Viacheslav Oganezov, co-founder and CEO of Finverity, outlines the ways in which digitalisation is key to improving access to supply chain finance, and the options available to banks to digitally build and manage their SCF operations.

 

A market requires a good balance between demand and supply to meet the needs of as many participants as possible. Regrettably, this doesn’t happen as often as it could. This is particularly evident in supply chain finance (SCF), where demand has long exceeded supply and led to a severe imbalance.

So, what’s been holding back the supply of SCF? The answer mainly revolves around the lack of a cost-efficient infrastructure to carry out SCF at scale.

In this piece we illustrate how digitalisation is rapidly solving this problem. Banks and non-bank financial institutions (NBFIs) are increasingly working with fintechs to reap the many benefits of digitalisation and ensure they are future-proof.

 

The bottleneck problem

Historically, the primary suppliers of SCF were the larger banks, which used cumbersome, human and paper-based processes to manage complex SCF programmes.

Since the year 2000, demand for SCF has kept growing in tandem with the explosion of global trade. But that growing demand has not been met by the larger banks. This has led to a ballooning of the global trade financing gap, which has rocketed to reach US$1.7tn today. The largest (and most under-served) segment of this gap is mid-market corporates in emerging markets.

Why did this gap expand? It was a classic bottleneck problem: the lack of a cost-effective servicing infrastructure able to support at scale the mid-market corporate segment and the tail of smaller suppliers in large SCF programmes.

From origination to funding and ongoing transaction servicing, we are now beginning to see one of digitalisation’s primary benefits: a dramatic reduction in operational costs and the upending of the entire SCF sector as we know it.

 

Main drivers of digitalisation

Three main drivers underpin digitalisation in SCF.

First is the mass adoption of digitalisation globally. Second, the pandemic has dramatically accelerated digitalisation in trade finance. A so-called ‘nice-to-have’ quickly became a ‘must-have’. Third, as noted above, SCF was ripe for disruption due to its ‘closed circle’ approach controlled by the larger banks.

 

Two routes to digital engagement via fintechs

Banks have various options when it comes to building and managing their SCF operations.

One route, in particular for mid-market and smaller banks, is to join a SCF platform. By doing so, funders can quickly access a larger basket of quality deals to finance, sometimes coupled with a cutting edge technology platform to service deals at scale. This empowers a bank to play to its traditional strengths as a funder and leave technology-enabled servicing and risk origination to a platform, the size and variety of which it would be unlikely to reach on its own.

A second route is for banks to manage their own SCF platforms, at which point they face two choices: to build it new from scratch internally or to license it using a white-label SaaS software.

We look at the two routes in turn.

 

Joining an SCF platform

The best platforms should offer both smart origination (a prequalified deal flow that matches a funder’s specific investment parameters) and smart tech (servicing of transactions at scale).

A platform with sufficient vetted, structured and relevant deal flow results in lower customer acquisition costs for funders. It also significantly shortens the origination-to-execution cycle and enables funders to scale up their books much faster than doing it alone.

The more corporates and funders join an SCF platform, the more valuable it becomes to its users as the network effect kicks in. Finverity’s SCF platform has in-built features that support this through access to a wider pool of transactions. It also enables funders to offer their own deals for co-funding/risk participation to other funders registered on the platform, thereby engaging with the whole ecosystem.

Partnering with platforms is particularly suitable for mid and smaller banks and alternative funders seeking to provide SCF funding to the mid and smaller corporate sector. This represents an attractive cost/benefit option whilst saving on substantial development and maintenance costs.

Platforms come in all shapes and sizes, with Finverity’s SCF platform offering the following industry-leading benefits:

  1. Access to qualified deal flow via Finverity’s marketplace. This mandate-driven service matches deal flow to funders’ credit appetite criteria.
  2. Comprehensive due diligence provided by Finverity before a deal is available to funders for review and supported by complete credit and KYC packs.
  3. End-to-end tech-enabled servicing infrastructure resulting in significantly lower operational costs and faster client onboarding time for funders.
  4. Real-time monitoring of data and transaction status through the platform leading to better risk management and fraud mitigation.
  5. Ready-made deal structures for transactions originated by the platform saving months of one-to-one negotiations and structuring.

 

Managing your own SCF funding platform

Software development is a complex and expensive undertaking, requiring large and sunk upfront fees and ongoing costs. Finverity has spent US$5mn over four years in developing its SCF solutions.

The alternative is to license an existing customisable SaaS solution such as Finverity’s. Call us biased, but this is ideal for larger banks and NBFIs with a sizeable SCF business. The licensing route will minimise disruption during the transition process and enable the bank to offer improved service quality to its customer base. Processes can be digitalised, designed and implemented to match or build on existing practices at a fraction of the cost and time. However, it is even more suitable for mid and smaller banks lacking the resources to build such complex and expensive systems in-house. By doing so they can validate their business model before investing more time and effort.

Each SaaS provider is different, so choosing carefully is essential. In the case of Finverity’s SaaS, the main benefits include:

  1. Ready-made end to end SCF/receivables modules at a fraction of the cost and time of building internally.
  2. Continuous development of software designed specifically for SCF. Finverity’s licensees automatically benefit from new features, improvements and updates, at no additional cost.
  3. An improved client experience through better data collection, full transparency, digitally sending funding requests and much more. This leads to a higher client retention rate and is an attractive feature to capture new ones.
  4. The collective knowledge and experience acquired from dozens of similar implementations carried out by Finverity and fed back into product improvement.
  5. White label. Clients can apply their own brand identity, logo, corporate colours and customisations to maximise customer satisfaction vis-à-vis their brand.

 

It is important to remember that adoption and engagement are two very different things. Research by McKinsey shows that anchor buyers (those who often set up SCF programmes) consistently rank supplier onboarding as the single most important factor for a successful programme. Similarly, for suppliers, ease of onboarding was the most frequently mentioned priority, well ahead of the cost of the facility.

Technical specifications must be backed up by real-life return on investment case studies that demonstrate their usefulness. The user-friendliness of Finverity’s SaaS solution has so far delighted many of Finverity’s clients, thanks to a smooth onboarding process guided by a committed team and easy integration into banks’ existing operational models.

 

Select your fintech partner or vendor with care

Choosing the right fintech partner is crucial for a funder. Dodging a careful selection process will likely lead to problems further down the line.

Funders should evaluate fintech platforms and tech solutions based on relevance to their target market, geographical reach and integration suitability into their operating systems, among other factors. Given the rate of innovation in SCF, we advise clients choose a partner with experience in offering both an origination and servicing platform as well as offering in-house solutions to banks and NBFIs. This means its products have been double tested.

At Finverity, we believe that the best solution is the one that’s best for the client. We live in a world of increasing specialisation in which time to market is crucial. Which is more important: specialisation or time to market? In our view, both. Collaborations that draw on each party’s core strengths are the best way to meet a client’s needs on time and on budget.

Clients come in all shapes and sizes, each with its own specific needs. It is the proactive banks and fintechs that spend time to find and build the right partnerships that will come out winning. Enabling an SCF ecosystem to develop based on collaboration rather than siloed competition is the way forward.