Supply chain finance (SCF) is not only improving working capital and supplier relationships, but also helping businesses overcome supply chain challenges predominantly caused by the coronavirus pandemic. And it’s boosting the global economy in these challenging times, by allowing businesses to expand their presence in new markets and foster new trading relationships.
The stats certainly show the huge potential of supply chain finance. According to research from Coalition, international SCF income increased by 4% in 2020. This was exacerbated by strong growth across markets such as the US and Europe. Additionally, global SCF revenues rose at the onset of the pandemic in Q1 2020.
A huge market opportunity
SCF is a big area of business for banks and other major financial institutions, but the way they offer this service is rapidly changing. Increasingly, they’re losing market share to fintech firms and other lenders with more innovative SCF models.
For example, dynamic discounting services, P2P (peer-to-peer) lending websites and challenger banks are developing technological solutions that improve the efficiency of payables, receivables and other types of cash transactions. And as investors and consumers continue to back these innovations, the supply chain finance market will evolve significantly in the coming years.
Businesses are also increasingly looking for financial solutions to help their supply chains recover from the adverse effects of the coronavirus pandemic. In particular, there’s an onus on fintech companies to meet their ESG responsibilities by supporting firms that have experienced supply chain disruption over the past year.
Traditional banks and financial institutions are being forced to digitally transform and modernize their supply chain finance offerings. Although that requires significant time and investment, it’s a unique opportunity for banks to capitalize on the gains of an exciting new industry.
Due to this changing market, traditional banks and financial institutions – many of which still rely heavily on legacy technologies – are being forced to digitally transform and modernize their supply chain finance offerings. Although that requires significant time and investment, it’s a unique opportunity for banks to capitalize on the gains of an exciting new industry.
Ultimately, the rise of new innovations in the supply chain finance market provides benefits for both businesses and suppliers. However, they also meet the aims of the exchequer, procurement industry and commercial department. Moreover, banks will undoubtedly steal more market share from fintech companies by digitizing existing supply chain finance offerings.
NTT DATA notes that the digitalization of the supply chain finance process is a trend with increasing weight in the priorities of the banks and corporates. Therefore, we are collaborating with multiple entities to implement and modernize their systems to offer a more digitized supply chain finance service.
Challenges to overcome
While technology-driven supply chain finance presents major opportunities for buyers, suppliers and the entire financial services industry, it’s not without challenges. Firstly, credit reporting companies often view supply chain finance as a risky area. And this perception has only grown due to the economic uncertainties of the pandemic.
In a previous report, S&P Global Ratings branded it as a “sleeping risk”. It says poor disclosures can not only negatively affect a firm’s underlying health, but also cause capital to be mispriced or misallocated.
The risks associated with SCF are highlighted by high-profile events like the demise of Greensill Capital. In Greensill’s case, it has appeared that financing was provided to borrowers on hypothetical future invoices and from customers that did not yet exist. This situation could damage investors’ confidence in SCF and result in additional regulatory inspections.
However, this case has shown the importance of investors having proper control of their investments. The banking sector has set standards and principles that should help increase the understanding of SCF as a product while protecting against these practices. Moreover, banks need to continue creating more robust risk controls frameworks to prevent harmful practices from happening again in the future.
There are also adoption challenges. Like any other novel innovation, SCF platforms can be a new and daunting area for organizations used to legacy systems. Companies adopting these technologies will need to train their users on how to use and get the most out of them.
This can take time and financial investment. NTT DATA is helping companies implement product solutions, apply platforms and solutions to improve risk control models, improve pricing (including ESG related models), and integrate with legacy systems seamlessly.
New innovations
Regardless of the positives and negatives of SCF technology, what’s certain is that the market is quickly transforming as organizations look for more agile and intuitive approaches to supply chain finance. Because of this, many different SCF innovations are coming to fruition.
What’s certain is that the market is quickly transforming as organizations look for more agile and intuitive approaches to supply chain finance. Because of this, many different innovations are coming to fruition.
For example, NTT DATA has developed an SCF solution that brings together banks, buyers, suppliers and other possible funders on a single platform. Based on the SAP Ariba Network, it provides suppliers with an invoice financing service in their own SAP Ariba screens. The platform aims to digitize and simplify supply chain processes end-to-end, while enhancing working capital management and risk vision.
NTT DATA’s platform equips banks with an additional invoice channel and reduces their front-end development costs. It also gives buyers the capability to control all their financing programs on a single platform. And suppliers can request discounts from different programs and banks without having to log into several banking platforms.
Unlike traditional supply chain finance services, NTT DATA’s platform works across multiple currencies and geographic locations. So, regardless of where buyers and lenders are based across the world, it offers the same user experience for every user. Moreover, it allows banks, buyers, suppliers and any other actor to gain a 360-degree view of supplier onboarding information, payments, all the KYC (Know Your Customer) supplier requirements and other crucial data. They can also trace payments and track relevant KPIs using comprehensive dashboards.
Overall, new supply chain finance technologies offer enormous value for banks, buyers and suppliers. They can enable banks to enhance the experience of existing SCF services, buyers to improve liquidity management and partner relationships, and suppliers to simulate and request finance quickly and easily.
