Tat Yeen Yap, Head of Product APAC at MonetaGo, talks to TRF News about SCF regulation, why SCF techniques are critical, how SMEs can be better served and what MonetaGo offers to support SMEs.
TRF News: Do you think that supply chain finance (SCF) providers needs to be more regulated and why? Why is it considered that SCF techniques are critical?
Tat Yeen Yap: Many SCF providers are already regulated entities. We feel that they should be allowed to act in the best interests of their customers, shareholders and funders, in responsible and ethical ways, without over-regulation which might stifle enterprise and end up denying businesses and the economy the financing that they need for their commercial and economic activities.
SCF is of course not a single technique, but a collection of techniques generally categorised as either receivables purchase or loan-based receivables financing, and within which there are different methods or techniques. For example, receivables discounting, factoring, forfaiting and payables finance are different techniques for receivables purchase, and they may be known by different names depending on the preference of the providers and/or their clients.
SCF is usually organised as a scheme or program for ongoing transactions. It can be originated by/with the buyer or supplier. The term SCF is often narrowly associated with buyer-led financing arrangements for suppliers, what is called payables finance, reverse factoring, supplier finance or simply 'SCF'. Under such buyer-led arrangements, the buyer arranges with a financing institution to provide financing to its suppliers – usually suppliers with long term supply contracts, who need to be onboarded or enrolled in the financier’s SCF program – based on the buyer’s approved payables for these suppliers for which the financier is appointed by the buyer as a paying agent.
SCF providers promote such programs with large corporate buyers, whose incentives include managing their networking position by lengthening payables days – this is done by getting suppliers to agree to the credit terms the buyers want in exchange for an early payment scheme. They are marketed as win-win arrangements for both buyer and supplier – the buyer achieves its working capital goals, and the supplier receives early payment for its credit termed sales to the buyers. The financier of course wins by an often-sticky revenue stream from the program, priced somewhere in between the risk pricing of the large corporate and the usually smaller suppliers thereby achieving ‘above-market’ returns on capital allocated for the buyer’s risk.
Buyer-led SCF schemes have been criticised by some quarters as being unfair to suppliers. Buyers are accused of arm-twisting their suppliers into extending credit terms in exchange for the financing, and of improperly accounting for bank debt as trade payables. It has been said that if buyers wanted to secure their supply chains, they should pay the suppliers earlier. But it must be remembered that every company is both a buyer and a supplier, and they all have the objective of minimising their networking capital or cash conversion cycles, by managing the levels of their working capital components: inventory, trade receivables and trade payables. For businesses to extend credit and carry inventory, they need to be extended credit for their inventory (trade payables) and fund any working capital gap with either equity or borrowings. SCF techniques assist businesses to reduce receivables and secure suppliers' credit.
TRF News: Is SCF the right solution for SMEs? What can the players (financial institutions) do in order to support better the SMEs via SCF?
Tat Yeen Yap: Enrolment in its customer’s payables finance program is an option for the eligible supplier. SMEs can evaluate whether this option is attractive vis-à-vis its other options, viz. alternative external financing arrangements e.g. factoring, overdrafts, bank loans, with their own relationship lenders. If the SME supplier has few or no better options, then being able to avail financing from its customer’s payables finance program cannot but be a boon.
If the pricing is not exorbitant when compared to other financing options, buyers’ SCF programs should generally be advantageous to SMEs, as they would be able to use their customers’ financing limits to sell to these customers and reserve their bilateral financing limits with their own financiers to grow their business with other customers.
Financial institutions tend to arrange payables finance programs for investment grade corporates (and sometimes for those one to two notches lower); the distance between the credit rating of the majority of SMEs and those of their large corporate customers often provide enough pricing arbitrage to make the rates offered to SME suppliers attractive.
Besides, most of these payables finance programs are on non-recourse basis to the suppliers (if they were not, they ought to be made so!), and that is of value to the suppliers because it means that the financial institution provides not only liquidity but is in fact prepaying the supplier, and the supplier has no repayment obligation to the financial institution unlike an overdraft or a loan.
TRF News: Can you please describe how MonetaGo supports the SMEs?
MonetaGo provides fraud-prevention services to providers of trade finance to SMEs. The MonetaGo solution prevents duplicate financing and authenticates the data in trade finance requests so that lenders can provide financing to clients more confidently.
The MonetaGo solution was first implemented in India in March 2018 to prevent duplicate financing on the Trade Receivables e-Discounting System (TReDS). TReDS is the brainchild of the Reserve Bank of India to avail receivables discounting to micro, small and medium enterprise (MSME) suppliers of large corporate buyers in India – it can be likened to a national SCF platform on which MSME suppliers may avail financing of their customer-approved invoices from multiple lenders (banks and non-banks). There are presently three receivables discounting exchanges on TReDS; each of them is a for-profit commercial enterprise that competes with the others for clients and financing transactions – they had a common problem to solve: how do they prevent duplicate financing between themselves for the same receivables, noting that a supplier may upload the same invoices on more than one exchange, without sharing their customer and transaction data with each other?
MonetaGo solved this problem for TReDS by deployment of privacy-preserving technology capable of validating the uniqueness and financing status of each invoice to prevent duplicate financing. In addition, suppliers can authorise MonetaGo to perform validation checks on their invoice data by comparing them with golden sources such as the Goods and Services Tax Network and India’s Electronic Way Bill System, thus providing the needed assurance to lenders that the invoice data is authentic. By providing validation services on invoices to TReDS and lenders, MonetaGo contributes to the financial inclusion agenda of making available more trade finance to the underserved MSME segment of the economy.
Thanks to the early success of the MonetaGo solution to prevent duplicate financing on TReDS, financing outside of TReDS by commercial banks and non-banking financing companies are today also availing the duplicate financing checks provided by MonetaGo in India.
The third-generation of MonetaGo’s trade finance validation solution is being rolled out globally, with enhanced features and capabilities to validate financing transactions based on bills of lading, warehouse receipts, purchase orders and other documents required by lenders for trade finance.