Businesses (especially those of the small to medium variety) face the common pitfall of attempting to remain ‘liquid’ while at the same time having to rely on payment at a later date for the services/products that they deal in.
Stable cash flow is the lifeblood of many organisations and in an era of disruption, where industries are coming unhinged and a clear power shift from corporations to consumers has begun to take place, marketplace finance presents us with a workable alternative to traditional modes of financing.
Peers, crowds and the democratisation of finance
Built on a branchless ecosystem that enables transactions within a two-sided market that isn’t focused on institutions but on people, marketplace financing has been enabled by the exponential growth of technology and is bringing balance back, removing barriers and changing the way that the world borrows and invests.
It is now a significant part of the global economy. In an industry worth over $145 billion, marketplace finance has spurred economic activity, employment and innovation. Through marketplace finance, businesses looking to meet their short-term financing needs are able to use receivables from big buyers and sell them to participating investors, effectively improving cash position, cost base and working capital.
Millions of small businesses do not have access to bank finance. This means that they have to rely on invoice payments or private loans to fund working capital. Through the use of marketplace finance, these businesses are able to alleviate cash flow issues and concentrate on fuelling product/service innovation as well as business expansion. They are also able to lower their costs and avoid delays in delivery due to a lack of funding, all with huge macroeconomic implications.
Driven primarily by natural market dynamics, the value proposition that marketplace finance brings to the table is incorporated into both sides of each transaction. Low-cost operating models ensures lower rates for borrowers and a high chance of solid returns for investors. It connects companies in search of new and competitively priced financing sources to savvy investors, brings demand closer to supply and serves as an excellent business model for entrants due to the law of large numbers.
Powering the supply chain – Marketplace finance strengthens relationships all along the supply chain by decreasing/removing delays between suppliers and firms. At the same time, big buyers get to negotiate longer supplier payment terms as well as discounts, enabling financially robust and reliable supply chains.
Better rates – Thanks to low/negative interest rates, marketplace finance brings with it the potential for higher returns compared to traditional investments. It also offers more flexibility and leeway as well as fees that are significantly lower and much more dynamic compared to those offered by traditional lending institutions.
Data – With services that deliver powerful deal-level granularity, filter and search functionalities, data, analytics and more, marketplace financing supports effective risk management and regulatory development. It also provides dynamic reporting so investors can keep track of returns/investments and align investment opportunities with their own target return profile/risk appetite. Platform resources/communities can be consulted and performance histories carefully considered for enhanced decision making.
Transparency – Vibrant and responsive to the demands of its stakeholders, the industry provides loan-level credit and performance data and nearly every marketplace lending platform allows investors access to extensive transparency on their loan portfolios. Open investment through marketplace financing enables a rigorous evaluation of track records and risk/return ratios. Vetting processes ensure that only quality investment opportunities are on offer and transactions can also be validated, ensuring that counterparties are legitimate. With fully verifiable transactions that can be tracked, marketplace finance offers the potential for truly open-source many-to-many lending.
It has its own index – the first global index for alternative finance CAMFI (the Crowdfunding And Marketplace Finance Index) displays a single numerical measure of the state of the global online crowdfunding and marketplace finance industry. By cleaning, accessing and presenting data in benchmark form, CAMFI educates SMEs, public bodies, financial analysts and more on the health of the online finance industry and functions as a single point of reference.
Mitigate risk – By limiting exposure to credit risks, investors are able to protect themselves and earn risk-adjusted returns by opting to buy receivables with high-quality ratings. Operational as well as platform risk lie at the core of decision-making for investors in the industry and with marketplace finance, investors have the ability to choose between platforms (selecting the highest potential returns, lowest perceived investment risks, best products and least counterparty risk) as well as between different products (such as those that enable further nuanced credit grade or loan-level selections within product types), giving investors the ability to truly customise their portfolios.
Due to these reasons, marketplace finance also presents an interesting proposition for the corporate treasurer seeking to achieve liquidity targets, optimise cash management and improve controls.
A promising utility for treasurers
Over the past decade, online marketplace platforms have transitioned into sophisticated networks featuring institutional investors, financial institution partnerships, direct lending and securitisation transactions.
Treasurers, whose priorities include sourcing access to technology mediums with sufficient potential, power and flexibility for their initiatives and policies have begun to focus on innovation at a time of market volatility as well as intense corporate regulation.
According to the second annual Treasurer Survey from C2FO, technology will continue to support the role of the treasury function as it drives additional benefits to the entire organisation.
In fact, nearly three-quarters (74 percent) of the corporate treasurers surveyed said that roles in treasury will be revolutionised by technology innovation in the next three years.
Marketplace finance adds value through technology solutions that enhance financial initiatives while simultaneously creating a healthier supply chain.
By including marketplace finance within the corporate treasurer’s toolkit, more strategic business decisions can be made towards achieving company objectives.
Opportunity to Expand Access to Credit – Online marketplace finance extends accessibility to credit in certain segments by providing loans to borrowers who may not have been otherwise eligible. Although debt consolidation purposes are the reason for a majority of consumer loans, small business loans generally originate from a requirement for working capital. Distribution partnerships between marketplaces and traditional lenders also present an opportunity to leverage technology, expanding access to credit into more underserved verticals.
Greater Transparency Benefiting Borrowers and Investors – As marketplace finance continues to grow, market participants benefit from a potential increase in transparency when it comes to pricing terms and standardised loan-level data for investors.
Use of Data and Modelling Techniques for Underwriting – The use of data for credit underwriting is a core element in marketplace finance. Data-driven processes stand to expedite credit assessments while reducing costs and corporate treasurers realise that they aren’t getting the most out of Bank Deposits. However, unlike pensioners, they are empowered with the resources to act on that realisation. Treasurers practice lending to their vendors through Supply Chain Finance (SCF) and once they connect SCF with Marketplace Finance, their work process have the potential to be rapidly impacted, fundamentally changing the way in which financial initiatives are handled.