Treasury Today Country Profiles in association with Citi

Collaboration in SCF

Rowers working together in a race

As competition intensifies in the supply chain finance (SCF) space, collaboration may be the key to delivering a successful programme. The Euro Banking Association (EBA) has recently issued guidance that may be of use to corporates who want to work better together.

How many times has your supply chain finance (SCF) cycle been disrupted by a weak or unreliable link? Given the impact disruptions can have further down the chain, a collaborative approach to the discipline would seem logical. However, this is not always the case, and forging strong business partnerships, and closely monitoring the chain, is not necessarily standard practice in SCF.

As we saw earlier this month, as the provision of bank finance continues to dry up, at least in the UK, SCF has great potential as a financing activity for SMEs that banks are still willing to take part in. But for this potential to be fully realised, buyers need their suppliers to get on board with their plans, and this is often easier said than done: Treasurers cited a lack of interest from suppliers as the third most significant barrier to SCF, after cost and insufficient buy-in across the organisation, in Treasury Today’s 2013 European Corporate Treasury Benchmarking Study.

Furthermore, the monitoring of the supply chain leaves a lot to be desired at many corporates. Research from Deloitte published earlier this year found that less than a third of corporates deployed data-analytics tools that can detect fraud or waste in the supply chain.

However, help may now be at hand for treasurers looking to work together with their SCF partners more efficiently.

New guidance published by European payments industry forum the Euro Banking Association (EBA) has placed a direct emphasis on collaboration in the process. In its European Market Guide to Supply Chain Finance, the EBA sets out recommendations on how collaboration and partnerships in SCF can be managed, as well as identifying some of the key risk management and regulatory issues in the space. The guide, which is the EBA’s second on this theme, also describes the changing ‘ecosystem’ of SCF, and addresses the range of terminology relating to SCF.

“Version 2.0 of the EBA Supply Chain Finance market guide is a result of the continued monitoring and study of the SCF market by our expert working group. It is one of our key objectives to help our member banks and the wider industry to assess the opportunities and risks of this growing market. As part of the EBA’s collaborative engagement, we also contribute to the Global SCF Forum working on the development of standard market definitions for the range of SCF instruments offered by the market,” says Daniel Szmukler, Director, Euro Banking Association, in a release.

Expanding collaboration

According to the guidelines, industry cooperation in SCF to date has been limited to syndication and asset distribution, and a handful of collaborative finance platforms – the rest has remained ‘a purely competitive activity’. The EBA breaks down collaboration in the SCF industry into three distinct spaces:

    Competitive space, including individual value propositions. The EBA says collaboration has no role here.

    Collaboration between business entities undertaken on a bilateral basis through partnerships or commercial contracts. This includes ‘four-corner’ models, technical outsourcing and cooperation with B2B networks and SCF-enabling platforms.

    Collaboration on a collective basis between market participants in areas defined in advance as being non-competitive, non-infringing of competition law and having the effect of creating the basis of overall market development to the benefit of individual competitors.

This last point in particular is where the EBA sees the greatest opportunity for improved collaboration. It says this space could give rise to joint-industry initiatives in the areas of regulation, standards, and infrastructural development.

The EBA proposes collective cooperation between banks and B2B networks, marketplaces and platforms as one way in which improved infrastructure can drive collaboration in SCF. It says that while collaboration between these providers is usually conducted on a bilateral, one-to-one basis, it may be possible to explore ‘collective modes of collaboration and working agreements on an industry basis’.

The industry forum even suggests a collective cooperation model based on a networked economy market approach (diagram 1). This model involves multiple banks, and an ERP Bus Service as the intermediary between clients.

Diagram 1: Fully networked environment approach to SCF
Diagram 1: Fully networked environment approach to SCF

Source: EBA

Opportunities and threats

The EBA says that despite the rapid growth of SCF, the industry is still at the beginning of its lifecycle, and there are range of opportunities and threats for corporates. The opportunities include increased potential for risk distribution with other financing partners, higher scalability and potential for market penetration, and additional sources of funding for corporates, while the challenges include increased commercial and operational complexity, technical interdependency and the need for well-defined standards, and friction between market players over revenue sharing.

“Collaboration between parties is a key aspect of contemporary electronic commerce and can be a crucial success factor for the success of SCF programs,” says the EBA in the guidance paper.

Given the trend towards fiercer competition in the space, corporates may do well to work together with their partners in order to derive better results.