Replacement + Additive Deals to Fuel Supply Chain Finance Market

Banks have historically been the dominate provider of both platform and funding of reverse factoring (commonly called supply chain finance) programs over the last decade. Even platform and managed service providers like Demica, Orbian and PrimeRevenue have historically relied on banks for balance sheets.

But times are changing. In the past, many large Fortune 500 companies may have had a point solution, where their reverse factoring solution helped provide working capital improvement for a specific subsidiary or country. But increasingly, companies are evaluating more holistic solutions.

TFM is starting to see that with deal cycles going on now.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

Every Fortune 500 non-financial company has been marketed supply chain finance or reverse factoring solutions for years. Up until recently, supply chain finance has yet to become a replacement market. But what is different now is the following:

  1. Banks are retrenching. RBS is a good example, Barclays dropped 8,000 employees in 4 months and is retrenching from Africa, BAML is rumored to be downsizing its trade business, StanChart recently recorded a $1.5 billion loss, and we at TFM have written about the Correspondent bank retrenchment. In fact, the chairman of the Indian Exim Bank, Yaduvendra Mathur, predicted disastrous results for developing economies, saying that the retrenchment of international banks to their home markets would result in local trade sectors “becoming starved of finance.”
  2. Fortune 500 companies are looking for more holistic solutions. The Global 500 may have launched a program that may have addressed a currency, a region, or a product flow or supplier segment, but they have not done something across their entire supply chain. In evaluating service provider proposals, your geographic scope is important, especially if it involves emerging markets.  If you are looking to roll-out a program in North America or Europe, that's one thing, but what about India, Brazil or China? The ability to have the geographic reach — local onboarding, local currency, local understanding of cultures and practices, etc. to deploy programs where the best bang for your buck is going to be is critical.  For example if a program is self-contained in Brazil or China to support a subsidiary of a Fortune 500 company, can your providers help find local real or renminbi finance? Ultimately entering into receivables purchase agreements or other structures like promissory notes with suppliers who elect to participate in the SCF program in different jurisdictions is not a trivial exercise.
  3. Bank funding is volatile. We are seeing more volatility with the banks that are funding deals, and that currencies and regions they will fund.

In making replacement decisions, of course platform functionality and the level of compatibility between your ERP and data warehouse is important. Procurement and treasury professionals generally commented that an effective platform must take in invoices, provide dispute management, credit notes and audit trails that are visible to all or relevant parties. The key is how the SCF platform works with a company’s existing legacy payables and third-party provider platforms (i.e., Tungsten, Basware), particularly if purchase orders are being uploaded through these systems.

So it seems more than ever, this particular finance technique has opened up non-bank managed service providers to compete with banks.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

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