In recent years, supply chain finance (SCF) has become increasingly mainstream as a means of facilitating trade and boosting working capital.
Around the world, many companies have chosen to adopt solutions which leverage the buyer’s credit rating to extend financing to suppliers at a more favourable rate than they might otherwise receive.
The benefits of this approach are clear: by taking advantage of SCF, buyers can extend their own DPO while enabling suppliers to reduce DSO and finance their receivables. As such, SCF can bring working capital benefits to both parties, while also strengthening relationships with suppliers and improving the overall resilience of the supply chain.
But despite the benefits, SCF has not been adopted to the same extent across all regions and company sizes. While SCF has enjoyed considerable success in the EU and US, notably among large corporates, the product has yet to see widespread adoption by middle market buyer companies and small or emerging market suppliers. So how can SCF providers break past these limitations and bring the benefits of this approach across a wider range of companies and regions?
Where SCF is concerned, size matters. Typically, the companies which adopt SCF programmes are large, investment-grade corporates – but for middle market companies, the benefits of SCF are largely unrealised. Indeed, Demica estimates the untapped potential of SCF to mid-market companies to be as high as US$3 trillion.
There are a number of reasons for this. For example, mid-market companies are less likely to have the same rate arbitrage over their suppliers as is typically found with large corporates. They are also less likely to have the bargaining power needed to extend supplier payment terms. Likewise, mid-market companies may lack the resources needed to navigate complex contracts and oversee supplier onboarding.
Banks may also face certain obstacles when it comes to providing SCF to mid-market companies. Large global banks may be less interested in providing SCF to companies of this size – and while regional banks may have more appetite for smaller scale programmes, they may lack the product expertise and technology platform needed to operationalise them.
Indeed, the adoption of SCF across different jurisdictions is a challenge in itself. Most SCF schemes are structured on a domestic basis, with buyers offering SCF to suppliers based mainly in developed markets. But as companies build increasingly globalised supply chains, there is a greater need for SCF to extend beyond the domestic market. Again, this is relevant not only to the largest corporates but also to mid-market companies.
In practice, banks may struggle to on-board suppliers in countries outside their own regions. On-boarding suppliers across a range of jurisdictions is far more challenging due to a range of factors. These include diverse KYC procedures, multiple languages and differing compliance requirements. At the same time, while many companies are building increasingly globalised supply chains, there is a trend for banks to adopt a more regional focus – meaning that many are not in a position to support SCF spanning different regions.
All these challenges mean that SCF has seen less take up among mid-market companies, particularly where supplier networks extend into emerging markets. But as the market continues to evolve, different approaches are emerging which could play a role in helping the industry overcome some of these obstacles.
One notable development is the arrival of FCIreverse. Developed by FCI and Demica, FCIreverse is a plug-and-play platform which enables members of FCI – the global representative body for the factoring and receivables finance Industry – to provide SCF across multiple currencies and jurisdictions.
While FCIreverse is the first solution of its kind, this does follow the established use of third-party technology platforms by corporates to extend beyond the traditional scope of one bank, one buyer and a group of suppliers. Being able to manage all bank funding partners across a single platform brings further simplification opportunities for corporate treasurers. This is not least because the platform provides reach into an extended universe of financial institutions which have long worked together under the FCI organisation.
Going forward, attention should also be paid to the challenges inherent in the supplier on-boarding process. This can often prove a sticking point when it comes to implementing a programme effectively: the costlier and complex the on-boarding process, the less likely it is that suppliers will choose to sign up. Likewise, suppliers which lack the resources needed to comply with time-consuming KYC procedures can fall by the wayside – meaning that programmes may fail to on-board the expected number of suppliers and achieve the desired benefits.
These factors can have a significant impact on the overall success of a SCF programme. Half of the respondents to PwC’s 2017 SCF Barometer, for example, cited the supplier on-boarding process as a key success factor, while 31% flagged it as a bottleneck. At the same time, SCF programmes often focus on a company’s largest suppliers: the PwC research noted that almost half of programmes included 25 or fewer suppliers, while only 28% of programmes were joined by more than 100 suppliers.
In light of these issues, there is a clear opportunity for SCF programmes to extend their reach to a wider group of suppliers – a goal that can be supported by streamlining the on-boarding process through the use of innovative tools. Efficient supplier on-boarding tools can play a key role in making the benefits of the programme clear to suppliers at the outset and spelling out how they will benefit from the programme. Digital on-boarding tools can also make it straightforward for suppliers to upload the documents needed for KYC checks, while enabling suppliers to sign the necessary documents digitally can also take much of the pain out of the process.
By reducing the complexity of supplier on-boarding, buyers may be able to increase supplier participation levels considerably. Indeed, one of the notable features of FCIreverse is the ability to on-board suppliers transparently and seamlessly across different jurisdictions using established FCI member relationships and Demica’s powerful online supplier on-boarding tool.
Supply chain finance has seen considerable adoption in recent years – but while many large companies are taking advantage of this type of solution, there remains a considerable untapped opportunity where mid-market companies and emerging markets are concerned.
The good news is that initiatives like FCIreverse demonstrate how the power of existing networks can be harnessed to build new collaborative relationships between financial institutions. By taking advantage of these opportunities – and by increasing supplier participation levels via a more efficient on-boarding process – providers will be well positioned to expand the reach of SCF in the coming years.