I sat down with Orbian’s Chairman, Tom Dunn, and Director of Marketing, Sabrina Piquemal to talk about Orbian, Supply Chain Finance (SCF), fintech and other related matters. Below is a detailed summary of our conversation.
I read that your company was founded in 1999. What was the original conception? How did it begin? Who started it?
Orbian was incorporated in 1999. It was first founded as a joint venture between SAP, the German software company and Citibank, the US financial services company, and that, if you like, has been the DNA of the company, ever since: we are a technology enabled financial services company. We’re not a fintech, we’re not a software company. We have a proprietary set of technical capabilities, but those are an enabler for our business. Our business is the business of providing liquidity to suppliers of major corporations.
So, it was about being a funder, originally?
It has always been about, if you like, sitting in the nexus between the accounts payable function of a buyer, and the accounts receivable, the sales side of the suppliers, enabling them to jointly collaborate around their working capital objectives.
That is something that has evolved more over time. I can’t really speak to what was the original founding thoughts between the SAP and Citibank all those days ago. But since 2004, we took the company private. A majority stake of 80% was sold by SAP and Citibank to a group of private investors. And over the subsequent eight or nine years, the residual stakes held by SAP and Citibank were sold down. And so now the company is 100% owned by interests that are not SAP and Citibank.
So, you see that as a benefit – being independent of this big bank? It puts you in a better position?
Absolutely, for a while we provided the Orbian services and solution to Citibank on a white label basis. And then around 2011, we made a very fateful decision to exit that relationship: it was preventing us from developing and growing as we wanted to. And it’s over that time since 2012, that we have grown to be the very large company that we are today with around about $7 billion in assets. Total funding last year was about $25 billion. This was something that would have been very difficult to achieve if we had remained so closely aligned with Citibank.
Let’s move on. You have kind of addressed the second question, which is about Orbian software facilities, and how they improve supply chain finance. So, you have software to better handle it, but you still have human input?
What it does is it sits within the ERP system of the buyer’s payable function and allows the buyer to approve invoices (for payable finance) and for those approved invoices to be visible to their suppliers, so that suppliers can then choose to receive early liquidity against those approved invoices. Many suppliers choose to elect what we call auto discount where they automatically receive the funds. Others want to go into the system and actually select invoices that they want to discount. Everyone has now been granted a tool that allows them to manage their respective working capital objectives. The software allows for the buyer to, generally speaking, have slightly longer payment terms; for the supplier to get liquidity as quickly as possible.
For the benefit of a company that’s maybe new to the factoring game, is it the ERP programme that is suggesting which invoices are best to use for invoice finance? Or is there an invoice financier that is also having an input?
No, this is a crucial difference between what Orbian does and what any kind of factoring arrangement does. It is vital for the buyer to approve the invoice: it’s up to the buyer to choose which invoices they wish to approve. That is done as part of their ongoing procurement relationship with the supplier. It’s not something that we have any involvement with, nor should we have any involvement with.
I see what you mean, because under a traditional system, the invoice financier strikes me has a very crucial role…
…trying to cherry pick those invoices that they want to finance.
Oh, I see, I didn’t look at it that way around, I thought that he would be providing impartial information to the client. I read on your website that it’s ‘non assigning of invoices’, does that mean it’s a non-recourse situation?
Yes, it’s non-recourse. We purchase the receivable from the supplier. The supplier now has cash. If in the hugely unlikely event that the buyer didn’t pay, we would not have recourse back to the supplier to ask them to give us our money back.
So, you take on the risk?
Yes, we take on the risk of the buyer. And what that means is that it’s giving the supplier the advantage that they no longer need to worry about the buyer risk at all. It has huge implications for the suppliers, therefore, in terms of allowing them to eliminate any credit risk insurance or trade credit insurance against that buyer, because they no longer have any risk against the buyer. From our perspective, it is good because it means that we have now eliminated the supplier’s financial performance from our risk profile. There is no performance risk that is associated with the supplier, which means that whilst we still do very thorough AML and KYC on all suppliers that join the program, we don’t need to do any additional credit work on suppliers that join the program.
Okay, right. And you did say there’s a very low percentage of defaults.
There’s zero. That’s partly because we’re careful about how we select buyers. These are core functionalities for the ongoing activities of a typical investment grade company. You can have companies that jump from investment grade to default. The classic examples would be Enron and Parmalat; more recently it was not a corporation. But I mean, on the day before it was taken over by the Federal Reserve, Signature Bank was rated Single A. Over the weekend its non-depositors were wiped out. These things can happen.
The background of the leadership team at Orbian is very heavily focused on credit type work – we’re very attuned to that.
So, you’re doing your homework.
On the dime. We’re doing our homework on the buyers always. For every buyer there are 100, 200 or 1000 suppliers. So, you need to design a process that obviates the need for supplier credit risk analysis.
I presume you’d have a lot of bad things to say about Greensill and how they got themselves in such a pickle.
I don’t really have a lot of bad things to say about that. It was possibly a fraud, and importantly had very few implications for the rest of the global SCF industry. For those that were close to Greensill of course, the ramifications were rather more serious: GAM [Swiss asset manager] suffered dreadfully, and they were one of the crucial elements leading to the recent demise of Credit Suisse.
Oh, I didn’t make that connection before. That’s kind of interesting. So, Credit Suisse were big backers of Greensill?
Credit Suisse had a $10 billion fund that was basically providing Greensill with all of the money that it needed for its invoice financing for Gupta and everybody else. When it collapsed, they were able to recover some of that. It was a fund that had been very aggressively marketed to their core private banking clients. In particular the high-net-worth individuals that they had as private banking clients in Southeast Asia were brought into this fund. It was sold as a very stable venture, you know, earn 1% over LIBOR kind of stuff. And it wasn’t: the underlying risk profile was very different to what was “on the tin”.
So, what’s your feelings about Deutsche Bank then? Do you feel that they’re not in the same predicament as Credit Suisse were? That they have stronger fundamentals?
They are altogether stronger. The trigger last week seems to have been that they bought back some bonds. People that had been short on credit derivatives positions needed to begin to neutralise those positions. It led to a spike in the charges for that. But on the basis of tiny, tiny volumes. And there was literally nothing to see there. Deutsche Bank, obviously had some problems in the past. I truly believe that the new management team that’s been in place for the last three years or so is doing a fantastic job. They really are turning that ship around.
I hope so for those depositors around Europe who’ve got their money in Deutsche Bank.
I think that for depositors, the lesson from Credit Suisse, from SVB, from Signature Bank everywhere, is that they are fine. It’s the people that are holding the lower tiers of security AT1 bonds, the subordinated debt, the equity, those are the guys that are on the hook here. But more importantly, actually, it’s more about the asset side of the balance sheet; that is where the ripple effects really start to come through. It’s the sudden withdrawal of a lender that is actually a bigger problem, in many cases, than the losses for bank capital providers. Because, as I said, depositors are being protected. It’s going to have broader macroeconomic implications. The impact on the asset side really can have very immediate negative consequences, which is why people were very keen to see the books of business of Silicon Valley Bank and Signature Bank be taken over very quickly.
Yes, we don’t want another 2008.
Moving on: you offer a plan to structure your clients’ businesses. You then implement this plan with suitable software. Have you developed your own software or are you using other people’s software?
All our core software is owned by Orbian. The original platform first created at the start of the millennium has been subject to constant revisions, constant updates, constant developments. Probably we do between three and four releases a year of new capabilities, new functionality. Some are minor releases and some are very substantial releases; but we always own our own software.
And do you allow your clients to download the software? Or is it software as a service?
For suppliers, it’s software as a service. They just go into a secure site; it’s something that they can access just via password protected sites. For the buyer, the software is installed as an embedded feature of their ERP system.
And does your software use AI or machine learning?
What our software does is it integrates seamlessly with any such machine learning or predictive tools that the buyer wants to use on their invoice management processes. But we ourselves don’t offer AI or machine learning.
Are you keen to see the situation where there’s automation from the creation of the invoice through to the final payment?
People are moving along that pathway. It is always going to rely on the fact that an invoice at the start is a claim by the supplier that they have delivered some goods or they have delivered some services. That they have been compliant with whatever contract they were under; but it’s a claim by the supplier. At the other end, is the delivery of cash from the buyer to the supplier. We can anticipate lots of ways that that process between those two things gets automated and streamlined. But at the end of the day before the buyer sends out cash, they want to know that they agree with the claim that was put in by the supplier.
Therefore, it’s useful to have a human stop?
Whether it’s a human stop; whether it’s randomised testing there needs to be something. It can’t simply be that the presentation of the invoice triggers the payment because there will always be bad actors that will figure out how to game that system.
Yes, I can imagine if you’re sending 100 invoices to one company then 101 might not be noticed.
Exactly. You can start to get dodgy invoices that are against future invoices from potential customers.
I’ve read about this interoperability problem with digital services. People are keen to automate it all. But I also think, there’s people that have got so much experience in this field that perhaps it’s not a bad thing for humans to come into the process.
You could save hundreds of thousands of dollars a year by automating – which is all great until a dodgy invoice for 5 million pounds gets paid. The recipient is off to the Caribbean. At which point you’ve lost 10 years’ worth of savings.
Still on the topic of software: what feedback do you get from your customers? What did they particularly like about your offering?
We poll all of our customers quite regularly. We try and simplify the questionnaire. So, it’s two or three questions that they can do on a point basis. But if I had to say what suppliers like the most about the system, it would be three things. The first is that they can have full automation. So, if they want to, they can just lock and load: they don’t need to worry about taking any action in order to receive the funds once the buyer has approved the invoice. The second thing is kind of related to that, which is that they get an incredibly rich suite of reporting tools. Regardless of whether they’re auto or manual, they can go in at any point and get full reconciliation reports, tracking down to the individual invoice, when an individual invoice has been approved, when they received the funds and a precise calculation of how much they paid as a discount charge against that. So, a very full set of records. And then the third thing is that they can, at any point, elect to fix or lock in the interest rate that they’re going to pay on any future discounts, so they are no longer exposed to movements in LIBOR.
That’s been moving around quite a lot recently.
For people who locked in this time last year, it was an absolute bonanza. You talked about machine learning and AI, we don’t offer that. What we do however do is a huge amount of analytics around the data that we are producing every day. We’ve had a joint research initiative running with a big university in Germany for about 10 years now, that is really focused on the behavioural aspects of Supply Chain Finance. What encourages buyers to participate? What encourages suppliers to participate? When encouraging suppliers to discount how does that change based on movements in interest rates movements or in other macroeconomic variables? That is highly proprietary information that we use in risk management. That is why we are able to offer suppliers fixed rate opportunities, because the risk management around those fixed rate options is incredibly complex. Getting that decision right is very difficult. Nobody else has been able to replicate this risk management process. The banks haven’t been able to replicate it. And specialist providers have not been able to replicate it because they just don’t have enough data. They don’t have enough risk management skill within their organisation.
That’s your unique selling point.
One of them.
And that’s very interesting, because that seems to be going more into psychology than anything else.
Warren Buffett has had a business partner for 60 years now called Charlie Munger. Charlie Munger is an international standard psychologist focused on what he calls cognitive biases. And he’s written very widely on this. He identifies about 30 key traits in cognitive bias. In a presentation in Chicago to 3000 people we pulled out 10 or 11 of these cognitive biases, and we illustrated different aspects of supply chain finance in the context of those 10 or 11 cognitive biases.
Are you close to feeling that there’s almost a universal law of market behaviour here? Or are you still surprised by aberrations?
[Tom laughs]. Absolutely not. Lie down and put a cold compress on your head!
I’m fascinated, because in psychology, there’s a lot of empiricism looking for trends rather than laws as such. I haven’t really read anything like that before that looks at a vast amount of data-defined behaviour.
if we put something up, then you’ll probably read about it in a couple of days on one or two of our competitors’ sites.
Are you employing people with a psychology background then? Or is it still very much financial people?
We’re not employing psychologists, but we’re using this joint venture we have with a university. There could be 10 PhD students that are working on different supply chain finance related projects. Some of the papers that they put out are mind-boggling. We have to study these really abstract ideas and then find practical applications within the context of what we’re doing.
We’re in a situation now where, after COVID, we are having problems with the supply chain. We’ve been told it’s the supply end and not the demand. And then we have the war in Ukraine causing shortages in gas and oil. We’ve seen the interest rates going up. Has this had a big impact on supply chain finance?
The impact this has had has really been to accelerate the need for Supply Chain Finance to help increase resilience in all supply chain activities. The two or three years of the COVID pandemic demonstrated that globalised supply chains have developed beyond the point where they can be relied upon as secure and resilient.
We’ve got this notion of localising, reshoring and ‘friend-shoring’ as some of the global geopolitical dynamics are getting a little bit more fraught at the moment. We’ve got these different dynamics, all of which, as supply chains generally are changing, are shifting their shapes that increases the demand for the liquidity that will enable that resilience to be built. We’ve also got a vital green agenda and how supply chains should play a role in that agenda. It’s very important. But overall, is this leading to step changes? No, what it’s doing is it’s adding further layers of gloss on to a market that continues to develop at 15 to 20% annualised increments rather than being something that is enjoying or enduring a step change in its application.
It’s still growing at 15 to 20%?
Yes. Supply Chain Finance still only counts for a small fraction of global working capital requirements. That’s the thing to keep in mind. You’ve got these big tectonic shifts that we can identify. But the fact is that the quotidian, daily responsibility for a procurement manager is still driven by 95% of things that are not related to those tectonic shifts. They are driven by how can I get an extra couple of days DPO? Or the supplier thinking ‘my effective cost of finance is now 10% (as LIBOR plus five), whereas a year ago, it was 5%. How do I deal with that?’ What are the issues that it raises?
That brings me on to my next point. Massive interest rises are causing bigger costs for companies.
Massive interest rate rises are giving rise to the realisation that working capital is no longer available for free whereas a year ago it was available for free.
Would you expect to see entrepreneurial endeavours reduce because of the expense of borrowing cash at the moment?
I don’t think that entrepreneurial activities are really driven by interest rates. Bankers put a huge amount of analytical effort into understanding what the weighted average cost of capital is and how that should drive investment decisions. I think even for large, stable corporations the notion of a precisely determined WACC that is driving investment decisions is a little bit attenuated. For entrepreneurs and for people trying to set up businesses or that are building small businesses into medium-sized businesses, the availability of liquidity is far more important than the cost of that liquidity.
So, if it’s there, they will take the extra cost.
Exactly. And circling back to the point about the collapse of Silicon Valley Bank: the reason why that was so important was not that it was going to increase the average cost of debt finance for companies in Silicon Valley by 1%, it was the fact that it was going to withdraw funds in their entirety from an entire part of the eco-system.
Thank you for your time.
Thanks again to Tom and Sabrina for sparing me the time for this insightful and informative interview.