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FINTECH & SUPPLY CHAIN FINANCE

Banks raise their game as demand for supply chain finance gathers pace

Demand for supply chain finance is growing, with banks providing increasingly digitalized solutions.

Why you should read this article


Supply chain finance is growing in popularity – offering a win-win scenario for both buyers and suppliers. Banks are now offering fully digital solutions that maximise the benefits supply chain finance programmes can bring.

Impelled by persistently low interest rates, corporates are increasingly exploring the possibilities of supply chain finance – and banks are stepping up their services to match the demand. Particular emphasis is being placed on improving the supplier onboarding process and implementing end-to-end digitalization, according to Adeline De Metz, Global Co-Head of Trade Finance at UniCredit.

As low interest rates cut the cost of finance and large corporates place ever greater emphasis on inter-departmental alignment, supply chain finance is growing in popularity. Typically an initiative instigated by larger corporates with complex supply networks, we are now seeing a growing demand for supply chain finance projects from small and medium-sized enterprises (SMEs).

It’s a timely development, coming as banks are embarking on ambitious digitalization programmes, with trade finance – traditionally a paper-intensive discipline – high up the list of fields set for a revamp.

At the same time, banks are becoming increasingly aware that the path to effective digitalization is not one they need walk alone. From cautious beginnings, the relationship between banks and the host of technology specialists arriving in the market has evolved in a promising direction, with collaboration emerging as the dominant paradigm.

Benefits for all, but onboarding a common barrier

Certainly, supply chain finance has been one of the early beneficiaries of this collaborative trend. It is an advantageous technique for all involved, with buyers reinforcing their supply chain and even – in some variations – finding ways to utilise their idle cash and avoid negative rates. Suppliers meanwhile, gain access to liquidity at vastly improved rates, thanks to the strong credit profile of their larger buyer. Both parties also stand to improve key working capital metrics, such as Days Payables Outstanding (DPO) and Days Sales Outstanding (DSO).

Additional Information


Working Capital Management

Trade Purchase for Suppliers

Trade Purchase for Buyers

Bank Payment Obligations (BPO)

It is no coincidence that this increased interest in supply chain finance comes at a time when many corporates are looking to align priorities among different departments. Treasurers, keen to maximise DPO by extending payment terms, are now working to ensure their actions don’t clash with those in procurement, who are tasked with improving procurement costs while protecting suppliers.

Supply chain finance offers a neat resolution to this tension – enabling buyers to safeguard their suppliers by lending them their strong credit profile when financing approved invoices. This means the supplier locks in favourable rates and quick settlement, while the buyer can negotiate extended payment terms in return.

It is no surprise then, that supply chain finance is gathering momentum. Traditionally, practised predominantly by large investment-grade companies, we are seeing a growing number of smaller buyers establishing their own programmes – enabling their suppliers to tap a rich and cost-effective source of financing to help them cover production cycles or to increase their sales appetite thanks to the risk mitigation offered by the without recourse purchase.

A fresh approach to onboarding suppliers

Of course, even without the added incentives of internal alignment and low interest rates, supply chain finance has always been an attractive proposition. So why haven’t more programmes been set up? In part, this comes down to supplier onboarding, which has been a historically challenging aspect – often limiting supplier adoption and, as a consequence, the value of the undertaking.

Certainly, this is something that a number of clients have approached UniCredit for help with, and, in response, we have developed a strong model for improving the onboarding process. The first step is to abandon the widely used “one size fits all” model in favour of an approach that caters to the multifarious needs of different suppliers.

Beyond this, we take the time to ensure we fully understand these needs, including how and why they come about. Based on this, we recommend splitting suppliers into separate tranches according to their common needs and their strategic relevance for the buyers and tailoring the onboarding strategy for each tranche accordingly.

Video

UniCredit's Supply Chain Finance Platform

A short introduction.




New technology fostering collaboration

Technology, of course, also has a role to play in simplifying supplier onboarding processes. UniCredit has already invested considerably in supply chain finance technology – incorporating a proprietary supply chain finance platform into its trade finance portal to help ease exactly this kind of issue. In addition, the platform reduces processing time and costs for invoice discounting, while offering a clear picture of the overall process for both buyers and suppliers.

Increasingly, however, we are also looking beyond in-house technology to new ventures – often in partnership with key industry players such as fintechs. Certainly, the predominant narrative of competition between banks and fintechs has receded in favour of a collaborative outlook. Fintechs are unlikely to be able to fill banks’ shoes when it comes to relationships and sustainable financing capability, but they are able to supplement and enhance bank processes immeasurably. It’s no surprise, then, that clients are coming to us more and more to ask about the potential of partnering with fintechs, and, as we see it, the outlook is very positive.

Principles for successful collaboration

Yet bank-fintech collaborations need to be nurtured carefully in order to be most effective. It can be difficult, for example, when clients approach fintechs directly for solutions that involve banks as funding partners only at a later stage. Clients may be unsure of a fintech’s ability to secure the necessary funding to make the programme sustainable, while resolving the different approaches and cultures of banks and fintechs can throw up issues for all involved. The best approach looks to be for banks and fintechs to have already established an understanding of one other’s capabilities. For this to happen, we must work to foster a collaborative “ecosystem” where banks and fintechs alike proactively co-operate at an early stage of any SCF project in order to deliver jointly a workable solution that meets clients objectives from both an IT and financial standpoint. Through this approach, banks and fintechs can develop solutions tailored to the specific needs of a given client and then go on to proactively approach similar clients with proven ideas.

At UniCredit, we are already seeing the benefits of this approach first hand, and are proactively co-operating with fintechs in specific situations where we feel this is bringing added value to our clients and clearly differentiating us from our competitors. Fintech-based solutions also enable our clients to finance suppliers directly using the surplus liquidity on their balance sheet or to offer truly multi-bank programmes without relying on the IT platform and fronting by one single bank. UniCredit is actively pursuing further projects of this kind, as well as looking at other models of fintech collaboration. And, while, for now, cooperation in Supply Chain Finance is most advantageous for very sizable programs, we think there is potential for this kind of venture to transform the industry – and not only trade finance, but the entirety of transaction banking.

Certainly, it is already having an impact on supply chain finance – mitigating a number of difficulties inherent in supplier onboarding, for example, while drastically improving speed and efficiency across the board. But this is just the beginning – and we remain focused on continued innovation to raise not only our supply chain finance services, but all our services, to ever greater levels.

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