Global trade is once again undergoing a period of intense change, with the pandemic and other factors dramatically affecting supply chains around the world. In this episode of Talking Banking Matters, payments expert and McKinsey senior partner Phil Bruno talks with Christian Lanng, the CEO and cofounder of Tradeshift, a global trade platform. The following edited transcript presents highlights of this conversation.
Philip Bruno, McKinsey: For several millennia, trade has mostly been conducted in the same manner. Though we have digitized some elements of the trade process, in many ways it’s really still just an electronic version of how trade has always been conducted: a buyer and seller come to an agreement with each other on the commercial terms, money changes hands, and goods are exchanged.
Tradeshift seeks to upend most of that. The Danish-born company, now a Silicon Valley–based fintech, offers a network that allows buyers and sellers to connect. Already, the platform serves a rapidly growing community of companies in more than 190 countries. Fast Company named Tradeshift to its list of the World’s Most Innovative Companies for 2020, and Forbes included it on its 2019 list of the Most Innovative Fintech Companies. And that was before the pandemic brought the term “supply chain” to kitchen tables around the world. The company was valued at about $2 billion following its December 2021 series F round of $200 million in funding. Investors include Goldman Sachs, American Express Ventures, and HSBC.
This episode’s guest is Christian Lanng, the CEO of Tradeshift and one of its cofounders. He shared his views on global trade broadly and how he sees Tradeshift disrupting it. Here’s Christian.
Christian Lanng, Tradeshift: Tradeshift was created roughly 12 years ago. Before that, my cofounders and I had worked in supply chain and payments for the prior 15 years. We had been involved in massive large-scale infrastructure projects such as the C2P payment era, SEPA [single euro payments area] in Europe, and building infrastructure for government and private companies. What we saw in that moment was that cloud computing was about to radically alter how companies connect, because it was going to radically alter the cost of connectivity. It had been very expensive to connect commerce previously.
Tradeshift was born with a very simple idea, which was, Could we make it as easy to create business relationships and connect the trade between them as it would be to connect you and me on Facebook? We’re not so much about the transactions.
A lot of people say, “It’s about getting the purchase order from the procurement system or getting the invoice from the supplier.” We actually think that’s part of the problem. If you ask any given supplier in the world who does business with a large company, “How many systems are you using to do business with that customer?” they will say, “On average, 15.” Fifteen different systems to do business with one customer of scale. Then you multiply that with your customer base, and you get a sense of the problem. And for each of those systems, the challenge is the change management of getting the supplier to adapt to that. So what we always say is, “No, we’ve got to have a network. We’re going to have a platform in place. We’re going to break down all these silos of the supplier relationship and put them on one platform.” That’s what Tradeshift is about.
Today we do it in three primary areas. We do it in within payment automation. A second area, which we’ve been working in for six years and which we think is a massive emerging area, is marketplaces. That is a category which is emerging very rapidly and will probably replace procurement over time, so we saw this big opportunity to become the Shopify for the enterprise—in a way, providing a little bit of technology to the platform to run their own marketplaces. And then the third leg is our platform technology. I think that’s an area that’s emerging also really, really quickly.
Once you have things in the cloud, networking is the next step. I think in enterprise we’re going through exactly the same transition.
Philip Bruno: Christian is super passionate about trade and talked about how the process of it, with bilateral interactions and complex invoicing, has not changed much for thousands of years. The opportunity for disruption is ripe, given that global trade recently hit a record high of $28.5 trillion, according to the UN Conference on Trade and Development, surpassing prepandemic levels, though the rate of growth has not fully recovered yet.1 Here Christian talks about how he feels the next five years will be transformational as trade modernizes.
Christian Lanng: The first law in the Code of Hammurabi refers to how to do an invoice. So this has been around for a while. I think what is transformational is that computing has pretty much moved in three very discrete stages. We had on-premises computing for a while. Then we had the cloud. The cloud phase lasted about a minute: there was a second where we uploaded our photos to the cloud just to have them there as backup, and then, a second later, we were all sharing them on Instagram and Facebook and everywhere else. What happens very naturally, and I think is always the state for cloud, is that once you have things in the cloud, networking is the next step.
I think in enterprise, we’re going through exactly the same transition. Almost all solutions in this space started with the idea that the buyer has all the power: let’s build some software the way the buyer wants it. And then we’re going to have the chief financial or procurement officer force everybody that the buyers do business with to comply with those terms. That’s not a network mindset; that’s a one-way road. But the challenge is that all of these suppliers are doing business with all these other companies, too, and it’s not very efficient for them.
We always approach it from a different perspective, which is that we don’t need to have a scarcity mindset. The seller and the buyer can win without either side losing. When you think about that from a technology perspective, it means that the sellers who use our platform, we don’t charge them. They can connect with all of their customers on Tradeshift, and they have a lot of tools to get paid faster, to sell more, and show access to value. And the same for the buyer. The buyer wins because the happier the sellers are with the solution and the more the sellers there are, the faster [buyers] can digitize their processes and the more control they can have.
Philip Bruno: Given the events of the last few years, including the pandemic and the events in Eastern Europe, things are changing dramatically. The share of global trade with less stable countries is rising, according to the World Bank, and the McKinsey Global Institute estimated that up to 25 percent of global trade could be reshored in the coming years as companies focus more on supply chain resilience and control.2 We asked Christian to talk about his views on whether we will see that kind of dislocation and movement and on the prospects for reshoring in the coming year.
Christian Lanng: I think what a lot of people have forgotten is that the last 60 years or so of pretty much uninterrupted peace, economic growth, and agreement on the economic rules of the road in the world is a unique, historic period in time. Before that, we had a couple of thousand years of constant change in relationships, power dynamics, and trade.
What is probably going to be a challenge for a lot of companies is they have optimized very heavily in the last ten or 20 years digitally for a world that’s stable, but what you probably should have been optimizing for the last five years is the extremely low cost of change. I’ve worked with some customers where it’ll take them four years to reconfigure a process in the supply chain and roll it out. Then you have a challenge with your cost of change.
If you look at where we are today in the world, we have moved more trade dollars around in Europe the last three months than we have in the last five years. I think there is not a single factor of the world that’s not changing, and the next five years is probably going to be the biggest change we’ve ever seen. Already we’ve seen a 90 percent drop in cross-border trade between the West and Russia. That’s staggering.
Talking Banking Matters
Philip Bruno: A truism of trade is that it’s local. We asked Christian to talk about whether he sees differences by country or major region in how global shifts in trade are manifesting, and how new trade systems and marketplaces are developing in different places. Among other aspects of this, he talked about the development of clearinghouses for trade and their effect on the ecosystem, increasing complexity of trade, and demand for increasing flexibility in payment terms.
Christian Lanng: If you look at the Global South or Latin or South America, or even Europe or Southeast Asia, there is an emergence everywhere of what we call clearinghouse systems for trade, which means when you trade, you leave a copy of your transaction with the government. What that means for companies is that the complexity and compliance of trade has gone up tenfold.
The other thing that’s happening is that just in the period that Tradeshift has existed, we have gone on average from payment terms of 30 days to 67 days. Some of our largest companies are talking about 180 days. We have companies who are talking about going to 365. And that’s the point where we have to realize that the current way of setting terms and doing financing [is unsustainable]. If a single company in the Fortune 500 tells its suppliers it doesn’t want to pay until later, the suppliers say, “OK, sure, you have the leverage to do that. You can tell your suppliers you don’t want to pay until later.” But as a system, if all the Fortune 500 companies in the world tell all the suppliers in the world, “We’re going to pay you later,” that is just a giant unstructured loan on people who have much worse credit ratings than you. And you’re very, very naive if you think you don’t pay for that.
In consumer, we have this huge ‘buy now, pay later’ thing happening. Exactly the same thing is going to happen in B2B. It’s going to happen at a network scale, and it’s going to probably be the single largest transformation of how companies do business.
We also do something that is, in my opinion, completely insane, which is for every single buyer-seller pair, we negotiate the terms. What we’re going to move to, because of this pressure on payment terms, is we’re going to move to a model where that’s decoupled. The buyer will pay in 365 days if that’s what they want. The seller will receive their money instantly if that’s what they want. And in between those two, there is structured finance.
Traditionally, there has been supply chain finance, but it’s a very inflexible tool. But with all of the data we have today and the fact that everything is digital, that is already rapidly being replaced with something that is real time, that is digital, that’s data driven and allows in real time to give both sides the terms they want.
In consumer, we have this huge “buy now, pay later” thing happening. Exactly the same thing is going to happen in B2B. It’s going to happen at a network scale, and it’s going to probably be the single largest transformation of how companies do business.
Philip Bruno: In recent decades, ERP [enterprise resource planning] systems have tried to address all of these procurement needs that Tradeshift seeks to answer. We asked Christian how he thinks about ERP systems in comparison to what Tradeshift seeks to do.
Christian Lanng: Most software in the enterprise space has always been built with what is called a single-player mindset. It’s an application for one organization, and it sits inside the business firewall. Ten or 15 years ago we started seeing applications add an external face—we called it a portal—where a third-party was interfacing with that organization. It could be a supplier or whatever, and they could go into a portal, and they could type some data in. But it’s not really a network. I think we mistakenly sometimes have called them networks, but it’s not really.
We came from a different place. We started with a network. We built the network first. We built something that looked like LinkedIn first. In fact, the only thing that separates you on Tradeshift if you’re a buyer or a seller, a supplier or a procurer, is what applications you’ve activated. We can turn any given seller on our network into a buyer in two minutes. What that means is that our sellers, for instance, on average have three to five connections to other buyers on the network now.
It also means is you can solve for things very differently. Take the enterprise payment automation process. It’s a lot about handling exceptions. We don’t want to receive a bad invoice. We don’t want to pay a bad invoice. We don’t want to pay too early. We want to make sure that the payment terms are the same as in the contract, and so on. If you’re handling that when you receive it in your ERP system—your portal—it’s too late, because you already have a transaction you need to undo. But if you’re in a network, you can solve this up front. As the supplier who is originating that invoice, you can say, “We can already tell you right now that this invoice will not pass through the network because it’s not compliant with the business terms of the receiver.”
So instead of trying to build a lot of features on an infrastructure around how to handle these exceptions when we are receiving them, if you have a network, you can say, “Why even have the exception to begin with?” And it’s the same with workflow or collaboration. If you see trade as a collaborative process, with both sides being able to collaborate in real time, like we do or in a spreadsheet, then you have a lot less friction. If the technology to do that is smart, if it’s advanced, if you’re using AI to stop a lot of problems up front, then it’s actually great to collaborate because it results in more value for both sides. And it results in more value faster.
Philip Bruno: The idea of a new trade finance system allowing both buyers and sellers to operate with the terms they want is intriguing. We asked Christian to talk about how such a system might manifest itself, who might play what roles in it, and what opportunities it would create.
Christian Lanng: I think this is probably the single biggest opportunity right now in the whole supply chain space. Any alternative to SCF [supply chain finance] has always been extremely dangerous. I mean, factoring is very expensive for a reason, because you’re blind. Now, though, we can have enough data, because we have a network on this buyer-seller pair, so we can actually—from a data-driven factoring or real-time factoring perspective—completely approximate supply-chain finance risk. There’s no reason you’re taking any more risk by just giving the money to the seller if you have enough data on the relationship. So that’s the first piece. We can now do sell-side financing with much, much less risk than we could do in the past.
We can also do another thing, which is we can shorten the window. All the SCF in the world needs to wait for the invoice to be approved. But if you’re moving to something that’s data driven and real time, you can give the money on the issuance of an invoice. In fact, we see very little risk difference in giving the money on issuance of invoice versus three weeks later when that invoice is approved, because we can predict with extremely high accuracy—we have all the data—that that invoice is going to get approved.
That changes the picture completely for the supplier: they can get their money now. It changes the picture for the buyer: they’re no longer on the hook for the working-capital position to underwrite that, so they’re getting exactly the same impact as they have with their SCF programs—in fact, better, because we can target every supplier in the supply chain, not just the top 5 percent.
In between those two, you have a whole new category of people who are doing financing. I think that’s the real breakthrough. It’s not the banks in the traditional way. It is people who are seeing, “Well, we can use data-driven financing.”
This has been happening in consumer now for five or ten years. The first fintechs were all doing this in different forms in different spaces: insurance, lending, and buy now, pay later. So all the financing forms exist. They have just not been applied yet at scale in enterprise. That’s what’s happening now.
Philip Bruno: One of the many benefits that Christian sees from a digitally transformed global trade process is facilitation of ESG ambitions. It’s difficult for companies to know where their suppliers source from, and he sees Tradeshift’s platform as a tool for helping with the provenance tracking that is critical to sustainability efforts.
Christian Lanng: By combining the tools of financing with the tools of procurement, you can do that. You can say, “Any supplier that will give us digitally audited records of where this is from we will pay in one day instead of 90 days.”
In between that, against it, is finance. Actually, ESG capital is now cheaper than regular capital. So there’s a one-to-one link between being able to prove the provenance of the goods and how it’s made and having the audit of that lead to cheaper financing and access to financing to companies that didn’t have that before.
What we’ve been doing is to try to make it a default part of the transactions, a default part of the network. What I mean is we are right now putting live features in Tradeshift that will allow every single invoice to have a shipping-from and shipping-to locations, mode of transport—all of these things that will allow us to actually calculate in real time the carbon footprint of any given transaction. Once you have that, you have the basis of, for instance, doing green financing.
Philip Bruno: While Christian’s passion and energy for global trade stand out, he describes himself as a “product guy at heart” who followed a fairly typical techie path, in that he was already building games as a kid, and he even sold his first company while in high school. We asked him who his mentors are. Perhaps not surprisingly, he shared a story about one of the most famous payments-industry innovators: Reid Hoffman, whose biography includes a leadership role in PayPal’s early years, as well as cofounding the social network LinkedIn.
Christian Lanng: I remember coming to Silicon Valley, and I had a very big hero in all the guys who built PayPal. Somebody introduced me to Reid Hoffman. And he said, “Why don’t you come by, Christian?” We spent two hours in his office. He was just whiteboarding. We were talking about payments; we were talking about cross-border; we were talking about what’s going to happen with networks. At some point, his assistant said, “Hey, Reid, you’ve really got to leave. We have this thing; you’re an hour late.” And he sighed and said, “OK, OK, can you come back later, Christian?” Two days later, LinkedIn announced their IPO.
I really remember how this guy, who’d never met me—I just came in, literally fresh off the boat in Silicon Valley—took two hours out of his day to chat about something he was passionate about in the week of announcing his IPO. Those people in the meeting were the bankers, and they were probably at that point annoyed that he had been gone for two hours. I think about that a lot: How do I not become the guy that doesn’t have time for that person?
One of the privileges of living where I do is that there are a lot of smart people that will humble you. And you’ve got to stay humble, or else you can’t learn.
Philip Bruno: As his words indicate, Christian has great passion for advancing and facilitating global trade and maybe even revolutionizing it. The pandemic and recent shocks to global supply chains are only adding to the complexity of money and information movement in global trade. Tradeshift’s platform-based approach with its network to pair buyers and suppliers offers a new approach to enabling trade at a time when buyers and suppliers need it most. It will be exciting to see how his ambitions for Tradeshift play out.
