Hi guys, welcome to the Fintech Coffee Break. I’m your host, Isabelle Castro. So not that long ago I caught up with Novicap’s founder and Executive Chairman Federico Travella in Paris.
In a beautiful studio overlooking Montmarte, we sat down to discuss the topic of Supply Chain Finance.
Now, while Novicap is focused on financing for the full supply chain. What I was really interested in for this conversation was deep to financing further explained that this area that is approached by few has huge potential for global development and economic stability.
We spoke about this opportunity, the challenges involved and why now is a critical time for attention.
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Isabelle Castro: 0:01
Hi, Fede. How are you today?
Federico Travella: 0:49
Good morning.Doing great. Thank you. Good,good.
Isabelle Castro: 0:51
Glad to hear.Welcome to Paris.
Federico Travella: 0:55
Thank you.Sunny for once.
Isabelle Castro: 0:57
Yeah, it’s lovely. Right? It’s really nice.And we’re in a lovely space for the recording as well. So to begin with, I just want to know what gets you up in the morning.
Federico Travella: 1:09
Usually, and also after this very busy at Paris FinTech forum days. It’s my alarm clock. So that was definitely the case this morning. But But usually, you know, I go for my 5am morning run, do a bit of yoga afterwards. And then finish morning with a green juice and a hand ground black coffee.
Actually, that’s not the case.So I’m not an early riser. I think I’ve come to accept my Kenyan rhythm. Doesn’t doesn’t get me out of the bed. Tutorial.Not Not, not really morning person. And but I think it’s an exciting time. So what what gets me up in the morning is you know, I’m an entrepreneur, I love building businesses, that that’s my obsession. That’s really what drives me what gives me positive energy. And I think we’ve never been in such an exciting world to build businesses, even though we’re the seven year low when it comes to venture capital funding. The advancements of technology of obviously, AI and we can talk about later, is very exciting.And so specifically when it comes to Fintech, you know, I’m very long term bullish on that industry. There’s some recent reports that shows can be a $1.5trillion revenue industry by 2030. And I definitely want to put my mark on that industry.
Isabelle Castro: 2:28
Yeah, no. And I think you already I mean, what brought you to founding Novicap, what was the journey?
Federico Travella: 2:35
The journey hasn’t been the typical one, I would say, as probably many entrepreneurial stories. So I’m Belgian Italian, grew up in Belgium. And I’m a marine scientist. So I’m a marine geologist, so not a typical tech or business background. And now,I’ve always had a bit of an entrepreneurial streak in me.And so I’ve joined the global venture builder, Rocket Internet post graduation. And so they were starting to build all those e commerce businesses globally.And that really inspired me, I thought it was going to be an MBA in entrepreneurship. And so post graduation, I joined them as a project manager for a couple of E commerce, e commerce projects in Australia, New Zealand. And then quickly, I moved to Singapore, where they built one of the largest e commerce businesses in in in history called Lazada. were eventually successful exit to to Alibaba. And during my time there, I was starting to see some of the struggles that small medium businesses go through when they are paid on terms. So in their paid late transfer, if I’m issuing an invoice to trade that or my client, and I’m getting paid in 6090 days, that has a tremendous impact on my organisation. Most small businesses, they obviously have their expenses on it, you know,on a monthly basis, but off often also weekly, or daily basis. And so if you’re paying your employees every month, but your clients are paying your 90days, that puts a lot of pressure on your organisation.And that brought me to try to innovate in that space. And that’s eventually what newbie cap came out off. And so having seen some of the incumbent banks that are not able to deal with this problem in a cost efficient way, led me to think that that complexity can be addressed by building superior technology.And that’s how I start Nuvi cap to address those those struggles in working capital management and financing for small medium businesses.
Isabelle Castro: 4:36
Okay, that’s a really great journey you’ve seen kind of like all areas of the spectrum of where you’re working in now. So Novicap focuses on working capital management, but today I’d like to focus specifically on deep tear financing. Maybe to begin with,please give me and our listeners a general overview of what that is.
Federico Travella: 4:59
Yeah, so If you think about supply chain financing, the first wave of innovation in that space in the last few years has been focusing on financing the long tails of suppliers of established companies. So I’d expect established corporations. So think about a large FMCG company that wants to provide working capital finance to its direct tier one suppliers. So it’s been very one dimensional in shape.
As I see you have 1000suppliers, typically incumbent banks have been financing the biggest suppliers. So typically,the 20% of suppliers has 80% of volume of spent right. So incoming banks have been very much focusing on that, because it’s big tickets, it’s easy to onboard those suppliers. And as such, it’s profitable for the bank. So the first wave of Supply Chain Finance innovation has been focusing on getting the remaining 80% of suppliers on board for those programmes. And that is typically through better technology. And that’s also where, for instance, Novicap has been very successful to ensure that that long tail of suppliers can can be financed. And this is where indeed technology is, is is, is a solution. As I, as I mentioned, this, this has been a very one dimensional space so far. So the tier one suppliers have a typical credit or fee,client or debtor. And deep tear financing, also, sometimes called multi tier financing is bringing this to a two dimensional space. So instead of going lateral, we’re going deeper, right? So we’re going to the suppliers of the suppliers,the suppliers of a supplier. So this can extend to many, many levels, right. But so the central idea is that instead of remain in that one dimensional space, we go deeper. So it’s still a form of Supply Chain Finance, because it allows the flow of capital throughout the entire supply chain, and also further down. And so it allows us suppliers to access financing, while making sure that buyers are able to pay their suppliers on time.
So this type of financing helps, of course, their suppliers, to be in good, promotes good financial health of those suppliers. But also at the same time, it strengthens a trade relationship between all the actors in that supply chain. So what comes out of that is that suppliers throughout the entire chains are also at deeper levels, they’re able to purchase the materials required to produce goods or, or services, but typically is good.And this obviously allows the end buyer to ensure there’s no delays in the production that that entire chain is working properly. And this is of course,going back to risks in the supply chain to keep everything in good financial health, but also to ensure that there’s no delays, and hence, the end,buyer can can can have more visibility on production and search. So we’ve seen this being beneficial as a reliable source of capital, but also especially more and more in this world to reduce the risk in supply chains. And I’m happy to elaborate more more than that.
Isabelle Castro: 8:20
Yeah, go ahead
Federico Travella: 8:24
so so we start, when I started looking at the space, it was all about financial inclusion. So we’re talking about an expansion of financial services throughout that entire supply chain. And obviously, providing access to capital to small suppliers,typically, that are not included in the typical financial system.So this means that businesses of all sizes have access to capital, and this now enables them to grow and succeed, which is is fantastic. So a typical example, which which we’ve, you know, looked at is is, is let’s say farming, right? So say your smallholder farm in an emerging market think about Africa, Asia,Latin America. So as such business will typically struggle to secure credit or loans locally, because they’re small,and so they have a poor or they have no credit score. And as such, they have little access to credit from local banks level or international ones. And so those income and banks, the way they underwrite is that they typically tend to underwrite on a balance sheet model, right? So they will be looking at the balance sheet of that small business in Guatemala or wherever they’re based on a standalone basis. So that balance sheet centric model leads to banks typically rejecting these businesses because of risk. In addition for local banks, the cost income ratio, which is eventually also what I’ve seen with no recap is typically broken for those small businesses over the Technology doesn’t, isn’t advanced enough to make that segment profitable.And there’s been some very often local, what people call microfinance initiatives. And they typically don’t provide sufficient liquidity, especially if your end client, which is an exporter of that small farm or a big buyer in the West is paying you in terms. So typically those local microfinance and end income and banks are not able to provide sufficient liquidity.And now say that that smallholder farm is is producing, you know, grain for instance, right. And so eventually that grain is bought by a very quiet or fee, Western buyer, to take an example,Nestle, so it’s, it’s a good credit, it’s an investment grade company. So this becomes a very strong data point for underwriting because Nestle is a very strong credit. So the central idea of deep tier financing is that you leverage that entire supply chain between the original supplier and strong end buyer as an anchor data, as they also called to provide financing and deeper levels of a supply chain. And this, again,leads to financial inclusion,but also reduction of the risk for a business like like Nestle.
Isabelle Castro: 11:20
It sounds like this stuff would really kind of work to the work list, the E,and the s, the social No,actually, all of all of the ESG the social and governance areas.Would you say that? Is it going moving towards more sustainable development? And maybe go into kind of how it does that on a global scale? Yeah.
Federico Travella: 11:49
So the it definitely, it captures the entire definition of ESG. No, no doubt thrown that. Maybe before that, you know, the benefits is brings, besides financial inclusion riders has improved cash flow for those businesses at the risk that it reduces through the entire supply chain,but also debt at the trade relationships in that entire supply chain are improved.Because and we’ve seen more and more large organisations paying attention to that is that if you’re squeezing out your suppliers, that under ESG,obviously that becomes unacceptable. But also it increases the risk for you as an organisation because and I’ve seen this myself firsthand. If your payment terms are that punitive, that suppliers are no longer willing to work with you that also can can affect the availability of goods or services that you need as organisations so that those improved trade relationships are something which which organisations are starting to pay more and more attention to as well.
Isabelle Castro: 13:02
This didn’t,yeah. This kind of sounds amazing. Why hasn’t it been addressed before now? Yeah.
Federico Travella: 13:14
It’s not a new concept. I think that the core underlying reason is that those incumbent banks have been ineffective at providing liquidity financing to small businesses locally. So, banks have had as I mentioned,typically stringent requirements when it comes to onboarding KYC.but also their underwriting models are typically outdated for a more globalised world. And as such, the process is to onboard those business to provide foreign financing are typically not working in that small medium business segment.So in essence, is the cost income ratio problem in this specific secret segment. So deep tear financing can provide a more reliable source a more efficient way of financing those small businesses, which would read them eventually not having the risk of running out of funds before they actually can also complete production for for the for the envoy buyer. But in essence, I would say that, that the underlying problem is a lack of technology, a lack of, of, of scalable setup on the bank side.
Isabelle Castro: 14:26
I mean, right now, supply chains are kind of in a shaky position if they’re on a global scale, right? We’re not in the best macro economic situation. Are there any additional challenges to deep tear financing given the current situation?
Federico Travella: 14:49
Yeah. So the supply chain is in need are are in limbo. They’re they’re being you know, there’s a lot of nearshoring happening if you look at what’s happening, prison In the Americas, right like with with the US, for instance,bringing as many supply chains back back back home, but also the nearshoring. In Mexico,having all of that also, by the way, creates a lot of opportunities for for for supply chains for supply chain financing as well. I think that the difficulty today that you have this this new geopolitical element where, you know, likely in the most geopolitically sensitive periods since the Cold War, and as such, I think many more governments, but also development, banks will be starting to pay a lot more attention to how supply chains work, whether they’re sustainable, and also how capital can be injected to to ensure the availability of certain goods. And obviously,agriculture, which is example I mentioned before is a good example. Because eventually Food Food security is is again, top of mind. And that wasn’t the case a few years ago.
Isabelle Castro: 16:01
Definitely. Are there any particular developments in technology in Fintech that you would feel will supercharge institutions ability to engage in deep terror financing.
Federico Travella: 16:17
Yeah, I think the central idea here is how do we bring more capital in the space. And so this obviously goes back to underwriting models, but also the complexity of the problem. So if you look at, at generally global trades,and then supply chain financing, and deeper financing, it’s such a complex problem, because there’s so there’s this intricate web of actors of parties with multiple variables to optimise for, you have financial inclusion, which governments development banks will be paying extra attention to. There’s a health and risk of a supply chain, which is particularly important for enterprise and buyers in this world. There is the availability of working capital throughout the chain. There’s financing rates, what is the cost of of capital or financing for the multiple actors in the chain,their security of certain goods,which goes back to the geopolitical elements we’ve we’ve touched on. And so complexity is generally something that I think technology can solve. And so the advancements when it comes to web three, when it comes to AI could help us expand financial services as as such. And so my base assumption is that if we talk, for instance, about AI, is that AI will be solving those problems better than humans can do. So I think it’s the opposite, it’s probably hard to argue, right? Is that that humans will will do better than AI. So my base case assumption is that the advancements in technology will be able to to help us better in that regard.Similarly, you know, AI didn’t need a cup of coffee this morning to get up in the morning. So, if we follow that assumption, what will really matter is going also more to the ethical part of of those advancements, in our advances in medical technology and AI specifically, is what do we optimise for, right what do we ask the system to to optimise for and I think in a system with with the wrong thing, or the same instructions or instructions misinterpreted can have disastrous consequences.So, for example, if if if he I will be leveraged for a fund manager and asset manager to maximise the risk adjusted returns that can be derived from financing, supply chain finance,deep care financing, it may not lead to the financial inclusion we all envision right, which we think generally as the economy and the global society care for.And this is because that funds will be optimising returns that may be actually churning certain suppliers or excluding them to exclude them from from financing because eventually risk adjusted that will not lead to the best outcome, as similarly, it may lead to extremely high interest rates like usury because they I believe that that there is the possibility to charge those rates. So this goes back to some of the global discussion the scientific AI world is having today is you know, how strong can AI be become and how is it being managed? And I think that is the core discussions are two different sets of problems that are now being I think, reviewed by AI experts which I don’t count myself amongst, but I’m definitely following the advances and how the technology could be leveraged also in our space.
Isabelle Castro: 20:07
Where do you see? Or where do you see in specifically deep to financing the AI making a difference,which could get out of control?And then how will people manage the risk of it getting out of control and
Federico Travella: 20:26
affecting people building on top of the example I touched on in agriculture, right. So if a government decides that they have an interest in ensuring food security, but it also has happened with with energy, and so that there is potentially one risk, in which, you know, we want to ensure sufficient resources in a certain jurisdiction or for certain businesses or for a certain organisation, that an AI for instance, monopolises an entire industry. So if we think about grain, which is obviously top of mind for many countries today,but energy as well, if we provide the wrong instructions,there is a risk that such system will monopolise and take over entire industry to ensure there is no constraints when it comes to that resource in a certain country. The way to limit that risk is I think, a lot harder to address. I don’t think we’re there yet, by the way, in terms of of systems, right, it’s not happening. Luckily, today, but I think global collaboration will be the only solution. Because it’s a globalised problem by definition. So that’s what you see now is that the whole AI community is starting to collaborate a lot more carefully. With regulators are obviously pushing for regulation, which arguably, may also be in their favor,especially for the most advanced organisations like Google Open AI. If regulation enters the game, it may also become harder for new entrants to build or compete with them. So it’s a bit of a interesting discussion itself. But so that global cooperation will be the only solution. For limiting, I think the the impact that a Rocque ai ai can have.
Isabelle Castro: 22:22
It sounds like a very complicated thing to manage.
Federico Travella: 22:27
Definitely.And especially when it comes to sensitive areas like having food security, ganas is something I would expect people to pay a lot more attention to in in the coming years. And, and it’s important both for exporters and importers, right,because think about emerging markets, some countries have 25%of the GDP coming from agriculture. And so there’s already been historically, which goes back, in fact, also to supply chain financing and deep terror financing has been historically a lot of initiatives locally in terms of government guarantees, and so on to foster export. But now, also the import countries are starting to pay more attention to Okay, do we have availability of certain resources? And how do we secure a supply chain? This naturally brings us for instance, to China, obviously,the export nation, we all we all follow closely. And so their reference is their road and belt initiative to connect east to west is a good example of that.So they make sure that working capital is injected along the way. And so there’s been also banks like Senator chard, that collaborates with with that initiative to ensure that sort the entire supply chain from east to west, for those goods for those transporters and so on, is in short, and is I think a very good example of how a nation is is aggressively pursuing during training to to improve its export capabilities through also working capital finance throughout the supply chain. But agriculture was definitely one that I would expect government’s development banks, and many other actors do too. Yeah, to increase their their investment.
Isabelle Castro: 24:19
I mean, with some of the issues that are going on some governments,especially in the larger kind of jurisdictions, they’re focusing a lot on self-sufficiency. And I wonder whether, is there still that incentive to collaborate,particularly between the large economies around the world is there still that
Unknown: 24:46
It’s definitely there.I think it’s a misconception that global trade is slowing down. Actually, the opposite is true. It’s not slowing down.And, and maybe, you know, even domestically if you thing about us where I think farming and farming lead activities is 5% of GDP. So even us domestically has a very strong incentive to ensure that industry is in good financial health. And supply chain financing, for instance,is a very important part of that to ensure that all the actors throughout the supply chain have access to working capital finance to ensure food security.And the US, of course, is unique in that regard, because it is self sufficient for most produce, there, they have enough green European situation from that perspective is different.So, in that regard, we’re probably as Europeans more interested in some of those cross-border initiatives and arguably than us.
Isabelle Castro: 25:53
Okay, well, unfortunately, we’re coming to the end of the interview. I have a few more questions for you before I let you go. So the first question I have is, What is a piece of advice that you have been given? It can be about anything that you would give to others.
Federico Travella: 26:14
So I think he’s already we’ve been talking about financial services today. And I think one of the central ideas that comes back in financial services is always swept trust. I think similarly. One of the biggest advices I’ve been given as an entrepreneur is the return of investment of investing in trust is the highest in life. And so you can visualise that as a piggy bank, right? So you’re adding in any business relationship or personal relationship, you’re adding coins to that piggy bank to build up a trustworthy relationship, which I think will lead to too many exciting things in life. So as such, investing in trust is one of the best investments you can make in your career.
Isabelle Castro: 27:03
Okay, I like that. I like that a lot. Your curveball question? If you had to delete all but three apps from your smartphone, what would you keep?
Federico Travella: 27:14
Yeah, beyond the standard application? Yeah.Okay,
Isabelle Castro: 27:17
let’s, let’s define that. That’s gonna be
Federico Travella: 27:20
so beyond the standard applications already installed on your Android or iPhone device. I would probably go back to Maslow’s hierarchy of needs. Okay. Nice. I think we all need to eat. So maybe keeping one food delivery app is a good one. Yeah. So I’ll leave in the middle, which one? Here, then secondly, I think you melt transport is not on the, I think hierarchy of needs, but eventually you have to go back to your, to your house from time to time. So I think transport is one I would also keep so bringing you to to a couple of other options. And I will definitely keep one, one notetaking application, which I think is is is one of the Yeah,is essential in in, in business life.
Isabelle Castro: 28:15
Absolutely. Especially when you’re dealing with kind of complicated issues. That’s right.
Federico Travella: 28:19
I think AI applied to notetaking is not our area, which excites me a lot. And I hope to see a lot of advances in the near future.
Isabelle Castro: 28:27
Yeah, no, it’s definitely helped me with my job. Okay, so I’m gonna let you go. But before I do, how can people get a hold of you either personally, or just through Novicap?
Federico Travella: 28:39
The best thing I think is, you know,LinkedIn. A good personalised message on LinkedIn I think, is the best way and be happy to to engage if if it’s mutual interesting.
Isabelle Castro: 28:50
Nice. Okay. Well, thank you for coming on the show. I’ve really enjoyed you as a guest. And yeah, have a great rest of your time in Paris.
Federico Travella: 28:59
Thank you Isabelle.
Isabelle Castro: 29:03
As always, you can reach out and chat with me or my personal LinkedIn or Twitter. For access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook, or Instagram. You can also sign up for our daily newsletter brand new structure inbox. For more Fintech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton and Todd Anderson.
That’s it from me. Until next time, enjoy your downtime.
