Supply chain finance (SCF) may be a well-established solution these days – but while many companies are taking advantage of programmes enabling them to offer early payment to suppliers, there continues to be a lack of consensus about the types of solution included under the SCF umbrella, and the terminology used to describe them.
For example, while some use the terms ‘supply chain finance’ and ‘reverse factoring’ interchangeably, others regard reverse factoring as one variation of SCF. PwC’s 2018/2019 SCF Barometer listed several types of SCF solution, including reverse factoring, inventory financing, invoice financing and dynamic discounting.
As such, there’s a need for greater clarity where language is concerned. Enrico Camerinelli, Senior Analyst at Aite Group, says he has recently worked on a market report on SCF undertaken by the European Commission. The goal of the project was to gain a better understanding of topics including what constitutes SCF, the products and terminology included in this area and any factors that may be hindering the adoption of it.
This may be particularly pertinent given that last year Moody’s issued a warning about ‘hidden risks’ arising due to a lack of disclosure by some companies about their use of SCF. The announcement stated that while reverse factoring “can weaken liquidity at a time of stress”, few customers fully disclose their use of this financing technique – meaning that investors may not be able to assess their exposure.
“Fortunately – or unfortunately – there are no generally accepted accounting principles for supply chain finance,” says Camerinelli. “So each company is trying to do its best. CFOs are very wary of running programmes where they don’t have complete certainty.”
Innovation and evolution
Meanwhile, innovation continues apace in this area. For one thing, while SCF programmes have traditionally focused on the buyer’s largest suppliers, there’s a growing trend for solutions that enable companies to onboard a wider group of suppliers. Camerinelli notes there are different initiatives in play, such as using artificial intelligence or predictive analytics to assess the credit risk of smaller suppliers – “but it’s definitely not a common practice.”
Camerinelli also points out that some companies are adopting innovative models in this area. He cites Previse, which uses algorithms to assess which invoices are unlikely to be disputed and authorises instant payment for those invoices. Another noteworthy initiative is Supply@ME, which has launched a blockchain-based inventory finance solution enabling companies to create value from their warehouse stocks.
Another interesting development, Camerinelli says, is Greensill’s acquisition of fintech FreeUp, which allows workers to receive early payment for wages that have been earned but not yet paid. “Essentially, all workers are suppliers – supplying their employers with their time and skills,” explained Greensill founder and CEO Lex Greensill in a press release last year. “There is effectively no difference between our firm making an early invoice payment and making an early salary payment.”
As the market continues to develop, Camerinelli predicts fintech SCF providers will focus on identifying niche gaps and finding ways to fill them. In particular, he says providers may look at providing SCF solutions for medium sized companies, potentially through the use of artificial intelligence and credit scoring technologies.
That said, Camerinelli doesn’t think the market is likely to see significant consolidation at this point. “Until these new approaches become the accepted methodology, I don’t think any large incumbent vendor will want to absorb these companies,” he concludes. “In the meantime, a lack of overarching harmonisation of legal and accounting practices is really what represents the main roadblock.”