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:
- Geographic scope. Does the company operate internationally or domestically? If it only operates domestically today, does it have plans to operate internationally in the future? What about its supply chain – is that purely domestic or does it include partners and suppliers in other countries? If a company has international reach, it will probably want to work with international banks on its working capital program. Even the biggest global banks don’t have a strong presence in every jurisdiction, however. So a bank-agnostic working capital solution will often be the best option for a company looking to secure funding for its suppliers from banks that are local to the countries where those suppliers operate.
- Banking relationships. The company’s strategy for managing relationships with its banks is likely to influence its decision around the working capital platform. It may have strong views as to whether it wants to further a relationship with a particular bank or be bank independent. It also needs to consider additional questions such as whether it is likely to need to develop relationships with other banks in the future or whether a single bank can provide a credit limit that is large enough to fund all of its suppliers. What about the interest rates that the suppliers will pay? It is important to note that financing spreads for bank-hosted programs in the mid market tend to be much larger than for those in the large corporate market. With a bank-independent platform, a company can have one working capital platform that works with many different banks, which increases its flexibility to offer appropriate funding to its suppliers.
- Funding options. Bank platforms essentially give suppliers one funding option: reverse factoring. This is where the supplier sells its invoices to the bank at a discount, in exchange for early payment. Bank platforms do not offer dynamic discounting, which is where the company uses its own working capital to finance its suppliers and thereby benefits from the supplier discount. Some companies use bank-agnostic working capital platforms specifically to take advantage of dynamic discounting or to combine it with invoice factoring.
- Visibility. With a bank-hosted working capital program, suppliers will only see invoices that have been approved by the company. Yet the company may also want to give them visibility of other invoices, including disputed invoices, in order to reduce the number of supplier queries that it has to handle.
- Size of the working capital program. Banks are mostly interested in large-scale programs where a sizeable number of suppliers can be uploaded at the outset. A company may prefer to start small, however, and gradually ramp up the size of its program by onboarding suppliers over an extended period of time. A bank-agnostic solution usually works well in this situation.
- Technological integration. How well would the bank’s platform integrate with the company’s existing systems and processes? Some companies will prefer to integrate their working capital program with their TMS on one platform, so that they can save time and resources when it comes to managing their relationships with their suppliers.
- Speed to Innovation. Most banks are not in the technology business and are not investing in developing modern solutions on a regular basis. Corporates who invest in a SaaS based platform, however, can get new features and upgrades without having to rely on a bank to develop new functionalities.
- Standardization. Corporates can put in place one standard procedure for all their SCF banking partners, and do not have to deal with each bank’s specificities, which adds to processing costs and resources to accommodate these corporate requirements.
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.