And Small Banks Democratizing The Commercial Card — For SMBs Too

Democratizing The Commercial Card — For SMBs, And Small Banks, Too

June 21, 2021 at 01:00PM

While demand for electronic B2B payment solutions has helped fuel the continued traction being gained among commercial card products, there are other market forces at play that are lowering the barriers to adoption.

For one, FinTechs and other corporate financial services innovators are introducing new card solutions designed to support small and medium-sized firms’ B2B payment needs, not just those of the largest corporate customers. While small firms might have historically relied upon personal cards — unable to provide the financial history necessary to underwrite a commercial card product — the FinServ landscape has largely tackled that issue, especially in the U.S.

With card technology democratized across businesses, innovators then tackled the friction that businesses face when accepting commercial card products, introducing tools like straight-through processing to ease the infrastructure burden on suppliers, or solutions that allow a business to pay via card but have a vendor receive funds through a different method.

Now, a new wave of democratization could be taking place in the commercial card market — though this time, it’s on the side of the issuing banks themselves.

Speaking with PYMNTS, Matt Walsh, EVP and CFO at Maine-based Machias Savings Bank, reflected on the early days of the financial institution’s recently-revamped corporate card offerings, the result of a recent partnership with Corserv. With some corporate customers eagerly becoming early adopters, Walsh noted that there are growing opportunities for smaller, regional banks to participate in commercial card adoption, and benefit as a result.

Eager Adoption

Machias Savings Bank first revealed last week that it collaborated with Corsev to introduce new commercial card products to its customers, including purchasing cards for employee spend and accounts payable, virtual cards, and other tools like fleet cards.

Even before the FI began its advertising campaign for the new products, Walsh said business clients were eager to sign on.

“It’s very early on, but I want to say it’s an easy sell,” he said, adding that the offering has been met with “enthusiasm and interest.”

Today, many of the bank’s existing corporate customers have traditional p-card solutions, but there is growing demand for virtual card technology, especially, he noted. Firms want to have the ability to use a B2B payment technology that can be seamlessly integrated into existing workflows, like payables.

Having the opportunity to use such products from a business’s existing local banking provider, rather than having to turn to a larger institution, is another enticing proposition.

“Early on, the interest has also stemmed from a business’s desire to keep things local,” Walsh said. “The idea they have a local bank, and a local partner, that they can do this sort of business, while still having all of the features and benefits of a card program they would only see in a national offering, is attractive.”

The Regional Bank’s Turn

Machias Savings Bank, with about $2 billion in assets, has its own motivation to invest in a commercial card program through a third party partner that allows the bank to retain the customer relationship — as well as the revenues from interchange and fees.

“I think the banking space we reside in absolutely should own a piece of the puzzle,” Walsh said of smaller banks’ opportunity to participate in the commercial card ecosystem. “I think too often, banks our size think they’re too small to be able to actually give a good solution to their commercial customers. Too often, banks might shortchange their perception of how well they might be able to serve that niche.”

The assumption is not unfounded. Traditionally, smaller banks have been forced to rely upon agent banks to manage card programs, which means the bank has had to forfeit ownership of the underwriting process, much of the revenues, and much of the customer relationship. Finding the right third-party partner, however, can reinstate that control with the bank.

Products like virtual cards and fleet cards, which would normally only be available through a large national bank, can now be issued from regional and community banks that not only have the opportunity to profit from these card programs, but benefit from the ancillary services surrounding those products, like spend control and support for AP.

Cash management is a particularly attractive offering to Machias Savings Bank clients, said Walsh, noting that these services and products create a new avenue through which the bank and their corporate customer can collaborate and interact, with a focus on how those clients are spending their money.

There is still plenty of friction facing businesses and their banks when it comes to commercial card adoption. The B2B payment method often remains too expensive and cumbersome for suppliers to accept, for example. And there is, of course, the resistance to change and a lack of resources among smaller firms, factors that can keep these businesses reliant on paper and wire transfers.

But with awareness of and interest in a variety of commercial card solutions growing throughout the business community, new opportunities in bank-FinTech collaboration models can similarly open the doors for smaller, regional and community banks to issue commercial cards, promote adoption and secure new revenue streams at the same time.

“More institutions in our space are likely to follow the path that we just did,” said Walsh.

As FinTech Business Models Shift Asset-Based Funding Evolves Too

As FinTech Business Models Shift, Asset-Based Funding Evolves, Too

June 11, 2021 at 01:00PM

Not every form of financing is right for every business, but for many high-growth technology companies, the options for funding that fits their expansion trajectories can be limited.

James Sagan, founder and CEO of newly launched asset-based lender Architect Capital, said the venture capital and venture debt that these young businesses often rely upon, while valuable, doesn’t always suit the needs of digital-first business models for firms like FinTechs, digital lenders or eCommerce.

It’s a niche market that Architect Capital is looking to target in both Latin America and the U.S., and one that Sagan told PYMNTS has brought clarity to the latest wave of alternative lending and FinTech innovation beginning to seep into the market.

Understanding how emerging business models of technology startups changes the way “assets” are defined can have a profound impact on the evolving business models of the lenders themselves, noted Sagan.

Defining An Asset

Among the biggest pain points of high-growth digital startups today is that many of these firms are generating assets at earlier stages in their lifecycles, yet the venture debt and equity that these firms have historically relied upon isn’t always able to enter the fold until later.

Sagan offered the example of a digital lending company.

“Lending companies start generating assets in the form of receivables, but there isn’t anybody who was set up to finance, especially in the early stage, the assets being generated by those businesses,” he explained. “Venture debt doesn’t scale enough in the early days to provide liquidity against those assets because venture debt providers aren’t underwriting the asset itself, they’re underwriting the sponsor.”

Likewise, equity can be “prohibitively expensive” when used against a loan book, he added.

While a need in a niche market was identified, understanding how to finance these companies using the assets they generate meant embracing a fluid and evolving definition of asset. For Architect Capital, said Sagan, the assets must be resilient and, perhaps most importantly, must generate cash flow.

Having confidence that a lender’s receivables are sustainable enough to repay a company’s debt is key to financing these firms. Intellectual property, on the other hand, doesn’t generate cash flow, and thus isn’t the right fit for Architect.

“Early on, we were much more comfortable with hard assets as collateral — real estate, let’s say,” noted Sagan. “We’ve subsequently become much more comfortable with assets that have statistical properties that we can underwrite… As we keep growing this business, the definition is broadening.”

Evolving Business Models

While the U.S. has no shortage of FinTechs and eCommerce businesses generating such assets, Latin America is experiencing a rapid rise in firms embracing these business models. Buy now, pay later (BNPL), for instance, is only beginning to gain traction in the geographic market, making it a prime moment to step in, said Sagan.

As digital startups explore new business models, they’re also able to take a digital-first approach to their own back offices, using technology to manage finance, accounting and payments that creates a steady stream of digital financial data. It’s been highly valuable to alternative lending firms working with these businesses and in need of rich, transparent insight into borrowers’ cash flows.

The digital lender and eCommerce businesses that fit the profile of an Architect Capital client are also a reflection of a quickly evolving next wave of alternative finance business models.

Again, Sagan pointed to BNPL FinTechs, which offer both a payment and a financing solution, or FinTechs that can facilitate embedded financing within eCommerce portals, as novel models that create cash flow-generating assets in new ways. These companies have also seemed to take the lessons learned from the first wave of alternative lenders that flooded the market in the wake of the 2008 financial crisis, which Sagan said relied upon cheap customer acquisition strategies for growth.

This generation of lending and finance FinTechs, meanwhile, are relying on the valuable partnerships they strike and the data that they can generate and have access to as a result of their collaborations to find both customers and success in the market today.

As these FinTechs evolve, so, too, must their financiers.

Understanding new ways to underwrite and define an asset could fill the funding gap with which many FinTechs, particularly in emerging markets, are struggling. And according to Sagan, unlocking that path to capital could open up a greenfield market.

“I’m exceedingly optimistic about the market that we’re in right now,” he said. “We’re seeing a lot of growth.”