Banking News

Supply Chain Finance suffering damaging identity crisis

(25 November 2019 - United Kingdom) At the ICC’s Trade and Supply Chain Finance in London earlier this month it was asked whether the trade finance industry will still be discussing what supply chain finance (SCF) by definition actually means in the same sense in a decade’s time. Even more interestingly, will it still exist as a concept?

Many key stakeholders do not expect SCF to be rebranded in the foreseeable future on an industry level, let alone by different bank and non-bank demarcations that feed into the SCF category. How important is the establishment of a strict definition for SCF? For CFOs and corporate treasurers managing their supply chain financing risks the term SCF may cease to exists by the year 2030. So should the concept undergo a rebrand? SCF has always struggled with its identity, primarily referring to a series of financing processes along the supply chain whose specific terms were defined by the ICC in 2016.

Reverse factoring has elicited significant concern in recent years as highlighted by a recent Moody’s report that asserts that reverse factoring’s popularity comes with high but hidden risks, few corporates reveal their use of it, and both corporate users and investors may not be able to see their exposure in the absence of disclosure. The recent well publicised defaults of Carillion and Abengoa are cited as key examples of where SCF may have weakened the companies’ liquidity, and contributed to their eventual wind up, not to mention the devastating impact on their suppliers down the line.

According to East & Partners latest Australian Trade Finance research based on direct interviews with 1,891 importers and exporters, when asked “What in your view does Supply Chain Finance refer to?”, the majority felt SCF explicitly denoted Receivables Finance, rating ahead of Supplier Finance / Supplier Payment Terms and Working Capital Finance. Interestingly variance was relatively limited by business size with the exception of the institutional segment who fell out of step with the middle market and SMEs. Distribution / Network Financing was independently nominated as a key factor however it is important to note one in ten SMEs were unsure what SCF entails, were unaware of the product or did not understand it whatsoever. Relatively few CFOs and corporate treasurers associated the term SCF with Factoring / Reverse Factoring or Payables Finance.

“I hope SCF is not rebranded. I try and encourage companies to think about understanding what the cost of funding is in their supply chain and how that's impacting the unit cost of what they're buying from their suppliers and how, in a more transparent world, and a fairer world, in terms of risk allocation and capital allocation across those supply chains, you can actually start to bring down the cost of production. While I've used the words supply chain or the words supply chain finance liberally in my explanation, personally, I hope that the current connotation of supply chain disappears and people start talking about ‘what's the cost of funding’, ‘what's the efficient cost of allocation of capital across ecosystems’, and ‘supplier ecosystems’” stated Barclays Managing Director, Global Head of Trade and Working Capital James Binns, who feels it will be all about cross border trade and working capital management.

“The evolution of credit models will lead to banks improving their product suites. Machine based learning is improving our ability to extend credit. That will enable us to offer cheaper credit, further down the supply chain over a period of time, by understanding the interaction between the buyer and seller” stated Michael Vrontamitis, Standard Chartered Head of Trade, Europe and Americas emphasising the transformative influence of changing technology.

“Part of the reason why we at the ICC put the standard SCF definitions out there was to draw a line between supply chain finance versus someone financing someone’s supply chain, which is still a loan, rather than rebranding the whole SCF term. SCF, including payables financing, has been included in the ICC Trade Register for the first time this year for the 2018 register and the products have proven to be no worse risk than trade business, and in some cases, better” stated ANZ Transaction Banking Managing Director Mark Evans who does not view there being a need for a rebrand of what SCF constitutes. Evans is keen to note how low risk payables financing is.

“There’s still a lack of understanding of trade, and there’s a grey area in open account, what documents do I have, short term sales, pricing liquidity properly, people need to know what’s going on and where SCF fits in. Some programmes are pure funding vehicles. I don’t think it’s time to rebrand, but ongoing efforts are needed to reflect the technology used and encourage banks and non-bank investors not to loosely use supply chain finance as a term – it’s more a need to educate rather than rebrand. Things have become too complicated in some people’s eyes and the brand ‘supply chain’ has been allowed to be diluted” Mr Evans added.

So what is the solution? “Thought leadership, making sure key messages get through and the opportunity to contribute to the communities in which we operate through values-based solutions. For instance, ANZ is exploring sustainable financing opportunities in supply chains through anchor clients that are financially sound to enable and reward risk-managed and compliant activities. Similarly, when done properly there can be real benefits for suppliers to work with their customers to ensure they mutually leverage their respective ‘buying’ power, ensuring the end- to-end costs of supply are managed as efficiently as possible. There is a misconception in some areas that this only results in additional fees or interest costs being incurred by SMEs who supply to larger companies but this is not the basis nor intent of the product and that needs to be better understood. We are working with industry participants and bodies such as ICC and BAFT to help get the message out there” commented Mr Evans.

“The question is if you rebrand SCF, would you change it? If you change the label from red to blue the flipside is still visibility of the underlying, regulators are asking banks to know where trade is coming from and going to, but they also need to know what’s under the bonnet and what’s going on. Don’t pretend. It doesn’t need rebranding but risks need to be understood better. You can’t abdicate responsibility as people got burnt, for instance, with Carillion, but you need to share information more effectively” a Japanese senior banker highlighted.