Fintech company Demica is one of the world’s largest providers of working capital solutions to banks and large corporates, through a broad range of supply chain finance products. In this Industry Perspective, Matt Wreford, the company’s CEO, discusses his outlook for the sector, new trends emerging in the wake of the Covid-19 pandemic, and the growing need for partnership between banks and fintechs.


GTR: Looking at the post-pandemic recovery landscape, what do you see in terms of working capital requirements? Where do the opportunities lie, and what are the challenges?

Wreford: In terms of the working capital cycle, the first thing that’s going to happen is that companies are going to be purchasing more raw materials as economies grow. We expect to see a surge in payables, then inventory off the back of that, and then finally receivables, one after the other.

Each of these aspects of working capital is going to need different financing techniques. First, we expect to see substantial drawdowns on supply chain finance programmes. We also expect to see a rise in the usage of receivables finance programmes, which have typically been a bit more muted recently as sales have been down in the traditional sectors of automotive and primary metals.

Compared to payables and receivables finance, inventory finance is an area where most banks aren’t particularly active, so this is what’s going to create the squeeze for a lot of companies as they seek to build up inventory to protect themselves from supply chain shocks.

GTR: Is sufficient liquidity available to support working capital needs throughout global supply chains?

Wreford: The liquidity is definitely there. The banking system is in good shape at the moment, and the first phases of losses due to Covid were a lot lower than expected. In the last 12 months, Demica has continued to grow very rapidly, which wouldn’t have happened if there was a problem in overall liquidity.

The main issue though is not the liquidity. It is the challenge of getting it into supply chains. This is causing a lot of banks to look at the operational and technology capabilities they have to support their customers, in anticipation of the surge in working capital finance demand that is likely to come during 2021.

This is where solutions like ours are going to be so important, as modern platforms with automated onboarding tools have the ability to support onboarding large numbers of suppliers quickly.

GTR: Does this mean that we are likely to see greater competition between fintechs and banks, or does this represent an opportunity to build partnerships and leverage the comparative strengths of each side?

Wreford: Demica has always been an enabler for banks as opposed to a competitor. Our vision is to become the infrastructure of the working capital finance market, and to have all of the world’s largest banks transacting using our technology to support their customers. This vision is completely different to everybody else’s: if you look at our competitors, they focus on winning corporate customers and having a direct relationship with those corporates. Meanwhile, for Demica, 80% of our programmes have been originated by banks using our platform, either white labelling it or introducing transactions to us. For us, our partnerships with banks are our key differentiator and this is absolutely critical to how we see the market evolving.

GTR: What do you currently offer to banks?

Wreford: We are transforming the supply chain finance market with a single platform that enables all parties to easily and efficiently transact, using any product anywhere. We partner with banks to co-develop best-in-class technology to deliver that vision.

That means our bank partners can offer dynamic discounting, approved payables, receivables discounting, structured receivables finance, distribution finance, or even asset-backed lending all through one platform.

Effectively, the banks work with us in three ways. Some are funding transactions that we’ve originated, so they are takers of volume. Others work with us transactionally: they introduce their client, who they wish to fund on a deal-by-deal basis. And then finally, we have another group that are white labelling us: using our solution for all of their transactions in a particular product class.

GTR: Have the types of conversations you have with banks changed recently?

Wreford: In the last two to three years, a procurement super-cycle has commenced within the large banks as they look to move away from legacy technology.

While individual banks may find it hard to justify the cost of developing cutting-edge technology in-house, increasingly they’re realising that a platform partner like Demica can amortise the cost of technology investment across several banks. This means we can invest more in product development and technology than any single bank can.

As a result, we are winning bank after bank as clients. Many of the world’s largest banks now use Demica – we currently have 50 live funders on the platform, of which 45 are banks.

GTR: What kinds of banks are joining Demica?

Wreford: Demica already works with ING to run its supply chain finance. During 2020, we announced that Lloyds was moving to Demica. BBVA also launched on Demica in the same year.

Recently we have announced that HSBC is migrating its large receivables finance transactions to Demica. They have moved from working with us transactionally, deal by deal, to partnering with us on a white label basis across multiple products.

This is significant: the world’s largest trade bank has made the decision that it’s better to partner with a fintech like Demica to access the innovative technology that we can provide rather than continue with internal systems that perhaps are much less flexible. Essentially, if HSBC can’t justify build versus buy any more, no bank can.

GTR: What impact do you expect the Greensill situation to have on the SCF industry? What will the investor response be?

Wreford: The collapse of Greensill appears to be due to issues unique to their business – poor underwriting, a reliance on one credit insurer and a substantial large exposure to a single client in their bank – and not the SCF product itself. We therefore think it is crucial that the SCF industry engages proactively with the press, clients and regulators to correct any misconceptions that might arise. The immediate fallout we have observed in our space – large banks financing investment grade clients – has been minimal. Longer-term though we expect banks and investors may pull back from indirect investing via note issuance vehicles and revert to direct funding of suppliers and, if insurance is required, requiring to be named on the policy. As concerns around transparency and risk exposure increase, we think it will become even more important that banks have reliable technology infrastructure through which to manage their programmes.

GTR: What trends are you seeing with respect to the types of programmes banks are running on the platform, and what are your growth expectations?

Wreford: We are currently at US$19bn in funded assets today, which we expect to increase to over US$35bn by 2023.

In the last couple of years, the relative focus of large banks has been to grow and extend their receivables finance capabilities, and we’re seeing increasing numbers of very large transactions being executed in this space. One example is the US$3bn transaction we did with Citi and BNP Paribas for Lenovo in 2019, which was financed by a syndicate of 15 banks and credit funds. At the end of 2020, we executed another multi-billion-dollar receivables deal demonstrating the continued momentum.

What we’re seeing here is a shift in emphasis. Payables are still very important, but now receivables programmes make up a significant majority of the platform assets. This is driven by the fact that the banks, using our technology, are able to finance much larger pools of debtors at the same time, with a cost of funds that’s highly competitive against alternative forms of corporate liquidity. Therefore, we’re very positive on seller-led products in 2021.