The pandemic has highlighted the benefits of supply chain finance for buyers and suppliers – and this area is continuing to evolve rapidly. So how is technology driving development, why are bank-tech partnerships important, and how can SCF help companies achieve their ESG goals? Taulia’s Bob Glotfelty and Ali Ansari share their views.
Bob Glotfelty
VP of Growth
Ali Ansari
Director for Global Supply Chain and Payables Solutions
Supply chain finance has come a long way in recent years. Having risen to prominence through the 2008-2009 financial crisis, it has since become increasingly prevalent as a method of supporting suppliers. And growth has continued apace since then: BCR’s World Supply Chain Finance Report 2021 found that the estimated global volume of SCF has increased from $330 billion in 2015 to over $1.3 trillion in 2020.
The arrival of the COVID-19 crisis presented supply chain finance with its first major test. But while some small business lenders have struggled during this period – as illustrated by the fate of US firm OnDeck Capital, an online lender which was sold for less than 10% of its 2015 market value – supply chain finance funding has remained available and adoption has continued to grow. Indeed, the BCR report found that SCF volumes were 35% higher in 2020 than in 2019.
In practice, the pandemic prompted a need for supply chain finance both for companies that saw sales dry up, and for those that experienced a surge in demand, says Bob Glotfelty, VP of Growth at Taulia. “For companies like consumer goods businesses that needed to produce more supply and sell more of their products, supply chain finance was a great option to get paid early, get more cash, and reinvest that into the business,” he explains. “Meanwhile, companies like automotive parts suppliers found their products weren’t being purchased when plants had shut down, so they found themselves in a very difficult position. Supply chain finance enabled them to get access to cash, and really secure and strengthen their businesses.”
What is supply chain finance?
Supply chain finance is a type of early payment solution that offers working capital benefits to both buyers and suppliers. It enables large buyers to offer their suppliers early payment of their invoices at a funding rate based on the buyer’s credit rating. As such, it gives suppliers cost-effective access to working capital, as well as providing more certainty about the timing of receivables. Funding is provided either through a single financier, or through a platform offering multi-funding capabilities.
Role of technology
Having weathered the challenges of the last 18 months, it’s clear that supply chain finance has much to offer businesses. What’s more, the types of solutions available are continuing to evolve rapidly, with more development on the horizon.
For one thing, technology has an important role to play in driving development in this area. Glotfelty cites the role of technology in helping to automate processes, such as invoice approval times: “The sooner an invoice gets approved, the sooner it can be paid, and the more opportunity there is to get your money faster.” Likewise, he notes that technology can speed up reconciliation and the way in which credit notes are handled. There is also considerable potential when it comes to taking advantage of artificial intelligence and machine learning in order to transform the way in which risks are assessed.
Also significant is the potential that technology has in terms of bringing the benefits of supply chain finance to smaller suppliers than has previously been possible. “When supply chain finance was purely driven by banks, it was a very manual, labour-intensive process to set up every party on the solution,” Glotfelty explains. “So typically, the penetration of the solution within the supply chain was very low, and it really ended up with large corporations using it between themselves.” But with technology providing more opportunities for automation, supply chain finance solutions can now be accessed by small and medium-sized businesses as well, providing more opportunities for companies to provide support to the whole supply chain.
Rise of the bank-tech partnership
As supply chain finance continues to evolve, another important development is the rise of closer partnerships between banks and technology companies. Both parties have something important to bring to the table: banks have been providing supply chain finance for many years, with extensive expertise in assessing risk and providing liquidity – but what they typically lack is the ability to harness technology effectively and provide a slick user experience. “Banks are lagging behind in terms of technology, so they need tech companies to bridge the gap,” says Ali Ansari, Director for Global Supply Chain and Payables Solutions at Taulia. Technology companies, meanwhile, have the ability to offer a highly automated and streamlined solution – but they may not have the existing relationships, or the deep knowledge of credit and legal structures.
As such, partnerships between banks and technology firms can provide the best of both worlds. “Technology companies can bring in experience of connectivity, data insights and AI-based predictive information in order to facilitate digital decisioning,” comments Ansari. “And banks can continue providing risk assessment and liquidity for assets that are generated through this exchange of information, facilitated by technology firms.”
By combining the agility and innovation offered by technology companies with banks’ stability, funding and client knowledge, the rise of the bank-tech partnership offers a way for all participants in the supply chain to maximise the benefit of SCF. Announced in 2020, Taulia’s strategic alliance with J.P. Morgan offers an example of how this can work well. More recently, J.P. Morgan led a consortium that provided Taulia with $6 billion in funding following the collapse of Greensill earlier this year.
ESG and SCF
Technology is not the only factor moving SCF forward. As well as providing stability for supply chains, supply chain finance also has the ability to have a positive impact on the way in which businesses behave – and that, in turn, means it can help to safeguard the future of the planet.
As companies identify growth opportunities and risks, they are focusing more closely than ever before on sustainability and Environmental, Social and Governance (ESG) concerns. Increasingly, companies are recognising that they need to look beyond their own operations and consider the ESG impact of the whole supply chain – indeed, a 2016 McKinsey report found that more than 90% of the environmental impact associated with consumer companies is embedded in supply chains.
With that in mind, there is a clear opportunity for companies to address ESG by taking steps to improve their suppliers’ sustainability performance. Depending on the nature of the business, that might mean encouraging suppliers to reduce their greenhouse gas emissions, embrace more ethical practices or improve the way in which they handle waste products. In practice, however, this is a course of action that requires a clear strategy, as suppliers may not change their practices unless they have a compelling reason to do so.
One option could be to end relationships with any suppliers that fall short of the expected standards. However, supply chain finance once again offers another way forward: by using a well-designed SCF programme, companies can offer suppliers a ‘carrot’ for good behaviour. For example, SCF can be used by companies to encourage more sustainable behaviour from their suppliers by assigning suppliers a sustainability score, and offering the highest-performing suppliers access to financing at slightly more favourable rates.
Notable developments in this area include a supply chain finance solution developed by tire manufacturer Bridgestone in conjunction with Taulia and J.P. Morgan. The solution uses sustainability ratings from ratings platform EcoVadis to determine a sustainability-based discount for each supplier. “The Bridgestone solution has been well publicised,” says Glotfelty. “We’re consistently hearing from our customers and prospects about the desire to go down this path and tie in their programmes with an ESG element.”
This approach is gaining momentum. “Businesses want to do the right thing – whether it’s for employees or communities, or whether it’s environmental factors like greenhouse gas emissions,” comments Glotfelty. “And as part of that, many companies are looking down their entire supply chains and are saying, ‘I want to make sure the people I’m buying from are doing things sustainably.’”
Shape of the future
What could supply chain finance look like in five years’ time? For Ansari, the most interesting opportunity is the way in which technology will lead the way. “You’ll see these programmes becoming more integrated, more insightful, and bringing the most efficient finance into play,” he says. “While the core SCF offering will remain the same, you won’t recognise these next-generation offerings as the programmes that exist today.”
Alongside the rise of bank-tech partnerships, Glotfelty predicts that adoption, volumes and usage of SCF will continue to rise. “Think about it – it’s an arbitrage opportunity,” he says. “You’re taking the creditworthiness of a large corporation, and you’re extending that value to a supply chain. While some of those are also large corporates, many are small and medium sized businesses that aren’t able to access financing at a low cost. So there’s a natural fit for a product like that.”
Last but not least, Glotfelty notes that the role that supply chain finance can play in helping companies embrace ESG is particularly encouraging. “It’s really creating a reason to publicise your work around ESG, and give a very tangible solution to the problem,” he concludes. “I think that’s really exciting.”
