Mispriced Credit? – Thin pricing around Supply Chain Finance structures

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I have had a few banks lament that their large corporate supply chain finance deals are now facing heavy competition, driving pricing down to what they believe to be almost irrational levels.

Banks are seeing RFPs worldwide for supplier finance deals, and these deals are coming down to what’s your capability and what’s your price. The banks tell me it’s not about the best mousetrap, it’s about onboarding suppliers, price and execution, that is, can you deliver what you say you can.

These razor thin margins come at time when banks are flushed with deposits and are looking for growth. While many banks may participate in these deals (ie, buy into a deal originated by another bank, or PrimeRevenue, or Orbian), only a handful can originate a deal and can service these programs, usually with a regional focus – RBS, JPMorgan, Citibank, Deutshce Bank, BankofAmerica, Wells Fargo, Santander, are some of the larger players.

In terms of pricing, a bank could lend $100 million at 80 basis points on a revolver for their client or do $100 million on supply chain for the same price, but there are very big differences for banks in terms of margin. The cost to originate these programs and to execute in terms of onboarding is not trivial. Banks must do Anti Money Laundering and Know Your Customer reviews, lien searches, training, etc. to onboard suppliers. In addition, if they use their own platform, there are maintenance and enhancement costs. And let’s not forget the biggest expense, the cost of a sales team to sell these programs. These costs can easily add 40 to 75 basis points to the overall funding costs.

While Fortune 2000 CFOs may or may not understand these additional costs, not many would like to see their supplier paper at significantly higher prices than their Commercial Paper. In order to win business, banks compete heavily on price, hence margin suffers. The consequence is suppliers of these Fortune 2000 companies are enjoying extra cheap money.

I dont see this trend changing anytime soon.

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Voices (2)

  1. Robert Kramer:

    David,

    I think your observations here are spot on regarding the pricing compression that banks are experiencing in Supply Chain Finance deals. Part of it has to do with the natural evolution of any market. First the product is priced based on value and then based on competition. That may be where the SCF market is today as greater competition drives down bank pricing. I think we actually may be moving to the final stage of market evolution – pricing based on cost. With the cost of money for investment grade credits at historic lows, we may not yet have reached the trough of SCF pricing for banks. The only way out of this downward pricing spiral is innovation and the associated differentiation.

    Bob Kramer
    Vice President, Working Capital Solutions
    PrimeRevenue, Inc.

  2. Louise Beaumont:

    Banks and other institutional investors need to think flexibly when looking to optimise margins. Rather than originate their own deals, they can invest the same amount of money on peer-to-peer platforms such as http:www.platformblack.com and achieve double digit gross returns without origination costs.

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