Corporate TreasuryFinancial Supply ChainSupply Chain FinanceUnlocking value: maximising the potential of supply chain finance

Unlocking value: maximising the potential of supply chain finance

The supply chain finance market is continuing its remarkable growth path, with solutions now increasingly available for smaller enterprises, writes Commerzbank’s Alexander Pawellek.

By some estimates, global supply chain finance (SCF) volumes reached US$447.8 billion in 2016 – marking a 36% increase from the previous year. Indeed, some estimates claim a year-on-year increase of up to 40%, although the rapid expansion is likely to level out at around 10% from 2020.

Precise market data is scarce but, undeniably, SCF’s growth trajectory seems remarkable. Also driving the product’s growth is that SCF solutions are becoming more accessible for smaller enterprises – which are not only benefitting from additional financing options but also from the procedural benefits that SCF can offer.

The opportunity, therefore, lies in ensuring that all players in the supply chain are aware of SCF’s possible benefits – and making strides towards making the product as accessible to smaller corporates as possible. Of course, one major benefit for the smaller corporate is that SCF utilises a company’s most under-valued asset: i.e. what it actually produces on a contracted basis for its multinational clients.

SCF: a route to inclusion?

Supply chain finance is defined as the use of financing and risk mitigation practices and techniques to optimise the management of working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform. And, so far, it is multinational companies and their immediate supplier base that have benefited most from SCF programmes, given their more plentiful resources, project capacities as well as their more extensive knowledge of different financing techniques.

In fact, big enterprises have led the way in adopting programmes on both the payables and receivables side of SCF. Yet the market is now expanding beyond the multinationals to smaller suppliers, providing midcaps and even SMEs with the opportunity to access working capital that would otherwise be closed to them.

Some credit for this broadening awareness goes to the International Chamber of Commerce (ICC), which released the Standard Definitions for Techniques of Supply Chain Finance (issued by the Global Supply Chain Finance Forum – GSCFF) in 2016. GSCFF helped drive understanding of SCF’s various sub-products and offerings by digging into the details of how these products work. The constituent members of the Forum have been involved in deepening the market understanding – helping SCF products become truly global as well as more attractive to suppliers that are likely to take advantage of them the most.

The role of financial institutions

Yet it is the banks and other financial institutions (FIs) that can make the most progress when it comes to broadening the appeal of SCF in order to include SMEs. One material shift in this respect is the rise of multi-bank solutions.

Previously, most financial institutions offered their own SCF offering, the so-called “single-bank solutions”, often delivered via a proprietary platform. While holding some merit – not least their ability to leverage existing relationships with a bank – single-bank solutions are losing ground to multi-bank platforms, mainly due to increased activity by fintechs in this space.

As the name suggests multi-bank platforms give a supply chain’s participants access to financing from more than one institution, thereby enabling funding for larger amounts as well as facilitating risk diversification and giving the client access to a broader range of expertise.

Yet some financial institutions look at multi-bank solutions with caution because this opens their client roster to alternative providers. This is not Commerzbank’s view. Rather than shying away from the changes that are already sweeping the SCF market, Commerzbank believes that banks should look at the benefits of such platforms, as they are granted a tremendous flexibility by embracing the power of multi-bank capabilities. For instance, if a buyer requires a higher financing volume than the bank has available within a particular credit limit, other banks can contribute to the capital.

Partnerships between banks and fintechs are also useful in this respect. They can unlock SCF by making the market more inclusive for smaller enterprises. Indeed, many fintechs are producing sleek and simple working capital solutions that are able to appeal to a wider group of companies – including start-ups. In return, banks provide a unique wealth of products as well as legal and compliance capabilities – allowing each party to bring complementary services to the overall SCF offering.

Delivering SCF programmes

This is a sea-change in the delivery of working capital financing for companies, a change that Commerzbank is keen to embrace. Since 2017, the bank has been partnering with PrimeRevenue – a leading fintech provider specialising in working capital solutions – to deliver SCF programmes to our clients. In addition, as a founding member of Marco Polo, Commerzbank is developing jointly with the R3 Trade Finance Blockchain consortium, an irrevocable payment obligation product.

And, in this respect, Commerzbank is already making significant breakthroughs. Earlier this year, Commerzbank and LBBW completed a pilot project to digitally transfer data for two commercial transactions between KSB SE and Voith using the R3-powered Corda platform. With the trade data mapped on the blockchain platform, the matching of payment data triggered an irrevocable payment obligation.

For SCF, wider application of this concept would mean improved transparency across the supply chain, which helps eliminate the tensions between buyers and sellers that can arise when the payment term’s end is approaching, since all payment and shipment status information would be visible on a shared platform for all involved parties to see. Much of the technology is in place to make this happen, yet it rests on the industry to broaden the application of this concept to SCF.

Greater buy-in among larger companies will lead to multi-bank platforms’ expansion particularly in terms of building the market’s trust and reducing fixed costs to the supplier. As a result, smaller enterprises, which have hitherto been more reluctant to engage, should be able to embrace SCF programmes.

The expansion of the SCF market is certainly a trend, but one unlikely to abate any time soon given its clear mutual benefits. SCF helps the buyer to generate working capital optimization potential in its supply chain. It supports the supplier, too, since invoices are paid faster – thus optimising cash flow. And there are clear advantages for financial institutions since combining SCF with trusted technology can increase financial inclusion for smaller enterprises.

By Alexander Pawellek, Head of Product Management, Supply Chain Finance & Innovation, Commerzbank

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