Alexander Pawellek, Head of Product Management, Supply Chain Finance and Innovation at Commerzbank, explains how clients’ fast-evolving needs are driving change within the SCF market.
Boasting growth rates of up to 40% in recent years, the supply chain finance (SCF) market continues on its upward trend. Globalisation has been a driving force behind the industry’s expansion – with supply chain networks now reaching further than ever before – and there is a growing awareness that capital trapped within supply chains need not be under-utilised.
The market is fast-maturing, spurred on by the increased application of technology, but the industry still faces a number of challenges. Geopolitical tensions, increased regulation and hiked competition have introduced new considerations into supply chain management, and clients are demanding sleeker, faster solutions to cope with the additional operational, regulatory and financial pressures they face.
“Payables” and “receivables” long constituted an untapped resource within many businesses’ balance sheets. Trapped within supply chains for the duration of the payment term, companies were unable to utilise this resource to best effect. Aside from limiting financial firepower in the immediate term, under-utilising this portion of the balance sheet also has negative impacts on cash flow, market share and financial security.
SCF allows buyers to optimise on their working capital, while supporting suppliers with faster payment of invoices – a veritable win-win for all parties, particularly in industries with razor-thin margins. In recognition of this, large multinationals are leading the way in implementing SCF programmes on both the payables and receivables sides. And they are not the only ones – there is an increasing trend towards the adoption of such programmes across the Mittelstand (middle sized) and small-and-medium sized enterprises (SMEs), too.
Quality in quantity
The market has now reached a new level of maturity – a clear indication of this being the gradual shift from single-bank solutions towards multi-bank solutions, where treasurers can access financing from more than one financial institution.
Their benefits are numerous. Diversification of funding sources is now an integral part of prudent risk management – particularly since the economic downturn in 2008 underscored the dangers of excessive aggregation. But beyond this, multi-bank solutions also offer clients greater access to capital, an increased range of expertise, and can ease the document exchange process for suppliers during the required know-your-customer (KYC) screenings. We expect that greater buy-in among larger corporates will grant multi-bank platforms even greater scope for expansion, and the cost benefit will gradually cascade down to the end-buyers and suppliers.
Technology opening doors
Multi-bank solutions are merely one example where technological advancements have brought about SCF’s coming of age. Certainly, digitalisation has had a transformative effect on data processing and execution capabilities – reducing friction within the supply chain and giving banks the wherewithal to structure products and on-board clients more efficiently and at a lower cost. Aside from these benefits, technology has also provided means to incorporate multiple parties more efficiently and transparently within trade and supply chain finance processes, and allow data to freely flow between them.
As clients demand more sophisticated solutions from their financial providers and competition increases, synergies between banks and fintechs have become more commonplace across the industry as a cost-efficient and complementary means of delivering the best results for the end-client. Commerzbank, for instance, has partnered with PrimeRevenue and CRX Markets – two leading fintech providers specialising in working capital solutions – to ensure that it could deliver the latest, state-of-the-art SCF solutions to its clients. For banks to continue to stay ahead of the curve, such synergies can be valuable – being open to the benefit of external IT systems ensures an unbiased approach to service-enhancing technology that puts the clients’ interests first.
Blockchain – distributed digital ledger technology that records transactions in a series of blocks – has been revolutionary in improving the customer experience and is much more than just a secure means of holding and exchanging funds. It can manage any form of exchange, agreement or tracking process and has broad application across a variety of processes within the supply chain – from automated cold chain management to self-executing supply contracts. It now performs an integral function alongside a number of forward-looking industry initiatives – a key one being Marco Polo, the largest trade and working capital finance network in the world1. Buyers and suppliers are digitally integrated and connected under Marco Polo, and the transactions are mirrored on the blockchain with the aim of tracing from source to end-user, streamlining the process and generating efficiency.
Gradually, an industry that once relied exclusively on archaic, paper-based processes, is moving towards sleeker, faster and integrated digital alternatives. Indeed, Marco Polo aims to incorporate not only buyers and sellers, but also other parties involved within the supply chain, such as logistics providers and insurers, so that transactions can be mapped digitally via a centralised portal.
In mature economies, SCF was typically used to optimise on working capital and manage supply chain risk, whereas in emerging economies, the focus was generally towards generating liquidity and keeping pace with demand. But with trade tensions on the rise – and as supply chains become ever-more global – clients are increasingly exposed to geopolitical risk, irrespective of domicile. Comprehensive risk and liquidity management throughout the supply chain is critical as a means of protecting against geopolitical risk and market volatility. In this regard, the playing field has somewhat levelled with respect to what emerging and developed market clients are seeking from their financial providers and SCF programmes. Supply chain risk management is of paramount importance – rendering deep regional expertise an essential part of a bank’s service offering.
Here again, technology can help. The increased visibility it provides across supply chains can better inform practitioners of the potential geopolitical risk exposure. And when it comes to counterparty risk, advancing “reg-tech” has rendered KYC screening across diffuse supply chains a far less onerous process than ever before. Aside from the proactive risk management advantage this confers, it also has the added benefit of opening-up access to financing for small- and medium-sized enterprises (SMEs) that might have previously been precluded on account of size, by reducing the cost attached to on-boarding.
Continued growth in the SCF market will bring broad benefit – not least in providing more alternatives to SMEs or suppliers and buyers in emerging markets that may be under-served from a financial services perspective, or have a more limited range of products available to them. Certainly, technology will play a large part in making SCF more inclusive – creating efficiencies to reduce cost and make financing more accessible. To reap maximum benefit, corporates should seek a banking partner that demonstrates both digital prowess and industry expertise to deliver the most efficient and secure solutions to their liquidity, geopolitical and regulatory challenges.