Only an accountant could find the phrase “supply chain finance” alluring, at least unless it’s tied to a scandal. Little wonder that the recent downfall of Greensill Capital, the U.K.-based trade finance provider whose insolvency has left a trail of wreckage, has left many professionals in the space wincing, worried that their entire industry might now look tainted.
Greensill, backed by SoftBank, is facing scrutiny over financing for "future receivables," or advancing money for business the suppliers hadn't even done, as well as selling off the debt to Credit Suisse to be packaged into securities. Insurers for Greensill jettisoned it earlier this month, causing the lender to collapse. Greensill now faces a criminal probe into its German affiliate over financial irregularities, and a lawsuit from former client Bluestone Resources alleging widespread fraud.
“What we don’t want to have happen in this Greensill event is for supply chain finance to be painted with a broad brush that it’s bad,” Scott Ettien, a trade credit insurance broker with Willis Towers Watson, told me in a phone call this week.
Despite taking a defensive crouch, Ettien and a London-based trade credit lawyer, Geoffrey Wynne, were willing to offer me their take on the market’s current state of affairs behind the headlines.
“What worries me, and I have a vested interest, is that I believe trade finance should not be as regulated as it is now,” Wynne said. “I don’t want anybody, including journalists, to think the takeaway from [the Greensill scandal] is to regulate this market more. Shit happens.”
They do seem to have a point. As shady as Greensill’s dealings might have been, at least as alleged in court filings and news accounts, the market itself is rife with (presumably legitimate) opportunities for disruption and growth. Fintechs have been piling in the sector, offering new and expanded products, and uncertainty in the pandemic has heightened demand from businesses for mechanisms that can speed the flow of incoming cash.
Taulia, for instance, is swooping in to pick up Greensill’s business. The San Francisco-based fintech, which formerly partnered with Greensill, secured more than $6 billion in funding from a group led by JPMorgan to continue serving the fallen company’s clients. Before the deal was struck, Apollo’s insurance arm Athene had been looking to acquire Greensill’s operating assets, according to Reuters.
Stripe, now the most valuable U.S. startup, seems to be edging toward the trade financing space by offering business lending and developing tools involved in supplier relationship management. The company posted an ad last year seeking an “insightful and analytical leader to manage the end to end supplier payment lifecycle for Stripe’s businesses.”
Other fintechs that have recently jumped into the market, or are angling for a larger share, include U.K.-based Stenn, New York-based LiquidX, Kansas City, Missouri-based C2FO, Palo Alto-based Drip Capital, Orlando, Florida-based LSQ, Atlanta-based PrimeRevenue, and Cherry Hill, New Jersey-based Corcentric.
Shortly after Greensill had the rug pulled out from under it by its insurers early this month, C2FO proclaimed that it was eager to pick up the slack.
The company said it was “prepared to offer its secure online platform and diverse multinational funding network to help enterprises manage the unexpected events occurring across the supply chain finance industry currently,” noting that “a large supply chain finance company experienced funding difficulty that impacted markets and companies across Europe, North America and parts of Asia.”
Fintechs have been flocking to supply chain finance because while at first blush it sounds complicated and difficult, it can become a lot simpler and highly desirable when a middleman does back-end work and users can simply get their money by clicking buttons on a graphical interface. By using the systems, companies can offer their suppliers quick access to payment for invoices, at a discount, with a lender (usually partnering with a fintech) taking a small slice.
The whole thing works fine, as long as as there is appropriate insurance coverage in case payments fall through for unforeseeable reasons, and parties do appropriate diligence.
Although the market has been growing steadily for the past several. years, it still has a long way to go. Something like 80 percent of eligible assets, worth trillions, could benefit from slicker payment options, McKinsey said in its 2020 Global Payments Report.
Greensill went a bit outside the mold, though. The lender, founded by Australian businessman Lex Greensill, got involved in dicier deals and was heavily concentrated in a just a few big corporate clients, the Wall Street Journal reported. After insurers balked at the risks, Greensill went under, and is now causing massive headaches for Credit Suisse, which is expecting a wave of defaults in its funds tied to Greensill. The litigation and bad headlines are probably not going to die down anytime soon.
“There isn’t a problem, unless you look at how people might abuse [supply chain finance],” said Wynne, a partner with law firm Sullivan & Worcester LLP, explained to me. “As the famous saying goes, bad cases don’t make good law.”
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