writing in October 2020, Accenture concluded that
“Historically, banks’ primary hurdles to profitability in the SME segment included compressed margins, high cost to serve, ineffective segmentation criteria and services ill-suited to SME needs. These internal challenges are being emphasized and, in some cases, amplified by COVID-19’s economic impact.”
Why are SMEs in Ireland not looking elsewhere for working capital and funding solutions? Is it due to inertia? Could it be a lack of awareness that there are so many alternatives available and how they work? Is there a concern that using these newer methods is an indication of poor business performance?
Maybe in reality it’s a mix of all of those things. In fact, for the majority of SME’s when they think of Alternative Finance options, they are probably thinking that means Invoice Discounting, when there is a lot more to Alternative Finance than giving over control of your entire debtor book to raise much needed working capital. Far from being an indicator of a poorly performing business, Alternative Finance is mostly used by businesses in growth, but who can’t get the working capital they need to fuel that growth – either because the banks have no appetite for it, or it is in sectors they deem too ‘risky’.
THE WORKING CAPITAL CYCLE
Alternative Finance is a term used to define any type of finance that isn’t provided by traditional banks. There are a number of different types of Alternative Finance available to Irish SME’s. It is an area that has seen enormous innovation over the past 5 years in particular.
At its heart is a difference in approach from the traditional approach of the pillar banks. Alternative Finance providers differ from banks in a number of ways:
- Not afraid to innovate and come up with smarter solutions tailored to the SME and the environment it is operating
- Not hung up about fixed assets and restrictive security obligations
- Can make decisions faster in order to allow SME’s capitalise on growth opportunities.
At InvoiceFair, we are focussed on solving real world working capital challenges for businesses looking to scale – enabling them to leverage their quality receivables to release cash immediately, on their terms and when they need it.
So, we re-thought the working capital cycle, looked at the current market failures in traditional banking options and identified ways of releasing cash at every point – right from the moment a sales or Purchase Order is raised, through to when the invoice is raised.
Even revenue that has not yet occurred can be funded!
Meaning that SME’s with quality receivables have 100% certainty of getting access to cash when they need it, not when the bank tells them they can or can’t have it.
How does it work? At its core is the principle that we treat receivables (Invoices, Purchase Orders, Contracts, Future recurring revenue) as an asset class and offer them for sale on the capital markets to our panel of institutional investors.
Here are a few examples, all based on real transactions.
Example 1: Selective Invoice Finance
Company A has won a new contract with a key customer. However their credit terms have been extended from 60 to 90 days. The good news is, as an approved Member of the InvoiceFair platform, they can access guaranteed funding that’s fast and very flexible. They can sell 90% of the value of the invoice at a discount today and get funds tomorrow. Better still they control their maximum discount when listing it for trading and during the 2 hour session, institutional funders deploy funds driving the cost of finance downwards for Company A.
When the trading session closes, the net proceeds are transferred to Company A’s bank account. The 10% balance is paid once Company A’s customer pay the invoice on settlement in to the InvoiceFair Trust Account.
Example 2: Purchase Order Finance
Company B has been approached by a Health Authority’s procurement department to fulfil a multi-million euro order for PPE. It is a huge order, but Company B realises that in order to complete the order, they will have to make advance payments to the manufacturer who is based in South East Asia and the balance before the goods leave the factory. They will also have to fund all shipping and taxes to land the goods. In reality, Company B literally cannot afford to take the order. As an approved Member of InvoiceFair the approved blue chip order from the debtor is treated as a ‘future receivable’ and is listed for trading on the InvoiceFair platform. The exact same process occurs and up to 70% of the value of the purchase order is released within 24 hours. The 30% balance is paid to Company B once the Health Authority settles the invoice into the InvoiceFair Trust Account.
Example 3: Future Recurring Revenue Finance
Company C is an exciting business that is experiencing exponential growth. A subscription-based direct to consumer service provider, they needed to access working capital to fund further expansion. Access to the accounts of the company demonstrated that Company C had a very solid, dependable and growing subscriber base. 70% of the value of 3 months future subscriptions was financed Day 1, Month 1 by InvoiceFair’s Funders, releasing a full Quarter’s revenue to fund their growth plans. As each month settles, a new month is added, allowing Company C to leverage the new ‘asset’ and gain access to a line of funding that is directly aligned to their growth in monthly recurring revenue on an ongoing basis.
AN ALTERNATIVE FUTURE
Surely with such an uncertain future for Irish Businesses and their relationship with the pillar banks, we have reached that pivotal point. There are alternatives and they are available right now.
Irish Banks may well be sitting ducks, as McWilliams opined. But that doesn’t mean your business has to be one too.
Isn’t now a good time to find out how to plan an alternative future?