The Evolution of Supply Chain Finance: Multi-domestic Solutions
Mature supply chain finance (SCF) providers have reached a new evolution stage and are slowly moving from a ‘global’ approach to ‘multi-domestic’ solutions. This development is a natural and positive outcome of the learning curve the banks’ organisations had to go through, while designing financing solutions for the supply chains of their most demanding international customers.
At the beginning of the product life cycle, SCF was mainly conceived by banks as specific client solutions, where clearly defined boundaries, often geographic, helped manage the complexity linked to the creation of a new form of banking service. At this initial stage, financial institutions were piloting ‘domestic’, single-country solutions, focusing on the respective core markets and servicing mainly buyers and suppliers who they knew well and operated in a common and familiar jurisdiction.
As corporate demand for SCF increased and the capabilities of the banks grew further, many institutions tried to establish their solutions as a ‘global’. Multi national clients started to ask for international services, and banks reacted by extending the geographical reach of their core products. The hope was that the technology, know-how and service infrastructure initially developed by the banks could be stretched and made available on a global scale with little or no modifications. This strategy had a lot to do with the pressure to reach a faster return on investment (ROI), after usually high project costs for the development of the first SCF systems.
While the use of the internet allowed technology to be deployed rather easily in multiple countries, financial institutions found more difficulties in applying a uniform set of documentation and supplier on-boarding processes across boundaries. The idea was that a bank could delegate to a unique centre of competence the roll-out of a SCF programme for a big multi national in several regions of the world. Excluding a few exceptions, the real-life application of such a model did not work out.
Large corporations run their business worldwide through a network of local subsidiaries, who often also require interaction with local banking partners. Moreover, the subsidiaries normally have pure domestic business relationships with local suppliers, who don’t expect to deal with remote financial institutions when discussing financing. Country-specific know-how is needed not only to deal with the obvious banks’ issues related to the know-your-customer (KYC) procedures and the legal due diligence on contracts, but also to solve more articulated problems due to the funding in local currencies, compliance with market usances for the assignment of receivables, withholding tax issues and confrontation with local financial institutions who might be seen as competitors, as well as partners in the SCF programmes.
This experience led to the definition of a new form of SCF delivery model, namely ‘multi-domestic’. This concept represents the effort of major commercial banks to leverage both their world-class centres expertise on one side, as well as their extensive banking network on the other. According to this model, a central team of highly specialised SCF professionals is responsible for the structuring of the deal and for the technological enablement, while the banks’ staff in the local branches takes care of all tasks that require an interaction with the local buyers and suppliers. The model is more complex and expensive to realise, since it assumes that SCF is not managed anymore by banks as an ‘elite’ product assembled in a special lab for premium customers, but it is instead methodically deployed into their retail and commercial organisations. The local country networks are seen in this scenario not as passive receivers of a new product with the order to execute it, but rather as active marketers that need to preserve a core of differentiating features while customising the service according to the respective market realities.
Even more difficult – but also more rewarding – is the task of empowering the local in-country bank units to administer the entire SCF transactions on their own and book the revenues in their own local profit and loss (P&L) accounts. This often requires an extra investment in IT and training, but the outcome is a fully engaged organisation that has enough ‘skin in the game’ to mobilise its local sales force and fully leverage their excellent market coverage, particularly when it comes to reach out in the territory to on-board a high number of suppliers.
A good example is UniCredit’s experience with a leading European retailer in Turkey. The bank, with a global SCF platform, was challenged to implement the programme in a pure domestic context among Turkish buying and supplying entities. The institution fully leveraged its presence in Turkey, through the powerful network of Yapi Kredi, a member of UniCredit, linking the supply chain finance technology to the local accounting, customising the related cash management systems and adapting the legal framework to the recommended practices in the Turkish market. The full engagement of the staff in the local bank network led, for example, to the fine-tuning of the assignment letter for the receivables of the suppliers, which in Turkey might incur very different notary costs, depending on the way it is formulated. The on-the-ground expertise was fully leveraged to optimise the text of the assignment letter and find a pricing agreement with a few notary offices, so that the final costs for the on-boarding of suppliers could be minimised. Because the Turkish organisation of the bank was set-up to retain the entire costs and benefits of the programme, the best local resources were put on the deal and the client received the best possible advice for a successful roll-out.
Coherent with the basic principle of a multi-domestic approach, the bank still designated a global team of specialists to act as single point of contact for the multinational client head-quartered in Switzerland, defining the overall strategy and design of a SCF programme that had to cover several countries. At the same time, the global strategy was executed in each country by the locally most competent units of the bank, thus ensuring a flawless delivery. This allowed exploitation of the advantages of a deeply rooted market presence, without neglecting the client’s need for a globally harmonised service standard.
The model proved to be scalable and allowed for a brilliant deployment to other countries, too, such as Hungary – where more than 50 suppliers could be onboarded in only a few weeks.