Supply chain finance is proving to be big business for leading US banks, with both corporate buyers and suppliers now seeing its provision as best practice when it comes to managing their trade relationships. Liz Salecka examines the huge growth being witnessed in this market.
As the volume and value of supply chain finance programmes escalates globally, the US domestic market is proving no exception to the rule.
Existing US programmes are being scaled up and a wider spectrum of corporates are now looking to support their suppliers with early access to finance for the very first time. This has meant strong growth in business volumes for established providers of supply chain finance – many of which are now looking to attract other sources of funding so that they can meet demand.
“We have seen growing uptake of supply chain finance in the US market throughout the last 10 years, mainly due to favourable accounting structures,” says Michael McDonough, global head of corporate trade and supply chain at JP Morgan, whose portfolio in the US is now approximately three times larger than it was four years ago by value and number of programmes. “More and more US corporates are adopting supply chain finance along with subsidiaries of European and Asian corporates based in the US.”
Bank of America Merrill Lynch (BofAML), meanwhile, has seen a tripling in the volume of US supply chain finance programmes over the last five years as a result of the expansion of existing programmes and new ones being launched.
“There has been increased awareness and adoption of supply chain finance as more US companies are recognising the value of this type of financing to their working capital strategies,” says Maureen Sullivan, head of North American trade sales at the bank.
At Citi, Sebastien Delasnerie, managing director and trade head for North America, believes that supply chain finance is now one of the fastest growing products in trade finance in the region.
He identifies two key factors behind this growth:
- Corporates’ desire to maintain discipline in their working capital metrics in the aftermath of the financial crisis;
- The need to ensure the stability of supply chains by improving working capital management for buyers and suppliers.
“There is an emulation effect taking place here, typically within one industry segment,” he says. “Suppliers that have realised the benefits of supply chain finance when working with one buyer may ask their other buyers to replicate this type of programme.”
Delasnerie adds that the provision of supply chain finance is increasingly being seen as best practice by both buyers and suppliers. “For buyers it improves their working capital and financial management, while suppliers are provided with access to well-priced liquidity before the payment due date,” he says.
Whereas supply chain finance was once the premise of multinational corporations (MNCs) and the larger US corporates, today it is witnessing growing traction with companies outside of the top tier.
Sullivan identifies increased adoption by mid-market companies. “They were first introduced to supply chain finance as suppliers to large corporate buyers and, having realised the value of supply chain finance themselves, have decided to use it as a tool to support their own strategic suppliers,” she says.
“We are now witnessing demand for smaller programmes in the US as supply chain finance is attracting more interest down-market,” adds McDonough, pointing out that JP Morgan is now seeing demand from smaller companies looking for programmes with a value of US$40 to US$50mn. “Whereas supply chain finance has been mostly utilised by the Fortune 100, we are now seeing it sought by the Fortune 1000.”
However, he also notes that there comes a point when a supply chain finance programme can become too small to be economic.
There are three main challenges to smaller programmes:
- Credit – banks normally prefer to work with investment grade or highly-rated companies;
- Pricing – where buyers have a lower credit rating this may affect pricing for suppliers;
- Scale – the costs of structuring a programme are the same whether it is small or large.
Growing domestic bank interest
As more US companies take advantage of supply chain finance, a growing number of US banks – and regional banks in particular – are looking for increased exposure to this market. Some have even taken the plunge by offering it directly as a service.
“There is absolutely plenty of scope for mid-sized US banks to get involved in supply chain finance and a handful of regional banks have been running their own supply chain finance businesses for a number of years,” says McDonough. Such banks typically roll out domestic programmes for corporate clients with which they have an existing relationship.
However, setting up a supply chain finance business is not without its challenges for banks outside the top tier.
“It is difficult for them [mid-sized banks] to move into this business on their own and offer the whole solution. The technological investment required can act as a barrier to entry,” explains Sullivan. Banks entering this space also need the expertise to manage supplier onboarding and the resources to manage supplier relationships across multiple locations.
“For any type of supply chain finance programme to be successful for the corporate client, a bank has to have certain capabilities, particularly in terms of onboarding suppliers and managing the dialogue with them. Technology is important, but it eventually boils down to having the human resources in place to deliver best-in-class execution to the suppliers and the buyers,” adds Citi’s Delasnerie.
He explains that having these capabilities does require a bank to be of a certain size – and for corporates that want scale, this usually means approaching a larger, global bank. “For smaller banks, the provision of supply chain finance typically translates into a more focused approach with concentration on certain clients or industries. Either way the economics for the programme provider need to be there,” he says.
For these reasons, Delasnerie believes that the largest banks will continue to be leaders in this space in the near term. “We are not yet at the stage where supply chain finance is becoming a common commercial bank product offering. Certain banks may decide to enter supply chain finance – either directly or as participants – usually based on whether the product is a core offering for them.”
However, there are ways in which US banks outside the top tier can get around the complexities and costs of setting up a supply chain finance business.
McDonough explains that the cost of investing in supply chain finance technology platforms is not the hardest part of the jigsaw for banks outside the top 10 as they can go to a third-party solution provider instead of building their own platforms.
PrimeRevenue is one company that can offer a number of options to banks that do not have the scope to invest in the technology and supply chain finance capabilities required.
They can, for example, go down the white-labelling route and take advantage of PrimeRevenue’s own technology platform and expertise for themselves.
“Where a bank has an important client relationship, we as a third-party provider can provide a solution to them that they can offer to that client. Banks can set up their own supply chain finance programmes using PrimeRevenue technology and services and brand it in their own name,” explains Bob Kramer, the company’s vice-president of working capital solutions.
Banks looking to service existing clients can also take a co-marketing approach which involves introducing PrimeRevenue and its solution to their clients. “Many banks are likely to start with this co-marketing approach and then go down the white-labelling route. It makes sense to learn about supply chain finance first and get a feel for the market and then white-label the solution,” adds Kramer.
Participation makes sense
US domestic banks that view supply chain finance as an attractive asset class that they want to increase their exposure to, can also participate in the programmes rolled out by traditional established providers. In this way they can put their balance sheets to work in supply chain finance without having to build up the infrastructure and skills sets required.
This type of co-operation is particularly relevant to global banks today which, faced with the increased capital requirements of Basel III and burgeoning demand for supply chain finance, now recognise the need to attract more participants to their programmes.
“For regional banks looking to play a role in the supply chain finance space this can be achieved by buying assets from the asset originators. We can distribute supply chain finance assets to those banks which do not have the resources to enter this business directly,” says Delasnerie.
He points out that many US banks most typically seek involvement where a programme is rolled out for an existing client. “This provides them with an opportunity to participate – and support their own clients,” he says.
Meanwhile Sullivan expects mid-sized US banks to play a significant role in supply chain finance in the near term and points out that by investing in “these attractively-priced assets” they can further strengthen their client relationships.
“There is sufficient demand for supply chain finance paper and there are a variety of ways in which new investors such as domestic banks can engage – including joining existing programmes that are managed by either global banks or third-party technology providers,” she says. “The critical component is that there is alignment between the new investors’ willingness to assume client exposure and the supply chain finance programme user.”
Sullivan adds that BofAML currently has numerous participant banks in its programmes and has reached the stage where demand is outstripping supply. “Insurance companies, private equity funds and hedge funds are now keen to participate in supply chain finance programmes as investors as well,” she says.
However, despite growing interest from non-bank investors, Delasnerie believes that US domestic banks will always have the upper hand when it comes to getting involved in tier 1 bank-led programmes.
“The interest in supply chain finance assets is definitely widening but this is not yet something that is being pursued as aggressively by non-bank participants,” he says. Insurance companies and hedge funds do not follow the same criteria as banks when making these decisions.
Delasnerie explains that non-bank investors tend to have greater risk requirements in areas such as who the legal obligor is – and this can add complexities to their involvement in a programme.
“One big difference is that banks typically benefit from the advantage of having an existing relationship with the buyer and this means they are flexible when it comes to areas such as documentation and cross-border considerations,” he says.
Regardless of this, he believes that strong demand for supply chain finance means there is room for everybody. “Banks running programmes need to continue to work towards expanding the base of funders to sustain the levels of capital required,” he says.
PrimeRevenue, whose business model relies on attracting funding from banks, is also keen to draw interest from more mid-sized US banks. Kramer believes that this is often a preferred route for these banks over participation in programmes led by larger banks.
“What larger banks do is syndicate their supply chain finance programmes among smaller banks – but this type of participation has its constraints. The smaller banks participating often have no visibility into the programme such as the pricing applied,” he says.
“When working with a third-party platform provider they can participate more fully and set their own price. They also have direct access to the clients and many of them prefer this approach.
Barriers to entry
The typical barriers to entry into supply chain finance as a business include:
- The cost of investing in, and maintaining, supply chain finance technology platforms;
- The onboarding and servicing of suppliers across widespread geographic locations;
- Building up the necessary skills and expertise required in different locations.