How An E-Invoicing Company Could Disrupt The Banking Industry

Tradeshift is using real-time data to change the way rates get set for small business loans.

A Danish startup has created a fairly straightforward web-based application that lets organizations invoice each other online. But humble though it may sound, in the long run, this Nordic venture could well end up disrupting not just the business software industry but the banking industry as well.

That's because the invoicing application is just the tip of a much larger iceberg that the company, Tradeshift, is envisioning--one that leverages big data to reinvent how credit ratings are set for small- and medium-sized businesses.

Its most potentially disruptive idea is Instant Payments, a service which allows suppliers to get paid immediately once a customer accepts an invoice on the Tradeshift system, instead of having to wait the usual 30, 60, or 90 days.

The money still comes with an interest rate, but the size of that rate gets determined based on the buyer's credit rating, not the supplier's. Which is good news for small- and medium-sized suppliers, which often get hit with higher rates because they are perceived to be riskier bets.

Large companies, however, often have better credit ratings. And when you combine that with the fact that Tradeshift can see that a buyer has accepted an invoice (thereby declaring that they do intend to pay the bill), the risk for Tradeshift (and its financing partners) plummets. 

"We can do real-time credit assessments," CEO and cofounder Christian Lanng tells Fast Company.

Instant Payments is currently being beta tested in England and Denmark and is slated to be available in the U.S. in the fall. The long-term implications of the real-time visibility Tradeshift now has are powerful. "You cannot even begin to imagine what big data will do to finance," Lanng says. "As we get more data on transactions, that changes the whole credit picture."

Lanng and his cofounders, Mikkel Hippe Brun and Gert Sylvest, came up with the idea for the e-invoicing service while building a similar system system for the Danish government. The initial goal was simply to help businesses around the world become more productive. Invoices are still largely delivered in paper or PDF format, which means parties on the receiving end have to spend time retyping the details into their own systems. (The Danish government estimated that this costs 15 minutes of worker time per invoice.)

Since businesses of all sizes and shapes share the same challenge, Lanng, Brun, and Sylvest decided to tackle the problem on a global scale. Tradeshift launched in 2010, with Morten Lund, one of Skype's early investors, helping to arrange seed funding. (Lund is now chairman of Tradeshift's board.)

The company initially launched just in Scandinavia, Germany, and the U.K. But since companies frequently do business trans-nationally, the system rapidly swept across the globe.

Today 100,000 businesses in 190 countries use Tradeshift, including the U.K.'s National Health Service, the French government, and Kuehne+Nagel, one of the largest transportation and logistics companies in the world. About 2,000 new companies join every week, up from 1,000-1,500 a week six months ago.

With 20,000 companies on the system, the United States has the largest number of users (including Dell and Accenture). India and Malaysia are fast-growing countries, though, and CEO Lanng tells Fast Company India could soon overtake the U.S.

The company won't disclose the exact number of transactions processed, but Lanng says that Fortune 500s are sending "millions" of invoices through the system annually, and that the overall volume of transactions in the system has tripled since January.

The service is free to use. Tradeshift makes its money off its developer ecosystem. The company quickly saw that the main value they were creating wasn't solely in productivity. All of a sudden, its databases contained massive amounts of real-time data about economic activity that businesses would want to access and put to use beyond simply checking the status of invoices.

About 30 third-party apps have been built on top of Tradeshift so far (with 20 more on the way), Lanng says, including ones that create heat maps of your suppliers and customers and others that integrate with Google Docs and PayPal. In addition to public apps that anyone can use, individual companies can build proprietary apps to use just with their own supply chain. 

"This is what happens when you take the Facebook model and apply it to business," Lanng says. "You get some very powerful business possibilities."

Privacy is not an issue, Lanng says, because the apps don't give users access to all the data in the system, only to data relating to their own businesses. "A lot of this data is data they share with their business partners anyway," he explains. But instead of delivering it manually and partners having to re-key it into their own systems, they can now access it in real-time through the centralized system.

Tradeshift takes a percentage of the fees charged by paid public apps (30%, on average) and negotiates independent deals with companies that build proprietary apps.

If the developer ecosystem expands, the Tradeshift model could one day steal market share from business software stalwarts like Intuit's QuickBooks, as small and medium-sized businesses choose to work on Tradeshift and use its app ecosystem because of the convenience of connecting real-time with their business partners elsewhere.

[Image: Flickr user KrissZPhotography]

E.B. Boyd is FastCompany.com's Silicon Valley reporter. Twitter | Google+ | Email

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