The Advantages of Supply Chain Finance

What is Supply Chain Finance??

Buyers and sellers in a supply chain have competing financial interests; the buyer wants to pay as late as possible while the supplier wants to be paid as early as possible. Therefore, supply chain finance has emerged to bridge these conflicting interests by providing financing and risk mitigation solutions. These are designed to optimize working capital and liquidity in domestic and international supply chains. There is diversity in the products, with some provided directly to suppliers, while others to buyers.?

Advantages of Supply Chain Finance?

Supply chain finance has now surpassed traditional trade finance in market revenues. We expect this trend to accelerate over the next three to five years. Three factors may drive the growth:

a)????A deepening of established solutions targeted toward suppliers

b)????Greater integration and evolution of products for buyers

c)????A convergence between buyer and supplier-oriented solutions.?

a)?Supplier Solutions

Although receivables finance has been around since the mid-19th century, it has seen significant growth over the last decade. In developed markets, this growth has been driven by buyers extending payment terms to their suppliers. This occurs because unsecured credit available to smaller companies is restricted or limited. We have also recently observed strong growth in emerging markets, where unsecured credit is often more constrained and the market for alternative financing products is generally more limited.

While banks remain the largest providers of receivables finance, a number of new fintech offerings have emerged in recent years.

b)?Buyer Solutions

Akin to receivable finance, the payable financing market has grown rapidly over the last decade. Banks have built this business by bidding for supply chain finance programme mandates and pitching them to their existing large corporate clients.

Platforms have also emerged in this part of the market which provides aggregation services and financing available from banks and non-banks alike. The multi-bank nature of these providers increases competition between banks, which puts pressure on margins and drives improvements in quality, e.g. more streamlined onboarding and superior interfaces.?

Another crucial facet of these solutions is dynamic discounting. This entails early payments by buyers in return for a discount by suppliers on the goods or services purchased. Early payments can be made from the buyer’s own excess cash or from an intermediary financing provider.

c) Convergence of Buyer and Supplier Solutions:

Trade is becoming increasingly digital. Digital procurement tools and electronic invoice platforms are scaling up and broadening their offerings. E-commerce platforms are growing rapidly and providing integrated solutions that make buying and selling easier for companies. Moreover, rapid advances are occurring in data and analytics which further aid decision-making for both buyers and suppliers.

i)??????????????Opportunities for Banks:

Digital platforms are enabling banks and financial institutions to create solutions for buyers and suppliers which ultimately lead to growth in supply chain finance.

ii)????????????Analytics-driven Solutions:

New and rich datasets allow banks to adopt buyer and supplier-focused approaches through advanced analytics. Utilizing analytics for data-driven decision-making has distinct advantages. Data creates a better understanding of buyer/supplier networks and thus can be used to identify new client opportunities. It also enables richer discussions with existing clients and helps identify tailored solutions. Finally, by creating a holistic understanding of risk in the ecosystem, it aids in accurate product pricing.

iii)??????????New Revenue Stream:

Advanced analysis of buyer and supplier data allows banks to further extend their financing. In the status quo, a lack of transparency and digitization leaves a significant volume of trade finance uncatered to. Through the SCF platform banks will be able to view historical purchase orders, shipments, invoices and payment data, thus allowing banks to extend their exposure to clients. The digital supply chain will thus facilitate banks to capture new revenue streams.

Banks which capitalize on data advantages often develop new products/solutions and drive growth. This is mainly because previously unmet financing needs are met, and customer issues and complaints are eliminated

Author: Azhar Tasadduq