Working Capital At The Touch Of a “Green Button”

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When Tungsten Corporation announced that it had completed the acquisition of Tungsten Bank earlier this year, it meant the B2B supply chain network servicer would take on the burden of a heavily regulated environment. But the acquisition also placed Tungsten in a unique position, able to offer suppliers capital – with just the click of one Green Button – to support cash flow and supply chain management. And as Tungsten CEO Richard Hurwitz told MPD CEO Karen Webster, while large suppliers are certainly taking advantage of that access to capital, it’s small- and medium-sized enterprises that can really benefit from Tungsten’s new feature, supporting startups and the economies of jurisdictions around the globe.

KW: Tungsten, for those listening, provides automated invoicing, supply chain financing, and a variety of related payments and financial services to businesses. The occasion for our chat today is the news that Tungsten just completed the acquisition of Tungsten Bank. Rick, my question to you is: what’s so significant about that, and what does it allow you to do that perhaps you couldn’t do easily before?

RH: Tungsten, dare I say, operates a unique business model, which consists of a triumvirate of offerings that are mutually reinforcing. We operate a global invoicing network – the largest corporations in the world are receiving invoices from their supply chain across our network. It drives very demonstrable business efficiencies, and as those are understood, and as that data flows, our clients are leveraging that activity as a means of creating a database.

Today, Tungsten provides a very powerful analytics tool that gives our clients easy access to spend data. And as soon as they begin to make use of the benefits of that visibility, and benefits of that analysis, they recognize that it makes sense to run more vendors over the network.

So there’s this reinforcing aspect of that relationship. Our analytics combine with electronic invoicing, and it becomes the other side of the same coin, if you will. Around that whole ecosystem is a set of suppliers that is very deep. And at the Tungsten network we enjoy relationships with about 180,000 global vendors that are growing every single month. And critical in that bargain that vendors have with these large corporate buyers is payments for goods. As you recognize, those payments aren’t made immediately, they’re made over time. Increasingly, as companies better manage their balance sheets, they seem to be extending those payment terms, which puts some stress on the supply chains’ working capital.

So, Tungsten operates a third piece of its product offering, and today that is the ability for that deep, global supply chain to access working capital in a very robust, risk-free, low-cost and no-hassle manner.

The bank puts Tungsten in the position to deliver that holistic, bigger purpose-based offering.

Benefiting the Global Supply Chain

KW: Why did you decide to make such a service available to clients? I understand why they find it desirable, but it obviously means a whole new and different set of activities that you have to undertake, like managing risk. What made you think to do offer a service?

RH: There are two parts to that answer. One is looking at it on the direction of our clients – both the global supply chain and the buyer organizations to whom they serve – but also from Tungsten, in terms of that business model I reference earlier. I’ll start with the former first.

At Tungsten, they say that a good business requires a distinctive product offering and talented people to deliver it. But it also requires a sizeable, addressable market and the factoring of accounts receivable as a conventional market space – $2 trillion in principle traded last year – is woefully underserved. Businesses around the world today, in our post-crisis environment, have a harder time than ever accessing credit. Banks have stricter underwriting requirements, some of the non-conventional sources have gone away. When you can’t access capital, the amounts and costs are more challenging, particularly for small- and medium-sized enterprises.

Tungsten comes into that mix with a higher purpose. We have this global platform where we’re smack-dab in the middle of that bargain between buyer and seller, and again, there’s this time lag that in bargain, that notion of payment terms. That notion of: “I may, as a business, incur costs in advance of receiving payment.” We really do view that we’re providing great benefit to the global supply chain. It makes the economy stronger around the world, and it’s a sizeable market.

Increasing Connectivity in a Global Market

KW: It’s a giant market for sure, but it’s also now an increasingly competitive market. What about Early Payment is competitive and differentiated? Is it because the suppliers are part of the existing network and it’s easier for them to access the service? Or are there other things about your solution that make it more attractive than existing alternatives?

RH: Indeed, this is a market space with lots of participants and we’re choosing to enter it because we think we are doing so in a disruptive manner. Let me be specific.

You put your finger on a huge piece. Tungsten is connected electronically to 180,000 suppliers around the world, growing every single month. We have this unique opportunity to communicate to them in a digital manner and in an easy manner. So those suppliers on our network come to a portal every week to manage their invoices to see whether their client has received them, where it is in the processing queue, when it’s going to be paid. There are lots of benefits to both sides of the buy/sell bargain.

But today, those suppliers can go to the same portal and, with the flick of the “Green Button”, just like ordering songs from iTunes, they can access capital. That’s a fundamentally different proposition than the convention. All of those market participants you referenced, whether they be banks or the many firms that exist in Denver, Colorado, where I am, or Boston, where you are, the opportunity for businesses to access capital against the collateral called the “receivable” in the conventional space is document intensive.

There are all kinds of frictional costs associated, legal fees, corporate resolutions, reps and warranties, recourse. It’s costly, at market it has interest rates that approach credit card rates, and when a company can access capital against those receivables it might be for a fraction of the total amount of the principle of those receivables. Today, with Tungsten’s Early Payment proposition, small- and medium-sized businesses can click a “Green Button” and access that capital with no documentation, no reps and warranties, no recourse. No cost other than an interest rate against that receivable. It’s a fraction of what the conventional costs are. Indeed, it’s a lower cost, lower hassle facility that’s always on, whether they want to make use of it or not. And that lets them sleep at night.

Businesses Big and Small Take Advantage of the Green Button

KW: This is a relatively new development for Tungsten Networks. How are suppliers receiving the service? What has been the response?

RH: It’s a new service. We’ve been operating in earnest for about 60 days, and I can tell you that our thesis is intact. All the premises and propositions I’ve been articulating to you this afternoon are holding true. We have suppliers on our network clicking that “Green Button,” we have capital out the door, we have seen that capital come back, so we’ve gone full cycle on a payment term. We’ve seen those vendors click on that button more than once, so there is repeat behavior occurring. Bank accounts are opening, and I can tell you, when you speak to a vendor about the facility, what they recognize at its core is they have an opportunity to open up a no-cost credit facility. Again, whether they use it or not, right at this web portal, where they’re visiting frequently, they have a facility that if and when they need working capital they’re a click away from getting it. That’s a very powerful proposition, and it’s good for everybody involved.

KW: It sure sounds it. What are the parameters around which you’re willing to make such a loan? Give me a sense of high and low – what has been your experience, and how do you expect that to evolve with experience and with different suppliers taking advantage of this?

RH: To our surprise, larger suppliers want to take advantage of this. Think major global corporations that are providing chemicals or other direct components into the buyer organizations, they, too, in this tighter-credit environment, with heightened regulatory sensitivities, they are interested in this facility once they come to understand it. We are seeing large suppliers tap the button.

But I want to call contrast here. The conventional receivable financing space is one that focuses typically on larger corporations. Where banks come in with supply chain financing programs alongside a large buying organization, who may have just extended payment terms. They typically focus on the biggest suppliers because that’s where the credit risk is lowest. That’s where Citibank, Royal Bank of Scotland, will emphasize their resources. At Tungsten, we’re very much focused on those small- and medium-sized enterprises who find it more difficult to access credit or who don’t have credit ratings to access it, or access it in full against their receivables. For the first time, they’re actually able to use the receivable as collateral in a funding relationship.

Tungsten’s Vision for the Future

KW: It sounds like it’s off to a great start. Where do you see this going? Take us through the next year or so with respect to this particular offering, and maybe other things that may be on your roadmap.

RH: It’s Tungsten’s belief that we’re going to expand the marketplace, and we’re going to do so by making low-cost capital available in spaces it conventionally hasn’t been easily available. Our activities today are centered on creating awareness around this facility.

Tungsten’s Early Payment proposition is being communicated through lots of tactics to our captive audience, as you recognize, who are doing that through direct conversations with larger suppliers, who are doing that through digital mediums at our portal, and other places. It’s our intent to personally increase that awareness, help folks understand the power of the proposition. It’s a reason that Tungsten has chosen to put itself into a regulated environment as a bank. Ours is a global platform serving global buyer organizations and their global suppliers. When those suppliers seek financing, they’re not just doing it here in the US, but they’re doing it in markets around the globe. For Tungsten to be able to be that global platform that we’ve just positioned ourselves to be, we need to be able to provide capital in other jurisdictions – jurisdictions that may require heavily regulated activity. The bank allows us to fulfill that global approach we’re taking to our activities. Point one.

Point two, the small- and medium-sized enterprises often want confidence that they’re trading with a safe and sound counterparty. Tungsten as a banker, we’re a fiduciary, a regulated entity. We need to make that known to the SMEs so they have confidence in clicking that green button. That’s a big part of our activity.

And lastly, regarding your specific question I would offer you this: Increasingly, municipalities are coming to understand that if they can deploy the benefits and business efficiencies of electronic invoicing, they’re able to use their municipal payables, not higher taxes, to energize the small businesses and startups in their economy. We’re working with municipalities to understand that. As soon as they do, they see that the velocity of their payments into a marketplace begins to help with the working capital management of their suppliers. And then they point to the performance of Tungsten’s Early Pay and show that, as a viable, perhaps preferred financing mechanism for their local businesses. We’re getting great reception to that. Again, to the higher purpose, we really think we have something that helps address economic growth and municipalities in states that have stressed balanced sheets and increasingly need that help.

“Cracking the Code” of B2B Payments

KW: That’s a really interesting angle and as a taxpayer I’m all for it! Final question: B2B payments has always been very difficult. There is lots of friction, and networks like Tungsten have often experienced great difficulty getting traction. It sounds as though you’ve overcome those obstacles and you do have a very robust buyer/supplier network that is engaged in invoicing and, now, with supply chain financing. How have you cracked the code on B2B payments? What have you done that others, perhaps, haven’t been able to do as well?

RH: I hear several themes to your question. The first I’d offer you is that removing paper from the payables process is really a no-brainer. The cost savings, the visibility increase, the better control that comes from it, it is so demonstrable and quantifiable that it’s not an “if,” it’s a “when” for large businesses around the globe. In many, and in fact most, where they use it, it’s not always for their entire supply chain. Not all supply chains are delivering invoices digitally. Regarding cracking the code, what Tungsten has firstly done is given these large corporate procurement organizations easy access to, and visibility into, their spend activity. That is, where letting them quickly and easily access all of this invoice activity down to a line-item level, so that they can become smarter about their procurement activity. They can identify price variances. They can have better control over their procurement rules, which aren’t always followed. And they can better manage their supply chain in terms of its numbers, the “wheres,” and the “whens”. And that additional information, allowing them to be quick and better decision makers, initiates a thinking in these buyer organizations: my gosh, if we can run more of our paper invoices digitally, we’ll have more access to this kind of relevant information.

That reinforcing activity is causing these companies to run much greater volume across Tungsten’s network. We’re watching as our client base is truly turning over their entire master vendor list. That’s a fundamental change from where the industry itself has been, and certainly where our predecessor company had been. In every one of those new suppliers, invoice flows represent financing activity, opportunity to liquefy a receivable. As soon as the message about Tungsten’s Early Payment gets out and permeates, we have no doubt that because of the strength of its benefits, they will make use of it. That’s what we’re seeing.

The last comment I’ll make is that the industry has done a lot to try to join up financing with digital receivables through dynamic discounting and some of those methods. But those have been replete with unintended consequences. They’ve been delivered into the payables department, not to the treasury department where investors are making asset liability management decisions. Tungsten as a bank, and the proposition we’re making available, really allows buying organizations to participate in a risk-adjusted returns of supply chain financing, but without any unintended consequences. Because we’re eliminating some of those barriers, the programs become more robust, and some of the problems inherent in the historical approaches go away. I think that’s why we’re beginning to see the traction that we are.