Peer-to-peer loan platforms are getting most of the attention. But the Internet's decentralized architecture is upending traditional finance in other ways, too.
Online marketplaces from companies like C2FO and Oxygen Finance are facilitating business-to-business transactions that mimic loans, but don't involve an actual extension of credit.
On these sites, big companies like Costco, Amazon, Walgreens and Nordstrom agree to accelerate certain payments they owe to their suppliers. In exchange for the speedier delivery of cash, the big companies' suppliers, which are often smaller firms, accept a discounted payment on their invoices.
It's a concept that has the potential to snuff out some of the demand for the kind of short-term credit that many small businesses use to smooth out their cash flow. And for bigger companies that are sitting on a stockpile of cash, the arrangements may offer better returns than their low-yielding alternatives.
"In our market, there is no underwriting. There is no risk-based provision of working capital," explained Alexander "Sandy" Kemper, chief executive officer of Fairway, Kan.-based C2FO.
[Coming this November: Marketplace Lending + Investing. Hear how participants in this fast-growth niche are using data and technology to propel lending into the 21st century.]
Kemper is a former CEO of UMB Financial in Kansas City, Mo., the $16.7 billion-asset banking company that has been led over the decades by multiple generations of Kempers. In 2008 he founded C2FO, shorthand for "collaborative cash flow optimization." As of the first quarter of this year, the company says that it has accelerated more than $15 billion in business-to-business payments.
It takes any business an average of 60 days to get paid, C2FO says. The firm's platform accelerates that schedule by about 23 or 24 days, according to Kemper. Suppliers name their discounted price, and then purchasers decide whether to accept that offer.
The average yield in the C2FO marketplace is an annual percentage rate of around 6%-7%, Kemper said. For small businesses, the accelerated payment of invoices offers a much cheaper form of short-term financing than other options, such as merchant cash advance providers, factoring companies and the new crop of online small-business lenders.
"There's a need for capital, and there's a lot of folks trying to jump into this market to provide that capital," Kemper said. "I think they're providing it at the wrong price."
In a recent interview, Kemper spoke about his firm's business model, the power of peer-to-peer technology, and what C2FO calls the "liquidity paradox." Below is an edited and condensed transcript of the interview.
What is the "liquidity paradox"?
SANDY KEMPER: The conundrum, if you will, is that there's a lot of liquidity in certain siloes across various economies. In other words, certain areas are awash with cash, and certain areas are not. So at the same time we have surplus ability to lend, or surplus ability to pay, there are companies out there who are struggling and fighting for access to capital.
Explain how, just practically speaking, this marketplace works.
On any given day, any one of our buyers, they may have hundreds of millions, if not billions of dollars, sitting on their balance sheet in short-term investments or cash equivalents. They're not making much in today's market maybe 10, 20 basis points per year on those sometimes billions of dollars of short-term paper.
Meanwhile, their supply chain may be having to borrow, may be having to factor, may be having to go to an asset-based lender, or may not be able to find working capital access at all. So somewhere in between the supplier's cost for capital, somewhere between that 10 and 20 basis points that they're making on their cash, and the 700 or 800 basis points on average that their supply chain is having to pay for cash, you can create a much more equitable exchange.
How does your company get paid?
Our revenue comes from the revenue we create for the buyer. So the buyer pays us based on how much money the buyer is making in the market through the improved yields that they're getting on their short-term cash. It's a no-cost solution for the suppliers.
Have discounting arrangements between suppliers and buyers been in existence for some period of time? I would think that particularly large suppliers, larger corporations have worked out these types of arrangements before there was a marketplace.
The ability for a company to ask for an early payment at a discount, or at an APR, has always existed. In fact, I think discounting of bills of trade has existed since shortly after bills of trade were created. As soon as that transaction's done, people want to clear their money as quick as they can.
Having said that, it is an entirely different thing to automate that both vertically and horizontally. Vertically, meaning deep down in the supply chain, so the Costco supplier can take money from Costco and move it down to their supplier, and their supplier can do it the same for their own suppliers.
And then you've got horizontal, meaning a supplier in our market might have 15 different buyers from whom that supplier can source cash.
Last year we managed or touched about 6.6 billion invoices. So this is not something that can be done manually.
How big do you see the addressable market as being?
On any given day in the U.S. economy, there is $7 trillion of accounts receivable on the books of businesses. That means there is plus or minus $7 trillion of accounts payable. Meanwhile, you have maybe plus or minus $500 billion, $600 billion, $700 billion of working-capital finance provided by banks.
So there is a huge market and a huge need not to go after the banks at all, but rather to go after the delta between that which is being provided today and that which could be provided if a more efficient model is created.
Conceptually, in terms of the architecture of what you're doing, it does have commonalities with a peer-to-peer loan model like Lending Club.
With the exception that we're not in the risk-underwriting business. But yes, we do it electronically. It is a marketplace environment. And it is done discreetly between the buyers and suppliers at massive scale inside this electronic environment.