Supply chain finance goes mainstream
Publication date: 9 March 2012
Author: Rebecca Brace, Columnist, FX-MM
Tagged with: Aite Group, Anil Stocker, Axel Pierron, Celent, Demica, Enrico Camerinelli, MarketInvoice, Phillip Kerle, Rebecca Brace, Supply Chain Finance (SCF)
Having made the leap from niche to mainstream, supply chain finance is continuing to evolve, both geographically and technologically. Rebecca Brace talks to a number of industry experts about this evolution and considers the future direction of supply chain finance.
Boosted by companies’ focus on liquidity and working capital since 2008, supply chain finance (SCF) continues to gain ground among global corporations. In 2010 supply chain finance was used for 8% of global trade, according to a report by Celent published last year – and by 2015, that figure is predicted to grow to 15%.
According to the Celent report, that growth will be driven in no small part by the growing popularity of supply chain finance in Asia (see Figure 1). “We certainly believe that Asia and particularly South East Asian countries represent the biggest opportunities for SCF programmes growth in 2012,” comments Axel Pierron, SVP, Celent. “This is for two main reasons: first, these countries are integrated into a regional logistic/production chain. Secondly, it is the region where SMEs have the most difficulty in accessing financing, despite strong economic growth.”
This is backed up by research published by Demica in October last year. The report, based on responses from the top 40 banks in Europe, found that respondents predicted that supply chain finance would grow at a rate of between 20% and 25% in emerging markets, including China and India. Meanwhile, respondents set the rate of growth in Europe and the US in the wider range of 10% – 30%.
Phillip Kerle, CEO of Demica, points out that while supply chain finance in Asia remains a hot topic, awareness of the benefits of supply chain finance is growing in other parts of the world. “At a recent conference I attended in Dubai, there was a lot of discussion about supply chain finance in Africa,” he says. “Small suppliers are beginning to see this as a huge opportunity in a number of different African juris – dictions – not just in South Africa, where there is already some supply chain finance activity, but also in places like Kenya and Nigeria.”
Meanwhile, the Eurozone debt crisis has con – tributed to a growing awareness of the potential benefits of supply chain finance. As it continues to become more mainstream, corporations and banks are becoming increasingly well informed about the topic, says Enrico Camerinelli, Senior Analyst at Aite Group. However, that doesn’t mean that the terminology around supply chain finance is always consistent. “There is still a big gap between what different parties mean by supply chain finance,” comments Camerinelli. “That is still the major issue right now. There are a number of associations which have come up with their own glossaries – but unfortunately these overlap and are sometimes inconsistent.”
One initiative which may go some way towards providing clarity is the Supply Chain Working Group (SCWG), set up at the end of 2011 by the European Banking Association (EBA). Building on the work done by the EBA’s E-Invoicing Working Group, the objectives of the SCWG include making recommendations re – garding supply chain finance terminology and exploring the link between supply chain finance and e-invoicing.
How companies use SCF
The early arguments in favour of supply chain finance have proved to be rather prescient. Five years ago, proponents of supply chain finance were arguing that supply chain finance offered companies a way of extending DPO without having a negative impact on their suppliers, which could be put at risk if their large customers squeezed them too hard. Market conditions since the crisis of 2008 have underlined this argument. Today, supply chain finance is widely recognised as a technique which can improve the corporate customer’s working capital position while enabling suppliers to get paid sooner.
The ongoing Eurozone crisis has cemented this focus further. As Pierron points out, “Direct lending from banks to corporates has been decreasing due to the financial crisis. Hence large corporates are realising that they need to step in in order to ensure the smooth efficiency of their logistic chain and leverage their creditworthiness to facilitate access to financing to their suppliers.” Meanwhile, self-funded supply chain finance programmes offer cash-rich companies a means of putting their money to good use at a time when interest rates continue to be low.
Pierron says that an interesting development in the past year has been the increased emergence of supply chain finance programmes at a regional level. “Previously, most SCF programmes were mainly conducted/implemented on a national basis,” says Pierron. “Regarding the roll out of SCF programmes outside national markets, what is interesting here is that it’s becoming a way to avoid the expensive trade finance products or to trade on an open account basis, which could be risky.” Additional geographies lead to additional complexities, and Kerle points out that when they are implemented at a global level, there is a growing trend for supply chain finance programmes to be set up with different banks funding the programme in different jurisdictions.
SCF for SMEs
It is clear that the use of supply chain finance programmes is continuing to grow – but which suppliers are benefiting from these programmes? On the one hand, small and medium sized enterprises (SMEs) may stand to gain the most from access to cheaper financing. SMEs are more likely to struggle to get bank funding, as evidenced by recent figures indicating that lending to SMEs in the UK under Project Merlin fell £1 billion short of the £76 billion target for 2011, while the target for all companies was exceeded by around £25 billion. On the other hand, in reality companies operating supply chain finance programmes are more likely to include their biggest suppliers in the programme because this strategy is more likely to lead to success.
“Often the SCF programmes that haven’t worked are the ones that have adopted a scattergun approach, trying to bring every supplier on board,” says Kerle. “The 80-20 rule applies here – in many cases, companies have tens of thousands of suppliers and it makes sense to identify the ones that will have the biggest impact and focus on bringing those ones on board.”
In most cases, these will be the largest suppliers, although Kerle observes that some companies adopt a more inclusive approach. “I’ve seen some transactions where the largest suppliers have been targeted first, on the 80-20 principle. Then the company has sent an email to the SMEs, outlining how they can join the programme without a lot of handholding. In these cases they will get some take up from the SMEs – but probably not a lot.”
Pierron points out that the extent to which SMEs have access to SCF varies significantly by industry. “Some industries, such as retail, have embraced SCF programmes in a more systematic way than other segments,” says Pierron. “However, we believe that governments across Europe should consider creating state-owned SCF programmes/platforms to fulfil the financing needs of certain segments of the market.”
Beyond bank-run SCF programmes, more recent developments have seen SCF type programmes emerging which are more focused on financing receivables for SMEs. The ‘eBay for receivables’ model, which allows companies to auction their invoices to a range of financiers, has also been making headway. The Receivables Exchange, launched in 2008, announced in January that it has funded over $1 billion to SMEs in the US. MarketInvoice, a more recent newcomer in the UK, has advanced over £6 million to UK businesses since it opened for business in January 2011.
As well as opening up receivables finance to SMEs, the auctioning receivables model also introduces different funding sources into the equation. “Private sector innovators such as MarketInvoice facilitate new sources of funding from family offices, asset managers and hedge funds to be channelled into the SME financing market,” comments Anil Stocker, Director and Co-founder of MarketInvoice.#
Future developments
Supply chain finance has come a long way in the last five years. This is a solution which was ideally placed to help companies weather some of the challenges they have faced since 2008. Having successfully made the leap from niche to mainstream, supply chain finance is continuing to evolve – both geographically and technologically. On the technology side, Kerle says that companies are increasingly looking for solutions which can fulfil all of their supply chain finance needs. “People are looking for one platform that can provide the full range of invoice based financing opportunities,” he says. “They want something that can do supply chain finance, invoice discounting, trade receivables securitisation – so the one stop shop approach.”
Camerinelli argues that the inclusion of supply chain finance functionality in treasury management systems (TMSs) is an area to watch. “Software vendors that operate on the treasury management side are starting to look at supply chain finance – mainly reverse factoring or invoice-based finance – as additional functionalities that they add to their main treasury and cash management offering.” Camerinelli predicts that TMS providers will be offering such functionalities within the next three years.
Meanwhile non-bank providers of supply chain finance and related services are continuing to increase in numbers. But despite these developments, supply chain finance is still likely to be dominated by bank programmes for the foreseeable future. The Celent report states: “we estimate that by 2015 bank-driven platforms will still represent over 50% of the SCF schemes implemented, while third party open platforms will account for just above 30% of the market.”
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