According to the World Supply Chain Finance Report 2022, supply chain finance fund volumes showed a significant increase in 2021 over 2020 as the global volume rose by 38% to $1.8bn and funds in use by 41% to $713bn. Banks traditionally dominated the industry; however, recently, fintech companies that provide platforms and software-based services to support supply chain finance, also called SCF, operations have entered the market.
Large corporations such as Apple, Colgate, Dell, P&G, Kellogg’s, and Siemens use fintech companies to tap previously inaccessible capital in their supply chains. This will help finance growth in new and emerging markets, develop and support new products, strengthen their financial positions, and increase the capital available to the whole supplier ecosystem. Plug and Play identified some of the trends and innovations in the space to understand how the ecosystem has evolved over time.
Leading trends around supply chain finance
Lengthened supply chains through globalization have increased the number of suppliers and boosted the number of transactions. In addition, the development of direct sourcing has made supply chains more complex and created a need for integrated solutions.
Cost of capital
The cost of capital in the wake of the credit crunch created an incentive to explore SCF programs as the spread between investment-grade and non-investment-grade rates widened. One of the main advantages of SCF programs is that they enable non-investment-grade suppliers to benefit from investment-grade financing rates.
Change in regulation
Regulatory changes have meant that SCF has been favored over traditional trade. The Basel II Capital Accord heralded harsher treatment for trade finance overall, with a minimum duration of one year for loans and focused on counterparty risk rather than performance risk. By reducing overall counterparty risk, SCF represents a lighter capital strategy than other traditional instruments.
Supply chain financing innovation trends
Different fintech waves have been disrupting supply chain finance throughout the procure-to-pay lifecycle. These are mainly:
- Wave 1: e-invoicing platforms
- Wave 2: procure-to-pay systems
- Wave 3: trade finance platforms
Wave 1: e-invoicing platforms
Like in many B2B verticals, SCF's first wave of innovation was in digitizing paper trials, specifically invoices, for better productivity. Such e-invoicing solutions specialize in a specific part of the procure-to-pay cycle. Tradeshift (2010, US & Denmark, $773m) and NvoicePay (2009, US, Acquired) are good examples of cloud-based electronic invoicing solutions for businesses that progressively expanded their value proposition towards invoice approval and invoice financing, with the latter being acquired by FleetCor Technologies.
Wave 2: procure-to-pay systems
Some fintech firms have leveraged their unique positions as payment data aggregators to reach beyond financing into supply-chain services such as procurement, supplier management, and inventory management. Amongst the leading fintech one-stop-shop solutions, Taulia (US, 2009, $220m) incorporates purchasing management and accounts payable functionality. It provides an integrated solution that supports a process that begins with a purchase requisition and terminates with payment to suppliers. These integrated systems enable buying firms to significantly reduce the burden of administering these functions because they close the loop between procurement and accounts payable and provide a structure that streamlines these processes. For suppliers, joining the platforms can be nearly as simple as adding an app to a smartphone.
Although end-to-end general-purpose supply chain solutions or ‘single point of access’ represent the next step in product innovation for fintech companies, such status has primarily been dominated by early movers, including Vayana Network, Prime Revenue, and C2FO, which were all founded pre-2010. However, Plug and Play keeps track of pre-scale ups leveraging new technologies to grow in this space.
Wave 3: trade finance platforms
Trade finance platforms or ‘pure SCF’ include fintech companies that manage invoice approval and financing and enable dynamic discounting for buyers. For example, when a supplier elects to receive payment for a $10,000 invoice in 15 days through the fintech and the buyer submits payment to the fintech 90 days after it approves the supplier invoice and the buyer’s cost of capital is 2%, the discount that the supplier gives to the fintech is only $41 (i.e., the supplier gets $9,959 of the $10,000). The buying firm benefits through more extended payables, which positively impact its working capital.
In many cases, companies such as Procter & Gamble and Kellogg’s have extended their accounts payable through supply-chain financing relationships to 120 days. Fintech firms typically act like brokers. Their relationships with a network of different banks or financial institutions allow them to obtain the best funding solutions for their customers. By analogy, this is similar to how third-party logistics companies (3PLs) arrange transportation. It used to be that a firm would have all of its transportation contracted with one trucking company. But a 3PL can choose a transport company in much the same way as a brokerage.
Both SaaS and marketplaces have been developed for financing. Examples of SaaS models include Incomlend (2016, Singapore, $21m), with whom suppliers can raise invoices via the platform. Suppliers can also sell export invoices. The loan term is up to 90 days. It also enables suppliers to manage the statistics of sold invoices. India is one of the most dynamic markets with solutions like Kredx (2015, India, $33m) offering an online invoice discounting marketplace for SME lending. The platform connects enterprises looking for financing with investors looking to earn higher short-term yields with lesser risk. The market has also seen increased adoption of AI solutions with startups like Previse (2016, UK, $22m) that use big data and AI algorithms to provide a score of a corporate buyer’s likelihood to pay the invoice.
Next steps for creating supply chain finance solutions
Financial institutions are increasingly partnering with fintech companies to compete in this untapped market opportunity. New SCF operations have been launched by traditional financial service firms such as CitiGroup, HSBC, BNP Paribas, and Deutsche Bank. CitiGroup launched Citi Supplier Finance, an easy-to-use web-based solution designed to help businesses realize an uninterrupted supply flow while also supporting the working capital needs of their suppliers. HSBC replicated the SaaS companies ‘Wave 2’ model into its processes and Citi was named World's Best Supply Chain Finance Bank 2022 through its novel solutions.