The supply chain finance (SCF) market is undergoing a period of transformation, driven by developments in technology, disruption to the global movement of goods and growing pressure over sustainability. GTR speaks to five of the industry’s leading figures to understand how those changes are taking shape, and what the future has in store.
Participants
- Ali Ansari, managing director, supply chain and payables finance, Taulia
- Maurice Benisty, chief commercial officer, Demica
- Kevin Day, chief executive, LendScape
- Daria Johnen, global product head, supply chain finance, HSBC
- Tim Nicolle, chief product officer, PrimaDollar
GTR: How have disruptions to supply chains, for example due to virus containment measures or the war in Ukraine, impacted demand for SCF?
Benisty: Even before the conflict in Ukraine, reshoring of the supply chain was a big item on the corporate agenda, driven mainly by a change in the relationship between Europe and the US, and China. This has been exacerbated by the disruption caused by repeated lockdowns in China as a result of Covid-19, as well as the difficulty of entering the country due to ongoing stringent quarantine requirements.
The conflict has caused commodity prices to rise, which creates increased working capital funding needs and supply chain uncertainty. This is also driving reshoring, as countries that were dependent on Russia or Ukraine look for alternative sources of supply in the face of sanctions and the physical impact of the war on the flow of agricultural supply out of Ukraine. Delayed shipments – caused by the disruption in the supply chain in China – are driving a need for extended payment terms in certain segments, particularly in the IT industry.
GTR: What changes are you seeing around the use of, and demand for, technology in SCF? What do you think will be the most important technology-related talking points over the next year?
Day: Cost savings, operational efficiency and customer experience will continue to be the most urgent priorities for the majority of financial institutions, so will be the driving forces behind change over the next 12 months. Digitisation, as a key lever for simplifying access to supply chain finance and introducing economies of scale, will remain at the forefront of discussions. Banks will continue to partner with technology providers and fintech startups in order to expedite their digital transformation plans and benefit from joint innovations. The move towards open data and cloud-based systems will accelerate, as this offers increased flexibility, security and transparency for lenders while further lowering IT costs. A cloud platform approach also improves business resilience, which has never been more critical following the economic shocks of the last two years.
There will be pressure on fledgling technology businesses to raise funds as investors tighten their belts and look for tangible return on investment (ROI). We’ve seen the demise of we.trade as an example of how new initiatives can flounder if they fail to gain a network effect. We will still see activity in the blockchain space, but there will no doubt be greater caution when selecting viable use cases for this technology. AI and its practical application are often misunderstood and misrepresented. However, the growing abundance of data and increased machine power are the ingredients that will enable this technology to become effective in the SCF space.
Nicolle: SCF has seen few innovations since the inception of the core concept 20 years ago and introduction of dynamic discounting 15 years ago. This is now changing with a new breed of platforms emerging. These new platforms aim to remove some of the barriers and reduce some of the practical limitations and costs associated with operating traditional SCF programmes.
For example, integrating trade and shipping documents enables SCF programmes to automate invoice approval processes, deliver financing to suppliers at shipment and increase uptake, because the availability of SCF is built into the supplier journey. Using intermediate special purpose vehicle (SPV) structures allows anti-money laundering and know-your-customer (KYC) limitations to be overcome, enabling participating banks to provide funding to suppliers beyond their geographical footprints. Also, pricing control for finance granted to suppliers moves to the SPV and is separate from the funder or funders. This means that dynamic pricing is easier to implement, for example linking to environmental, social and governance (ESG) targets, or allowing buyers to monetise the arbitrage between bank funding costs and supplier funding costs to their benefit. And using a two-payment model with suppliers enables buyers to approve less than 100% of the invoice balance upfront. This leads to better management of risk and enables debit notes to be deducted from payments, leading to simpler processing and easier discussions with auditors.
These innovations are already in live operation, particularly with buyers that have extended supply chains or where there is a mismatch between the comfortable geography of funders versus the locations of suppliers. Best of all, this new technology can be added to existing SCF programmes without disturbing arrangements that are already in place or the platforms on which the programmes currently operate.
Benisty: Many banks are evaluating their technology requirements, and we’re seeing more emphasis on the need for improved customer experience and integration between systems. Most banks are expecting to replace their existing technology within five years, and many are actively looking at external technology providers for their solutions. Banks are realising that their investment requirements exceed available budgets for own build, so software-as-a-service solutions are becoming more popular as they have lower upfront costs and revenues linked more closely to customer success. They also have the benefit of a network effect, with common market infrastructure emerging that enables a much higher level of product development and innovation over the long term.
With a burst in the bubble for blockchain-led solutions, we see less demand for applications that cannot solve a ‘today problem’ and more demand for new – but proven – technologies that can improve long-standing challenges around connectivity, processing speed, transaction structuring or configuration, and user experience. Investment decisions will be driven by old-fashioned ROI calculations, with growth playing at least as important a role as productivity improvement.
GTR: Currently, relatively few SCF programmes incorporate pricing based on ESG targets. To what extent do you see that changing over the coming year, and what challenges need to be solved?
Benisty: A lot of banks are expressing interest in incorporating ESG ratings into their programmes. However, a lack of standardisation in ESG ratings means it is difficult to be sure you are doing it well. There is a general lack of widespread, accepted definitions, and a lack of consistent ratings of ESG criteria.
Johnen: When we look at supply chains, it is important to understand that while most multinationals have well-developed ESG strategies and dedicated resources, many smaller suppliers may have neither, and may already be struggling through successive waves of disruption. However, they do understand that to retain their best customers, they need to invest in ESG or risk being dropped off the supplier list. We expect that the introduction of ESG targets into financing products, including SCF, will increase. Supply chains are re-calibrating in response to recent events, and some of the ESG factors such as consumer expectations, regulatory requirements and demand from stakeholders will play a defining role. Sustainability has already become an integral part of the discussion with our customers, including discussions around supply chains. We expect the trend towards incorporating ESG criteria into deals, including SCF deals, to continue.
Ansari: Three out of four conversations we are having with our clients include an ESG agenda. They understand that 80% of the potential impact of such an agenda will come from changes within the supply chain and in the behaviour of their vendors and partners. While SCF was initially promoted as a key solution to drive ESG changes in supply chains, companies soon realised that a small improvement in the early payment discount rate will not solely drive the necessary changes. Companies now recognise that SCF-differentiated pricing should demonstrate a company-wide approach to giving priority and preferential treatment to the suppliers that are supporting the company’s wider ESG agenda.
Nicolle: Increasingly, there is a requirement to move from the macro to the micro in ESG. We are all now starting to appreciate the dangers of painting with a broad brush. This can hide important realities, leading to accusations of greenwashing and potentially disincentivising the very behaviour we would like to encourage.
SCF has a key role to play in ESG. If ESG and SCF combined can be made to work at the shipment and even at the product level, it can be a powerful tool going forward for companies and banks to drive change in supply chains. With the rise of new platforms, this is becoming a reality.
Day: We’re seeing increased pressure on banks and lenders to embed ESG into their business models, following Covid-19 and amid growing awareness of climate change. As a major supplier to the banking sector, we must fully align with our clients’ ESG strategies and so have an acute understanding of the challenges posed by ESG due diligence. Lenders are turning to technology to assist them, seeking reporting tools and solutions to help them merge multiple datasets and gain meaningful insights into ESG risk and performance.
GTR: How can changes in technology help address challenges around introducing ESG criteria into SCF programmes?
Johnen: One of the key challenges for sustainable SCF is evaluating suppliers’ performance against ESG metrics. While the traditional data collection model has been self-reporting with validation by audit firms, over the last five years we have seen a number of organisations using supplier sustainability applications to scale their initiatives by enabling the collection and analysis of data relating to their suppliers’ ESG performance. These applications provide a comparison of the supplier’s performance against its peers in similar industries and then allows them to identify areas for improvement. Equally there have been advances in technologies, such as the Global Risk Assessment Services (GRAS) project supported by the German government, which uses remote sensing and satellite data to verify environmentally friendly land use. Asian palm oil suppliers, for example, can use those tools to ensure the land they are using meets the standards required by their European biofuel buyers.
As sustainability becomes embedded in all customer discussions, we can expect to see further collaboration between various technology providers and financiers to create propositions that embed financial services into these evolving ecosystems. We are likely to hear more about projects like GRAS, where remote sensing and imaging from satellites are used to establish compliance with the land use requirements of the buyers of palm oil, and to see such projects integrating with financial supply chains, offering seamless user journeys and new financing opportunities.
Nicolle: ESG is about data and documents. It is about evidence, and specifically not just self-certification. ESG operates at two levels: the macro level, where funders or banks engage and it is about linking the cost of money to externally-benchmarked measures of ESG performance; and the micro level, which is the shipment-by-shipment process needed by organisations to evidence their ESG claims through to their customers. That is very much a new part of how supply chains have to work today, and where many organisations are currently looking for solutions.
SCF platforms have a role to play at both levels. If the platform has control over what suppliers are charged, the macro level is easy to integrate. SCF v2.0 platforms like PrimaTrade have this capability, as supplier pricing is separated from funder pricing. This means that banks’ back offices are not exposed to rate movements driven by periodic changes in benchmarked per-supplier performance, and so sophisticated ESG-linked capabilities can be implemented. At the micro level, platforms that integrate trade and shipping documents provide a direct means for additional ESG documentation to be added to individual shipments on a case-by-case basis. For example, a garment made with recycled polyester can only be treated as ‘sustainable’ where the supplier provides evidence of the materials used in manufacture at the time of shipment. The inclusion of the inbound shipping documentation to the supplier evidencing the source materials then allows that specific shipment to benefit from an ESG-linked rate, noting that other shipments from the same supplier might not be as sustainable and therefore should not have the same benefit.
GTR: What changes do you see on the horizon when it comes to SCF, for example around shifting market dynamics, risk management or the rise of platform businesses?
Benisty: We expect this market to be dominated by banks for the medium term, with growth driven by tighter conditions in other financing markets. Teams are moving from being product-focused to more holistic, covering a wider range of product offerings within unified teams.
Day: There are ongoing debates around the accounting treatment of SCF programmes, as well as the role of credit insurance to underwrite buyer risk. All practitioners will need to focus on openness and transparency to avoid interference of regulators.
Progressive technology is already making SCF a viable option for more providers. For example, self-serve online portals and the automation of KYC checks during onboarding make the process faster and easier for borrowers and reduces cost to serve for the lender, without compromising on compliance. Combined with government pressure on banks to support small businesses, this will translate into improved access to SCF for small-to-medium enterprises (SMEs), provided the corporates and midcaps are encouraged to implement programmes.
We’re witnessing a continued shift towards cloud-hosted and cloud-based platforms, application programming interfaces (APIs) and open accounting, as finance providers aim to modernise their operations and deliver the user-friendly, digital experience that SMEs now expect. We are already at the point where it is possible to manage the flow of data related to payables, receivables and the day-to-day accounting of a business on a single platform, removing friction and allowing lenders to offer more personalised and holistic financial products.
Ansari: There is still a lot of room for improving how legacy financial institutions deliver financing, especially for SMEs, and around the modernisation of archaic practices for onboarding clients and underwriting risk.
One of the most significant barriers to a successful SCF programme is the perceived difficulty for suppliers to comply with data and document requirements. However, onboarding can be made far more efficient by using real-time supply chain data. APIs can extract information directly from the anchor buyer’s enterprise resource planning system, digitally obtaining confirmation from suppliers and auto-validation through a cross-check of the information held in trusted third-party registers, such as Companies House, tax authorities or credit bureaus. Data can also be used to improve the ability to assess risk effectively and manage it on an ongoing basis. Perhaps the business may make use of a digital record to confirm approval of invoice, receipt of goods or status of shipment, or alternatively, machine learning-enabled assessment on the likelihood of approval or payment on the due date.
The use of additional transactional data to augment traditional underwriting processes and policies will allow financial institutions to expand their risk appetite and deliver more financing to companies that need it the most.
