Since the convergence of financial services and technology (fintechs) began around a quarter century ago, the overwhelming majority of the focus has been on products like brokerage, banking and insurance.
But with regulatory changes, technological advancements and shifting market demand, fintechs themselves are evolving. What were once exclusively standalone products, these offerings have evolved to address the needs of both new and established markets. They do this by white labeling their offerings and integrating them with other companies in what’s often referred to as finance-as-a-service or FaaS.
FaaS is typically transparent to the supplier. To that audience, they have access to a new offering that allows them to keep their business all under one roof. This can help simplify operations and keep costs down – a goal for any company. To the business white labeling the fintech provider, it’s a new revenue stream that’s been market tested, is easy to deploy, is scalable and it provides an additional revenue stream with much lower risk than, say, acquiring a company. And to the fintech firm itself, the benefit comes with a built in customer base and a revenue sharing model that keeps cost per acquisition rates down. According to a 2016 report by HfS Research, FaaS is appealing because “plug and play business services can unlock value by interfacing with [ERP] systems…making them more extensible and more valuable.” They go on to note that it’s a particularly viable and valuable option for “small but growing companies.”
According to a 2016 report from the American Bankers Association and Accenture, FaaS is a $1.3 billion market and climbing.
With all these benefits, it’s no surprise that the FaaS market has seen rapid growth in recent years. According to a 2016 report from the American Bankers Association and Accenture, FaaS is a $1.3 billion market and climbing. These types of offerings can range from mortgage origination to payment and countless other opportunities. So let’s take a deeper look into the benefits of one particular type of FaaS, that being trade finance.
There are a number of large technology companies like Ariba, Oracle and Verian, just to name a few, that help customers with procurement, invoice submission and payment. These customers – ranging from SMEs to large corporations – have cash flow needs just like any other business. But with invoice payment periods potentially extending up to 90 days, this can present a challenge for businesses facing a cash crunch or simply looking to smooth out revenue. These technology companies are increasingly integrating FaaS providers that deliver early invoice payment.
Some examples of early invoice offerings include:
- Supply Chain Finance: While many corporate customers may have a SCF program, they may be unwilling to offer them to the mid- and long-tail of the supply chain. This may be a function of regulatory or jurisdictional restrictions from their bank or trade credit concerns. However FaaS providers can accommodate the entire supply chain, not to mention that it’s compatible with current supplier offerings.
- Accounts Receivable Finance: With AR Finance, companies can help their corporate clients secure off balance sheet financing. Additionally, for those dealing with extended payment terms, AR Finance helps in securing capital access and management.
As much as any industry, technology has delivered significant changes to financial services. We are clearly at the next stage of fintech, with the emergence of FaaS, and the opportunities it presents. Trade finance, in its various permutations, is not only a logical place for FaaS to emerge, but it could very well help businesses transform and reach new heights.