23 May 2017

As the ICC Academy facilitated discussions of opportunities and challenges facing the supply chain finance community at its 2017 summit, participants agreed that access to data and transaction transparency are key to growing this important area of trade finance.

Supply Chain Finance (SCF) – defined here broadly, and in line with the master definition, as “the use of financing and risk mitigation practises to optimise the management of the working capital and liquidity invested in supply chain processes” – mattersi

For Deutsche Bank SCF has become the fastest growing business line within the trade finance product family – with payables finance (also commonly referred to as reverse factoring and approved payables finance) displaying revenue growth rates of 20-30% in recent yearsii

However, the market is yet to capitalise on its full potential. A 2015 McKinsey report indicated that while the SCF market has a potential revenue pool of US$20bn, only a tenth of that potential is currently being captured globally. Moreover, the progress made by banks in this market has not been without its challenges.

So how can SCF maximise its potential moving forwards? Bringing together leading professionals from across the banking, corporate and fintech space, the ICC Banking Commission’s 6th Supply Chain Finance Summit (hosted by the ICC Academy in London on 3-4 May 2017) pinpointed the need for greater collaboration, more effective utilisation of technology and data, and the creation of truly “end-to-end solutions”.

Starting earlier – addressing supplier’s needs pre-shipment

Opening the conference, Deutsche Bank’s Daniel Schmand, Global Head of Trade Finance, spoke frankly about the lack of SCF availability at the early stages of trade transactions: “On the payables financing side, we, as banks, are now well-positioned to provide post-acceptance solutions across multiple jurisdictions and geographies. However, there is a whole world of financing requirements that start pre-shipment – including loans for the sourcing, manufacturing or conversion of raw materials or semi-finished goods into finished goods. We are not yet addressing these requirements.”

A panel discussion on industry definitions and standards development on day 1 focused on the Standard Definitions of SCF that were released on the ICC Academy summit last year in Singapore.  To establish the concept further in the market, the authors of the definitions have released a public website (http://supplychainfinanceforum.org/) where the SCF terminology is explained and the main document can be downloaded. The site also lists subject matter experts for each SCF Technique, who can be approached for questions or a debate. The panel agreed this website is an important step towards the further promotion and adoption of the SCF terminology in the industry, as it will facilitate the standardisation of this increasingly important business.

Building on Schmand’s point during the second day of the summit, Deutsche Bank’s Benjamin Madjar, Director Working Capital, emphasised the need for truly “end-to-end trade solutions”. In other words, successful SCF is a programme, not a product. He explained, “Providers must ensure they fully understand their clients’ working capital needs – both now, and in three years’ time – and tailor financial solutions accordingly.”

Taking SCF into the SME space

Banks and the new emerging generation of other platform providers have also generally focused on the largest corporates for SCF programmes (both in terms of the buyers and suppliers). But can SCF’s offerings be extended to SMEs?

There are valid reasons why banks could end up focusing on larger corporates. First, banks need to achieve a certain return on their capital. And with the operational costs of setting up a facility proving pretty much the same whether a facility limit is £200,000 or £4.5m – this opportunity cost needs to be taken into consideration.

Furthermore, if SMEs are still using paper invoices, or if they update their accounting data only once a month, banks won’t have sufficient visibility to get comfortable with the client’s finances and effectively assess the risks.
 
However, SCF programmes should not be seen as wholly beyond the reach of SMEs. As Deutsche Bank’s Madjar argued, “Ten years ago, SCF payables programmes were exclusively for the largest corporates – but now, in France, we have the example of a €13m company using a payable financing solution.”

He added, “What is important – SME or not – is access to the data. Ultimately it’s all about data, forecasts, and being able to monitor what is going on in a company. If a bank has sufficient visibility and clarity over a company’s finances, then they should be able to effectively manage risks.”

Stimulating increased non-bank investment in SCF

In the post-Basel world, where capital is tight for banks, non-bank investment could prove a useful source of extra liquidity for the SCF market (particularly to improve access for SMEs).  In the keynote address, Schmand emphasised the need to “develop a tradeable asset class for SCF”; one that is well-understood and accepted by investors. 
But this is not an easy feat. It requires the support of all players in the field – not just the efforts of one bank or institution.

After all, as the event’s chair, John Bugeja, Managing Director, Trade Advisory, put it, “Investors like certainty not conditionality. Without collaboration, how can you truly manage conditionality in ways investors can analyse, evaluate, and price effectively?”

Digitalising SCF

Today, supply chain and procurement processes  still consist of a fair amount of manual and even paper-based processes, as well as the services of numerous intermediaries to provide trust and security – all of which come at a cost for providers of finance.

Should digitalisation be the key priority moving forwards?

As Schmand noted, there is a lot of “buzz” and “hype” around digitalisation in the trade space, but the actual leap hasn’t quite happened yet.

“If you sit down with a fintech, they will tell you everything is in the cloud – so why do we still invest in paper?” he asked.
 
Glenn Kocher, Managing Director at Liquid X, an electronic marketplace for trade finance assets, observed that technology is just an enabler. “Unless you figure out what the end goal is, it isn’t going to move the market”. 

That isn’t to say digital doesn’t have potential in this space – but it is critical for banks (and third party providers) to take a view across the end-to-end transaction cycle. The overall message to banks was that they should not only consider the improvements technology can bring to their own business, but also what benefits and efficiencies it will deliver to their clients, and their clients’ suppliers and customers.

Blockchain and distributed ledger could certainly add enormous value to the SCF space. A blockchain-enabled system would allow all members of a supply chain – the various sellers, buyers, shippers, insurers, inspectors, banks and even investors – to share the same ledger, all but eliminating the need to reconcile inconsistent records. Substituting large numbers of proprietary systems with one open-source, relatively simple protocol would also dramatically drive down infrastructure costs, while making the system accessible to a far greater number of companies (thereby making it easier to eliminate paper-based processes).

However, there is some way to go before a blockchain-enabled SCF solution becomes something that can actually be used.

“Our biggest remaining challenge when it comes to blockchain,” noted Schmand, “is the lack of regulation guarding the use of this new technology.” Bugeja expanded, “We need protocols to enable parties to participate across a range of jurisdictions –the whole world needs to collaborate to a degree.”

Increased collaboration

The key takeaway from this particular gathering of the SCF cognoscenti was the need for greater collaboration to overcome the barriers restricting the growth of the SCF market.

“We need to strengthen partnerships, particularly between banks and the fintech community,” emphasised Chris Southworth, Secretary General, ICC United Kingdom.

Those partnerships are happening all around the world and the relationship between banks, credit insurers, supranationals, development banks, utilities (such as SWIFT), vendors (that look to banks for liquidity) and fintechs is an evolving ecosystem that will benefit everyone. One example of collaboration is Deutsche Bank’s investment in TrustBills (announced on 4 April 2017), an electronic true sale marketplace for national and international trade receivables – thereby facilitating further liquidity into global supply chains.

The ICC Academy hosted its 6th Supply Chain Finance (SCF) Summit on 3-4 May in London

SCF Canary Wharf

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iSee the ICC’s Standard Definitions for Techniques in Supply Chain Finance (published March 2016) here
iiA comment made by the bank’s Global Head of Trade Finance Daniel Schmand at the 2017 ICC Supply Chain Finance Summit

Benjamin Madjar

Director Working Capital, Deutsche Bank

Benjamin Madjar

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