How can payables finance maximise its potential?


Flow reports on how delegates at the BCR Publishing Supply Chain Finance Summit in Frankfurt agreed that payables finance has not only come of age with a common language and standard set, but is reaching hitherto unserved parts of the supply chain.

Since the birth of payables finance in the late 1990s, demand for this buyer-led supply chain finance (SCF) technique has surged. Where once banks had to knock on their clients’ doors and explain the benefits, corporate treasurers are now increasingly approaching providers and demanding payables finance solutions tailored to their specific needs.

The opportunity is enormous. In 2016, global volumes for payables finance were estimated at US$447.8bn (an increase of 36% when compared to 2015)1.  Moreover, according to estimates from McKinsey, the potential revenue pool from this business is worth approximately US$20bn.2

However, the industry is yet to capitalise on its full potential. In 2014, for example, only 10% of McKinsey’s US$20bn had been captured globally – with growth stunted by supplier on-boarding challenges, regulatory issues and a lack of standardisation.3

So how can payables finance maximise its potential? How can it help to plug the trade finance gap (74% of which is accounted for by small and medium-sized enterprises (SMEs) and mid-caps, and 40% of which originates in the Asia-Pacific region)?4 What role can new technologies play in the business? And finally, how can we build a trusted network for payables finance?

Bringing together leading professionals from across the banking, fintech, and insurance space, BCR’s 3rd annual Supply Chain Finance Summit, hosted in Frankfurt between the 31 January and 1 February 2018, pinpointed the need for increased collaboration (interbank, bank-fintech and bank-insurance), a more targeted approach to technological innovation, standardisation, and more effective utilisation of data.

Plugging the gap

A key discussion on the first day of the Summit was centred around how payables finance can be harnessed to plug the US$1.5trn trade finance gap and provide liquidity to cash-strapped SME and mid-cap suppliers, and particularly those located in emerging markets.

Opening the discussion, Qamar Saleem, Global Technical Lead, SME Banking Practice, at the International Financial Corporation (IFC), explained that the payables finance industry has historically been mesmerised by the “short-tail” of the supply chain (the top 20-30% of the supplier portfolio, typically covering more than 70% of the procurement volume). However, he outlined that the “long-tail” is where the untapped potential is – representing a US$1tn opportunity.

Shrey Daga, Product Head, EMEA Supply Chain Finance, Citi, agreed that this focus on SME suppliers and emerging markets constitutes the next step in the SCF business’ evolution. However, Daga also added a note of warning, emphasising that banks remain restricted in terms of what they can do for clients with short, or even non-existent, credit histories – due to compliance barriers, and their position as an unsecured creditor.

In this context, partnerships between international development organisations and commercial banks are extremely important. One example of a successful partnership is that established between the Asian Development Bank and Deutsche Bank to provide more than US$200m a year in financing to the Asian-based SME suppliers of Landmark Group, a large Middle East retailer. In this deal, the suppliers set to benefit from this joint programme are all small Asian producers located in Bangladesh, China, India, Sri Lanka and Vietnam.

However, finance alone will not be enough to plug the gap. SMEs also require access to knowledge, and training – and a structured and efficient on-boarding programme. Myrjam Tschoeke, Managing Director of Greensill Capital, stressed that, in this respect, “on-boarding needs to be tailored, reflecting each region’s unique culture and requirements.” As evidence she gave the example that while SMEs in North America will be more than willing to go through “click-through” digital on-boarding processes, those in Eastern Europe will require verbal outreach and training in their own language – if not only to build a level of trust between provider and supplier.

The power of technology – is it overstretched?

The current, and future, role of technology in the payables finance space was another key theme explored by participants at the Summit. There was broad agreement that technological innovations were important to expand market opportunities, notably: digital documentation and electronic signatures (to reduce the burden on suppliers and speed up the on-boarding processes); artificial intelligence (to enhance the efficiency and accuracy of KYC and risk management processes and help reduce fraud); and, in the longer-term, the application of blockchain technology (to allow multiple parties to transfer sensitive information in a space that is secure, permanent, anonymous and easily accessible). It was clear that, moving forward, collaboration, not competition, between banks and fintechs would be key.

When it came to blockchain, Marc Delbaere, Global Head of Corporates and Supply Chain at SWIFT, warned of the dangers of “hype”: “We need to be pragmatic and acknowledge that not every blockchain initiative will be successful”. He highlighted that, in the long-term, the practical success of blockchain would also depend on the development of global standards, especially in a business that is inherently cross-border.

Moving the debate on, Deutsche Bank’s Anil Walia, Financial Supply Chain Head, EMEA, emphasised that the impact and significance of technology may vary region-by-region: “In Germany, a fully digitised, app-based payables finance platform would undoubtedly facilitate the speedy on-boarding of SME suppliers. But in Bangladesh, where even getting a stable internet connection is a challenge, the implementation of such a programme would be largely ineffective.”

Qamar Saleem added that for technology to make a real difference – particularly in the SME space – you first need access to data. “You need access to basic information on the supplier, before you can think about using emerging technologies to organise and effectively leverage data. You need to learn to walk before you can run.”

Standardise, harmonise

At the end of the first day, the participants took time to reflect on the industry’s progress in terms of market standardisation and the development of a common language. In 2016, the ICC published the “Standard Definitions for Techniques of Supply Chain Finance” in an attempt to remove uncertainty and ambiguity surrounding industry terminology and create a common language through which all parties in the SCF ecosystem can communicate.

But why is the development of a common language important? And how effective have the definitions been in creating this common language?

All participants at the Summit agreed that the use of a whole host of different terms to describe what the Standard Definitions label “payables finance” (including reverse factoring, confirming, confirmed payables, supplier payments, and vendor pre-pay) diluted the effectiveness of communication aimed at fairly articulating the value proposition of payables finance programmes. As Angela Koll, Specialist Trade and Supply Chain Finance, Commerzbank, emphasised, “If you want to foster industry growth, you need to develop a common language between providers, corporates, SMEs, accountants, legal professionals and regulatory authorities.”

When it came to assessing the effectiveness of the Standard Definitions, Peter Mulroy, Secretary General of Factors Chain International (FCI), admitted that take-up of ICC terminology has been rather slow among well-established industry players. However, in a positive development, he suggested that FCI members – which make up the world’s largest network of factoring companies – are increasingly gravitating towards the definitions.

Building on Mulroy’s point, Sean Edwards, Chairman of the International Trade & Forfaiting Association UK (IFTA), emphasised that the value of the Standard Definitions lies not only in their provision of a set of agreed definitions. By providing clear guidance on how each individual technique works, the legal parties involved, their contractual relationships, as well as the implied risks and how to mitigate against these, “the Standard Definitions offer the essential building blocks for those wishing to design or initiate a payables finance programme”.

Closing the discussion, Deutsche Bank’s Walia emphasised that all participants in the market need to start using the definitions: “To reach our market potential, the industry, must advance the development of appropriate regulatory and accounting standards for the industry. Only once we have a widely used set of definitions, will this be possible.”

Credit insurance: adoption not avoidance

On the second day, attention turned to trade credit insurance, through which financial institutions can reduce their credit risk exposure – via protection against obligor default – and boost their funding power by obtaining regulatory capital relief.

Manuel Lopez, Managing Director of Marsh, explained that, in the past, usage and provision of trade credit insurance in the payables finance space has been limited by two common misconceptions: banks’ beliefs that underwriters wouldn’t pay out in the event of a claim and, on the flipside, underwriters’ negative views of the credit risks associated with payables finance.

At the heart of the matter when it comes to payables finance is policy wording – which ensures claims are paid and provides confidence to the market as a whole. Marilyn Blattner-Hoyle, Head of Supply Chain and Trade Finance AIG, said, “Traditionally, trade credit insurance contracts have been quite difficult to read – making it hard for banks to truly understand the policy they are signing up to”.

However, she emphasised that insurance companies are now moving to ensure their contracts are clear and user-friendly. By having in place a solid process of policy drafting, with clarity on exactly what is covered, challenges can largely be overcome. Technology – as used by AIG – can also help test coverage of policies in the event of a wide range of potential default scenarios.

More open and transparent claims data – available to all market participants – may also help this process of demonstrating the value of credit insurance. With well-structured policies, the product can clearly work, but the insurance industry must work together to make this case more clearly.

Building a roadmap

While recognising the long-term potential of innovative new technologies such as blockchain technology, the SCF Summit made it clear that providers need to be focused on developments and changes they can make in the here and now.

It was agreed that in the short-term, standardisation, access to, and more effective utilisation of data, and improved industry-wide collaboration, held the key to market growth. 

The BCR Supply Chain Finance Summit (now in its third year) took place at the Westin Grand Hotel, Frankfurt, Germany 31 January to 1 February 2018. Photos and comments can be found on Twitter at #SCFS18

1https://bcrpub.com/publications/world-supply-chain-finance-report-2018.
2
https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Supply%20chain%20finance%20The%20emergence%20of%20a%20new%20competitive%20landscape/MoP22_Supply_chain_finance_Emergence_of_a_new_competitive_landscape_2015.ashx.
3 Ibid.
4
https://www.adb.org/news/15-trillion-trade-finance-gap-persists-despite-fintech-breakthroughs.

Source: Deutsche Bank