Qupital, a Hong Kong-based trade-finance platform, says it is onboarding its first commercial banking users.
Andy Chan, founder and director, says the first banks should be live by Chinese New Year (February 2019), as investors accessing small business invoices as a form of short-term assets.
The new clientele will participate just after the startup completes a $20 million Series A fundraising that is due to close in December.
Chan would not name the banks joining as investors on the platform (which are not investing in the company's Series A round), but says they are international institutions headquartered outside of the region. Their corporate-finance departments or debt-capital markets desks want to obtain exposure to short-term Asian SME paper but lack brick-and-mortar operations on the ground.
Winning the banks
Attracting banks to the platform, alongside hedge funds, family offices and other institutional investors, was a slow process. Qupital had to navigate their bureaucracy. It also had to reach a certain scale, both to provide the larger deal flow that banks want – as well as to have amassed enough data and track record about its credit process to convince banks the platform was safe to use.
Since inception in 2016, Qupital has processed HK$1.2 billion ($154 million) in transaction volumes of receivables financing. It now has “hundreds” of SMEs using the platform to secure immediate funding of their invoices, and about 30 institutional investors, Chan says.
Qupital fronts the SMEs around 90% of the amount owed by their trading partners and on-sells the rights to their income to investors, who stand to earn returns from 8% to 12% on 60-day paper. The platform relies on a proprietary tech stack to assess real-time and other non-financial data of SMEs to determine credit risk. So far, the platform as a zero-loss record, Chan says.
Another benefit of getting banks to participate is that it reduces Qupital’s cost of funding. Although the original batch of investors wanted high, double-digit returns, the platform has enough of a track record to satisfy the relatively lower demands of banks, for whom a 7% to 8% return is attractive enough. Qupital intends to pass that saving on to SME borrowers. "This will help us out-compete other platforms" in the trade-fin space, he told DigFin.
The Alibaba advantage
One reason Qupital amassed enough scale to woo bank users was its strategic relationship with Alibaba. Just 18 months ago, the company consisted of just Chan and his co-founder, Winston Wong, but they had already attracted SMEs and were in the process of getting their first institutional investors.
Prior to setting up Qupital, the New Zealand-born Chan was a software programmer, and Hong Konger Wong was a software engineer at MUFG and a trade-finance specialist at CSHF Financial Factoring.
This will help us out-compete other platforms
The company conducted a $2 million seed round in 2017, and the investors included the Alibaba Entrepreneurs Fund.
For Ali, the stake was more than a pure financial play: it realized Qupital could offer financing to the myriad of exporters, manufacturers and distributors attached to Alibaba’s ecosystem, many of which had the usual SME problems of attracting financing. Alibaba-related companies that submit data to Qupital enjoy faster onboarding.
Growth story: e-commerce
Chan says today Alibaba-related SMEs account for less than half the users on the platform, but it was a significant chunk of business. The fintech's biggest growth area is companies involved in e-commerce. Qupital launched only servicing traditional merchants involved in physical trade, but last year began servicing SMEs looking to expand beyond being mere B2B players by selling directly to consumers on platforms such as T-Mall, Amazon or eBay.
Such sellers that authorize Qupital to pull their data from these commerce sites then allows the fintech to conduct sophisticated, non-financial credit scores on these businesses (unlike traditional merchants, where the credit and operational process is more analog). Chan declined to discuss the tech behind the company’s fraud-detection and credit-analysis operations.
Chan says e-commerce players now account for 34% of Qupital’s volumes, a figure he expects to grow: cross-border e-commerce out of China is now a Rmb100 billion ($14.4 billion) business, with most of the counterparties in Hong Kong, as well as in Japan and Korea.
The proceeds from the Series A round will go to setting up operations in Hangzhou and Guangzhou, cities that are hubs in China’s e-commerce world, as well as to building out Qupital’s product line, to get into other niches of trade finance, such as inventory finance and purchase orders.
Ultimately, Chan and Wong intend to go IPO once the company becomes profitable. In the meantime, Chan says he wants to company to remain independent rather than sell to a bank or other strategic investor. He says with this Series A funding round, the company’s target is to reach profitability by the end of 2019 or early 2020.