Companies used to offer working capital programs to their suppliers primarily in conjunction with a single bank. That was great for the bank, of course, because it allowed the bank to set the terms of the working capital program, to tie the company into a close, long-term relationship, and to gain maximum benefit from lending money to the company’s suppliers while only taking on the credit risk associated with the company itself. The company in question would, of course, usually be a multinational, large or mid-market business with a good credit rating.
Banks’ historic involvement with working capital means that even today – when there are numerous bank-agnostic solutions available on the market – many corporates first talk to their bank about their working capital requirements and might even end up being sold a solution without properly exploring other options. The risk with this approach is that the bank’s solution may not actually be the best overall solution for the corporate, taking into account factors such as credit availability, fees, funding costs and onboarding requirements, and also whether the organization has any specific needs, such as wanting to provide finance to suppliers in a country where the bank has no presence.
Furthermore, when a corporate sets up a working capital program with a single bank, it is effectively giving a large amount of business to the bank, which will certainly put it in that bank’s good books, but could be harmful to its relationships with other banks and increase its exposure to counterparty risk. Since there is a lot of effort involved with setting up a working capital platform initially, it can be difficult for a company to move to another solution if the bank’s service standards slip, it increases interest rates for suppliers at a steep rate, or it allows the technology underpinning the platform to become antiquated.
Another consideration is that a bank’s working capital platform will not necessarily integrate with the company’s forecasting and payments solutions, leading to duplication of effort when it comes to reporting and tracking transactions. Meanwhile, the invoices that will be financed under the working capital program will be stored in the company’s enterprise resource planning systems, not its platform, which reduces the efficiency of the payments process. Finally, when onboarding suppliers to its working capital platform, the company will inevitably have to follow the bank’s procedures, which are likely to be more onerous than its own procedures would be.
When a company is weighing up whether to use a bank-hosted program or to invest in its own platform, it should take the following selection criteria into account:
Large and mid-market companies both evaluate a number of considerations when making a decision about whether to establish a bank-hosted or a bank-agnostic working capital program. Companies that come down on the side of bank-agnostic will find that Kyriba’s cost-effective solution meets all their key requirements for a multi-bank platform. As well as being bank independent, the platform offers supply chain finance, dynamic discounting, and receivables finance solutions that easily integrate with ERP systems. Also, those companies that already use Kyriba’s cash, risk and payments modules will be able to integrate the working capital module with the rest of the platform. Alternatively, if a company doesn’t already use Kyriba, it can start with the working capital module and integrate the other modules later on. Integrating working capital with the payment factory, which is part of Kyriba’s payments module, offers a particularly strong value proposition since it allows a company to automate its end-to-end payment cycle – something that is not currently achievable with a bank system.
Ultimately, there are many reasons why a bank-agnostic working capital solutions are often a much better option for corporates than a solution offered by a single bank. Yet the most fundamental consideration is probably that with a bank-agnostic solution, the company is not directly tied to one bank platform, which means it can fund its working capital program without being over-reliant on one particular bank, or even relying on any banks at all since it can use its own cash to fund its suppliers instead. This independence is crucial in an era when the economic climate is volatile and the Basel III rules are imposing strict capital and liquidity requirements on banks, increasing the risk that they will withdraw their services from certain companies or certain countries. In fact, using a bank-agnostic working capital platform could actually be a way for companies to strengthen their relationship with their banks going forward. Since they are not beholden to one working capital platform provider, they should find that all their banks compete fiercely to gain and retain their business.
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