TReDS platforms: new B2B payment supply chain frontier

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MSME constitute around 1/3rd of Indian GDP, around 40% of overall exports, 45% of manufacturing output, generating around 70M employment opportunities in India. They are important partners in the value chain of large enterprises and MNCs. In a 2014 Firstbiz-Greyhound knowledge survey (sample size 540), biggest headwind faced by MSME is dearth of easy finance and credit instruments as per 79% of respondents. Most MSME rely on informal access to credit resulting in high cost of funding, higher defaults, inefficient mgmt. of working capital etc. Trade receivables discounting system (TReDS) aims to bridge this financing gap between MSME and financial institutes. 

TReDS platforms are regulated by RBI. As of this writing, there are three TReDS licenses issued by RBI (link)

Name of entity Payment systemsLicense issue / validity date
A TREDS limitedInvoicemartJune 29, 2017 / June 30, 2022
Mynd Solutions Private limitedMynd online national exchange (M1xchange)March 20, 2017 / March 31, 2022
Receivables exchange of India (RXIL)RXILMay 17, 2017 / June 30, 2022

Some key terms that we will use in this article are:

  • Buyer – PSU, corporates
  • Seller – enterprises as per MSMED Act 2006
  • Financier – Banks, NBFC
  • Factoring unit (FU) – invoice or bill on TReDS platform 
  • TReDS platformRXIL, M1, Invoicemart
  • Reverse factoring – Buyer raises invoice to create factoring unit 

On TReDS platform, each party has it’s own benefits. For example, a seller benefits through improved cash flow without any recourse. This is an alternative financing without any debt or collateral. More important, it is all digital through TReDS platform – thus reducing leakage or informal economy. On the other hand, buyer is able to streamline vendor payments and improve his procurement procedure. Buyer also gets access to flexible payment terms and can manage business cash flow more efficiently. More importantly, now there is a good price discovery mechanism available through TReDS for these invoices. For financier, this is business expansion to new geographies, new verticals and corporates which otherwise would have been impossible (example – a regional bank in south India can access a corporate buyer in North East and create a balanced loan book). It is also easy reconciliation for them. Any defaults in the system are handled outside TReDS platforms. 

TReDS platform workflow:

Courtesy: PwC

In a typical TReDS transaction, process flow is as following:

  1. MSME vendor (Seller) uploads invoice or bill of payments – thus creating a factoring unit. If buyer uploads such invoice, it becomes reverse factoring unit. 
  2. Counterparty approves factoring / reverse factoring unit as next step. 
  3. Once approval is done, this factoring unit is visible to all the financiers on the system and now they can start bidding on it. Financier can also check CERSAI registration system to make sure that factoring unit is being bid only once. This step is very critical. M1xchange is using blockchain technology to avoid duplication.
  4. At the end of bidding process, bid gets accepted by Seller / Buyer. It can be best bid or any other bid. Usually lowest price / best bid is the winner. 
  5. TReDS platform creates a formal obligation process. 
  6. Post obligation process, financier pays Seller through TReDS platform on a T+2 settlement basis. 
  7. On due date, buyer pays financier. 

TReDS platform gets paid a take rate on per transaction basis. Each platform grows by bringing in more buyers /corporates that bring in their vendors / MSME / Sellers on the platform. This brings more financier – banks and NBFC on platform. As SME digitization takes place in tier 2, tier 3 cities and villages in India in next decade, I believe these platforms have a great opportunity to create credit flywheel for Indian MSME. Over time, this process can be extended to non MSME and cross border trades (probably outside TReDS platforms). Basically as TReDS platforms develop and do more business with corporate buyers, hopefully they can get integrated into their ERP system and can unlock more value in future. 

TReDS platform discussion by Indian Politicians

Overall, I am very bullish on TReDS platforms over next decade and am glad to be part of this journey through our investment in M1xchange. 

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1 thought on “TReDS platforms: new B2B payment supply chain frontier”

  1. Dear Hero San,

    You have summed up the entire gamut of TReDs quite succinctly. Thank you for finding a place to mention KVB Bank with whom I believe you had a fruitful interaction over a call.

    Look forward to having BEENEXT as our partner in our growth story of 2021 and beyond!

    Tushar Buch

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