As technology matures, industries are transformed. It is very rare that a single technology inspires or effects the change. It is more usual that a gradual evolution of a mix of technologies lowers the barriers and opens up the opportunity for business models that would previously not have been worth serious consideration.
There was a time when the natural gas trapped in rocks under the ground, while known about, was simply not worth the effort to extract. But develop technologies like fracking that can tap this resource profitably and the future of a nation and its power needs is transformed.
If you understand the signs, it’s possible to see these fundamental changes coming and there is one such change in the financial services industry that is visible quite clearly on the horizon. A mix of technology has matured and a new business model, barely feasible until very recently, has become compelling. It’s good news for business. It’s not so good news for the banks.
Early in my career, I witnessed the transformation of an industry. Before the 1980s, personal lines insurance in the UK, (motor insurance, household insurance, that kind of thing) was sold by brokers – intermediaries who would serve their customers by broking the best deal. In turn, they would serve the insurers by bringing their products to market. These were face-to-face transactions in the main and always paper based. But then in the late 1980s it changed. The change was fundamental and it never changed back and it was technology that was the catalyst.
People will say it was the telephone that changed the insurance industry but it wasn’t. If it had been the telephone, the change would have happened decades earlier. It was a mix of maturing technologies including the availability of computers to business and the ubiquity of the telephone in the home that allowed insurers to sell direct to consumers cutting out the middle man, the broker and offering deals that the traditional insurance distribution channel could not compete with. (Actually, just as it wasn’t the telephone that made the difference, neither did the industry cut out the middleman- they just changed the middleman from broker to TV advertiser.)
There was another, well documented industry transformation in the 1990s. We take for granted today that we buy stuff on-line and indeed that we buy computers directly from the manufacturer. But in the mid 1990s, the big computer manufacturers, Toshiba, Compaq, Hewlett Packard and the rest, had hugely complex a clunky supply chains. There were distributors, wholesalers and retailers standing between the manufacturer and the end user. Until Dell. Dell turned the IT industry on its head. The transformation was fundamental and permanent. The huge costs inherent in the traditional supply chain were removed and it seemed for a time that Dell and the other direct suppliers would become dominant.
Many mergers later, most of the old names have disappeared. It was the internet that brought about the change, not so much the technology itself but its growing ubiquity. The widespread use of the internet made it possible for manufacturers to challenge the traditional distributor/retailer relationships and create relationships directly with consumers. It had always been possible but now it was feasible.
I’m not saying anything new here but there is a generation that doesn’t remember how the world was – when to get from A to B, a manufacturer or an insurer had to go via C, D and E and incur costs along the way. When technologies mature they sometimes allow previously unthinkable trading mechanisms to be taken seriously. And this is what is happening today in financial services.
The industry transformation around the corner
It’s become clichéd to talk about the ‘perfect storm’ – the combination of very low interest rates and constrained liquidity that make the case for supply chain finance compelling. And it would indeed be compelling it wasn’t for the cost involved in establishing a supply chain finance mechanism. At first glance, the combination of cash rich buyers and cash strapped suppliers in many industries seems to present an obvious opportunity for synergy but the reality is as disappointing as it is mundane.
SCF arrangements are structured in a special way. Buyers and suppliers, together with the buyer’s bank, collaborate. But for the SCF arrangement to work properly, the relationship between the buyer and supplier is held at “arm’s length”. There are accounting reasons for doing this, the details of which are distracting but the result is that the bank has to build a direct relationship with each supplier and, as with any relationship the bank has, they need to follow Know Your Customer (KYC) regulations. They need to satisfy themselves for example that the customer is who they say they are. For personal banking, KYC can be an inconvenience but at a corporate level, it’s a nightmare. It’s time consuming and expensive but it’s a necessary evil and as a result, SCF is only feasible for very big buyers and their biggest suppliers.
For B2B banking, KYC is a necessary evil. Just as insurance brokers were a necessary evil until the 1980s and IT distributors and retailers were until the 1990s. If, like brokers and distributors, KYC suddenly became less necessary, if someone developed fracking for financial services – that new, cost effective way of delivering to a market that has always been there but was always inaccessible – the market for SCM would be blown wide open. The techniques available to the very biggest industry would become available to all businesses not just the very large. And because a major cost would be removed, the value in SCF would increase.
I hope the guys at Taulia will forgive me for saying but when they explained their new SCF offering to me a few weeks ago, I was a little confused. There was nothing new that I could see. It was just another brand name joining the Supply Chain Finance space. I had to look at it a few times before I realised what it was that made it different.
Leaving the product details completely to one side, what Taulia and their partners have achieved is to automate or remove the cost of KYC from a traditional SCF package and with their proven platform and the financial clout of their partners, this brings something truly transformational to the market.
Cutting out the KYC costs and reducing the time to on-board suppliers means that Taulia are now able to open up the market. They’re able to get SCF from A to B without going via C,D and E. This is as fundamentally different to the SCF market as selling direct was to the IT industry in the 90’s.
Taulia haven’t actually invented anything. What they have done is straight forward. And it’s easy to imitate – given a little time and investment and assuming that you haven’t got all of your eggs in a 20th century basket. But by the time it is imitated, Taulia will have had the best part of a decade of track record.
Michael Dell didn’t invent anything either. He saw the wave and caught it just right. It was a matter of timing. It was about waiting for the important factors to align, for the technology to mature and for the barriers to drop just enough to make a new model feasible and then be brave enough to be amongst the first to take advantage of a new business model.
Pete Loughlin can be found on twitter @peteloughlin