Thursday 28th April, 2016
What better venue to discuss the difference between revolution and evolution than in the towering Aqua Shard with its bird's eye view over The City? Joining a group of industry commentators, I went along to a discussion there earlier this month, led by C2FO and Tradeshift. The panel were taking a look at the impact of fintech on working capital, pondering the question of whether we are in the throes of a revolution or simply following an evolutionary journey. It's tempting to view the rapid explosion of fintech as something set to blast the cobwebs off the banks and revolutionise the world of finance. But everything starts from somewhere, so for all the noise, maybe it’s really a case of business as usual, just better.
With negative interest rates and diminishing returns on equity, certainly interest in the use of fintech is something which is gaining in traction. But as Charles-Henri Royon, VP EMEA at Tradeshift pointed out, the problem lies with what happens in the middle – too much cash is being left to stagnate because the end to end process is not streamlined, and the key question is how to distribute that liquidity.
In fact it’s a problem that has led to a $150bn pool of cash in working capital stagnation in the UK, and a situation that some have accused the banks of not doing enough to help. Historically, only the larger corporates have been able to make use of financing, and only then, at a considerable cost, leaving the smaller suppliers to struggle, potentially injecting the supply chain with risk. But Mark Tweedie, UK Corporate Banking Head at Citi, quipped that that you might describe the relationship between the banks and fintech as being the very best of frenemies, adding that the two schools are able to both complement and compete, which ultimately delivers choice. He also takes the view that it’s an investment opportunity – there’s a lot of private equity looking for a home, and fintech can offer an attractive hearth.
A question from the floor about whether, that being the case, fintech is having a bubble moment, caused some shuffling in seats. But Sandy Kemper, CEO and self-confessed “libertarian rancher” (he's from Missouri) of C2FO agreed, saying that in times of easy VC money, no business can grow as fast as lending money as it’s easy to generate revenue, adding that this has the potential to proliferate bad debt. As a result he felt that certain areas were a bit frothy. Tweedie said that those who survive will likely be those who create the strongest alliances. But of course competition can be healthy, and that was certainly the view of Enrico Camerinelli, Senior analyst of Aite Group, who welcomed the bubble, pointing out that it meant that only the most robust would survive.
And the role of the government and regulation in all this? Well, Kemper said that in his view “if you don’t have risk, you don’t need regulation” But Camerinelli felt that although regs could be seen as something constraining, in a risk averse profession, it might help if general guidelines could be defined.But ultimately fintech penetration is likely to be something which is driven by the market, and any regulatory framework may find itself in the position of having to play catch-up. But the UK government is trying to do its bit to help, and with the new payment laws coming into force in October, it’s likely that we’ll see more companies signing up to the Prompt Payment Code and looking to fintech to help them meet their obligations.
So what’s holding some organisations back? One of the main factors seems to sit around education. There’s still a certain lack of general knowledge around what fintech can do, not just to save money and unlock working capital, but to raise levels of visibility and efficiency internally as well as along the supply chain. On top of that, while significant inroads have been made to break down some of the silos of the past across finance and between purchase to pay, there’s also the question of ownership and responsibility as well as broken systems between them - and any confusion causes inertia.
Whether it’s something revolutionary or more evolutionary in nature isn’t so important. What is, is the recognition that organisations need to move with the market, or risk getting left behind. There’s no longer any room for companies with manual processes, who lack visibility, with inadequate methods of managing their suppliers or their cash position.
For the record, the panel split down the middle – 2 revolutionaries, 2 evolutionaries.
And, I have to say – I’m inclined to agree…