Supply chain finance (SCF) is nothing new – in fact, as PrimeRevenue’s Peter Cook points out, it has been around in one form or another for about 30 years. What is new, however, is the way in which SCF has shifted away from being primarily delivered by banks, and towards a more open, dynamic approach driven by technology. This is the result of increased demand for flexibility, transparency and likelihood of a successful outcome – and has been brought about by innovation on the part of fintech providers stepping into the traditional banking space.
As Cook observes, “Much of SCF has been mainly proliferated by banks. SCF programs historically have been quite limited in scope – they were what we call ‘big-to-big’, implemented by the largest investment-grade corporates and offered to the few largest suppliers of those corporates.
“In more recent times there’s been an increasing number of fintech providers entering the market, with the objective of using technology and specialism to drive more scalable, flexible solutions. SCF has become a great equalisation measure in the economy, where larger and stronger companies can strengthen and inject liquidity into the supply chain ecosystems, which strengthens the smaller and weaker companies.”
SCF has become a great equalisation measure in the economy
This new dynamic can be seen as a significant pivot in businesses’ approach to working capital; rather than being exclusively viewed as a means of unlocking cash tied up in a company in order to meet its immediate strategic objectives, SCF is also increasingly being recognised as a way of freeing up the flow of cash within the supply chain itself, resulting in greater stability and economic growth up and down the financial ladder.
“The primary objective of companies launching these programs is less about just extending terms or looking after themselves at the expense of suppliers,” says Cook. “It’s more about a true strengthening of their supply chain ecosystem and a broader distribution of the benefit.
“The irony historically was that the companies that needed SCF the most were the ones that weren’t able to access it. Through the efforts of providers like PrimeRevenue that’s changing.”
The risk element
Many of the recent shifts in approach to SCF have been caused by changes in the wider economic situation. In addition to the growing complexity of supply chains themselves, the financial crisis brought about a fundamentally different approach to risk. It put the burden on corporates to think more flexibly and strategically about their supply chains to ensure that they are more robust. And those supply chains themselves are facing an ever-evolving set of challenges, among them Brexit and increasing trade protectionism around the world. This has resulted in a concerted effort to find more flexible financing solutions.
“Historically, banks have had the advantage of great access to liquidity and a fantastic network of clients, which allows them to provide SCF to both buyers and suppliers,” says Cook. “However, with the disruption caused by technology, sustainability and other economic factors in a rapidly evolving supply chain ecosystem bank SCF offerings have significant limitations, for three key reasons.
“The first issue is banks are typically large and complex companies, so despite best efforts, inherently they’re pretty siloed in terms of the constituent parts required to deliver SCF – things like credit assessments, onboarding, legal and IT.
“Second is the liquidity risk associated with a single funder. Banks are under increasingly intense regulatory oversight, which affects their ability to offer certain products in certain markets. We’ve seen banks and bank partners that react by pulling out of certain markets altogether or pulling out of SCF specifically, and that leaves their customers with a huge problem.
When a business is dealing with disruption in its sector, companies need huge flexibility in terms of where and how they source goods and services
“Third, most banks have limited capabilities on jurisdictional coverage. When a business is dealing with disruption in its sector – the automotive sector for example, where downstream suppliers are scrambling to retool their businesses to cope with electronic or autonomous vehicles – companies need huge flexibility in terms of where and how they source goods and services. In my experience, global banks work mainly with larger corporates in countries outside of their home markets, or subsidiaries of large corporates domiciled in their home markets. Conversely there are local banks in those markets that cater to smaller businesses, but lack the flexibility to offer global or regional visibility. So, you end up with a fragmented structure.”
Anthony Buchanan, treasurer at Asahi Breweries, has first-hand experience of the limitations of the traditional bank-based approach to SCF.
“Asahi Breweries was set up in April last year after the acquisition of SAB Miller’s European businesses by Asahi,” Buchanan says. “At SAB Miller we had been looking to set up SCF solutions across the globe, and back in 2013 we focused on Europe and set up a banking solution.
The discount rate is very competitive and we have great flexibility to help more of our supply base
“The bank we were working with started having a few issues and decided to pull out for some of our key markets. So, when the banks started pulling out of some of our key markets, we reassessed the marketplace and took the decision to maintain a flexible and potentially global solution. Our key requirements when searching for a new SCF provider were multi-currency and multi-jurisdiction with local language to help our businesses and our suppliers tap into onboarding at the right discount.
“It was better to move on to a tech solution and then plug the banks in behind that, which would give us the flexibility to support our larger suppliers. With the old solution there was a flaw in terms of a floor in how much annual spend a supplier required before it could access the program. With a new solution, we can look to offer this to the majority of our suppliers. The discount rate is very competitive and we have great flexibility to help more of our supply base.”
The future of SCF
Technological disruption in the financial industry is on everybody’s radar at present. From blockchain to AI, and from Open Banking to automation, it is obvious that the industry is undergoing a period of significant upheaval and recalibration, the full implications of which are yet to be fully understood. But despite this, the fundamentals of trade – getting the best deal under the best possible circumstances – remain the same as ever. Technology has a vital role to play in this.
According to Cook, “At PrimeRevenue, we have great solutions and proposition teams that are constantly improving our technology using automation and AI, as well as newer concepts like blockchain. We’re close to a couple of companies that are working in this space and we are certainly plugged into the direction of travel. A lot of these things, specifically blockchain, are still in proof-of-concept stage. It doesn’t make them any less interesting or valid – but while everyone’s out there innovating, someone also needs to be serving the market.”
We have great solutions and proposition teams that are constantly improving our technology using automation and AI, as well as newer concepts like blockchain
While he agrees that new technology will continue to have an impact on the financial supply chain, Buchanan believes that the fundamentals of price and convenience are still the factors that make SCF solutions so attractive to suppliers. “
“At Asahi we had a centralised procurement team, and then we had four or five different regional solutions, which ultimately caused confusion. All the platforms were slightly different depending on the region, and our central team didn’t sometimes fully understand the small differences and risks in different countries. Now with PrimeRevenue, we have a single platform. That makes life easier. And then as we expand into various countries, we can just plug in the relevant bank with the best priced currencies for that region.
“For us, it’s always about the suppliers. We’ve got to make sure they’re happy. Otherwise, it could work seamlessly with all our solutions but if it doesn’t work for the suppliers, you won’t get a single person onboarding.”
On the issue of why some companies may still be reluctant to explore SCF options in order to meet the needs of the future, Cook cites “inertia” as the main reason. “There’s no logical reason why they shouldn’t” he says. “It’s a very powerful tool for the suppliers and the buyers, and a very powerful means of mitigating risk, particularly risk in the supply chain. But I think there’s a need for growing education around it – an acceptance that this is a really valuable tool that benefits all parties.”
To listen to the webinar, please click here. To find out more about how SCF can work for your business, visit primerevenue.com