The "F" in SCF – The Evolution of Funding Solutions in Supply Chain Finance

April 15, 2019

What Started Simple Soon Became Complex

In the early days it was quite simple: only a few banks were offering Supply Chain Finance (also known as Reverse Factoring or Confirming). As a buyer you were pitched by one, two or three banks and chose the bank with the closest relationship and the best regional fit. In some cases, buyers awarded Supply Chain Finance (SCF) mandates to more than one bank by either assigning regions per bank or dividing the suppliers among their banks. Specifics of procurement, a decentralized working capital management and local decision making resulted for some large buyer groups in multiple Supply Chain Finance programs being operated bilaterally with multiple banking partners. Knowing the complexities of running just one program imagine what it takes in terms of IT, legal, accounting, treasury, finance and controlling effort and resources to implement, coordinate and maintain multiple Supply Chain Finance programs.

Global SCF Powerhouses – Risk of Credit Constraints

The large investment of several global banks to become Supply Chain Finance powerhouses and to offer Supply Chain Finance across the globe has to some extent helped to consolidate the resources and effort of the buyers. On the other side it has also introduced a severe dependency of a buyer and its supplier base on just one bank. The global Supply Chain Finance bank would typically provide the technical, legal and accounting solution for Supply Chain Finance, onboard the suppliers and be the single source of funding for them. In order to manage its credit exposure to the buyer, the bank would typically engage in syndicating out the Supply Chain Finance risks to other banks. Even if it could be taken for granted that the global Supply Chain Finance bank would never abandon this line of business (which in my view is a bold assumption to make as a CFO) the corporate buyers (and hence its suppliers) remain at risk of credit constraints and are not able to manage the exposure to the financing parties.

Platforms Reduce Dependencies

Nowadays, bank independent Supply Chain Finance platform providers enable the corporate buyers to reduce the above-mentioned dependencies. They set up a global program without making any compromises on either of the relevant building blocks (IT, legal, onboarding etc.). The new technical solutions achieve a deep ERP integration without requiring a lengthy and costly implementation project. This allows for full process automation for the buyer and warrants a quick implementation in any region and for any procurement entity. True multi-bank platforms allow the buyers to select the best group of banks offering stable and competitively priced funding to its suppliers. Unlike in a solution with a fronting bank selling down participations to other banks, the funding partners onboarded to an independent Supply Chain Finance platform are fully visible to the buyer, interact with and engage in cross-selling opportunities directly with the buyer and are part of the buyer’s wallet-sharing strategy. For global Supply Chain Finance programs with multiple currencies the buyer has full optionality to select the best partners without falling prey to any one credit institution. For large programs some providers offer the ability to include non-bank investors as funders by using a securitization vehicle to purchase the approved receivables and issue notes to banks and non-bank investors. This approach can further diversify the funding of an Supply Chain Finance program, increase the funding capacity and improve the pricing for suppliers. Lastly, working with a bank independent platform can enable the buyer to run a dynamic discounting program for parts of its supply chain while offering the multi-bank financing to its other suppliers.