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How B2B payment companies can expand supply chain finance solutions

If we are involved in receiving payable files, then we can certainly add early pay finance. While there is growing interest on the part of B2B payment providers to develop early pay capabilities, the credit and banking world has changed substantially in the surreal reality of the coronavirus crisis. The low-risk reputation of “purchasing” invoices or receivables has changed dramatically with coming credit downgrades, deterioration in balance sheets and income statements, seller and buyer bankruptcies, and many other aspects.

Will supply chain finance and p-cards collide as B2B payment techniques?

From the banks’ perspective, supply chain finance (SCF) is an uncommitted credit facility to a large company to purchase invoices from their suppliers. There are many issues around this simple statement, from the complexity of onboarding non-customer suppliers to the accounting treatment concerns that are now reeling heads.

With any finance technique, money needs to change hands and a payment is made to some supplier, either domestically or offshore. With SCF, the payment happens to be done early, by a third party that transfers funds electronically to the supplier’s bank account.

Can government save the supply chain finance market?

Supply chain finance (SCF) is a relatively small market compared to its more short-term liquidity cousin, commercial paper (CP). Yet, the SCF market is going through turbulent times and may need to be rescued with some form of guarantees. The CP market is extremely important to company liquidity and was frozen before the Fed put together a $1 trillion backstop. Essentially, CP broker-dealers would not buy paper because they were unsure companies would be able to pay it off at maturity within 90 days or less. The Fed announced a special credit facility to purchase corporate paper from issuers that have been having a difficult time finding buyers on the open market.

As such, that leaves us the supply chain finance market, where arguably there are anywhere from $50 billion to $75 billion in outstandings at any one time compared to $1 trillion or more for commercial paper.

The Journey to Multi-Tier Finance

Can visibility of data via deployment of technology — like blockchain, IoT and smart apps that provide product flow and supply chain party information — enable models to develop financing earlier and deeper into the supply chains?

This is a question worth asking, because trying to go beyond Tier 1 suppliers with an approved buyer invoice scheduled for payment tied to a buyer irrevocable payment undertaking is about as far as we have come.

Is ‘supply chain finance’ a fancy way of saying ‘financialization’?

What is financialization?

“Financialization is profit margin growth without labor productivity growth. Financialization is squeezing more earnings from a dollar of sales without squeezing at all, but through tax arbitrage or balance sheet arbitrage.” — Ben Hunt, Epsilon Theory

Is payable finance (aka reverse factoring or its generic form, supply chain finance) as practiced by large corporates, really just balance sheet manipulation? 

Large Companies Lack Cash to Fund Their Supply Chains

procurement

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

The popular opinion has been that many large American companies are flush with cash. In fact, surveys from some reputable institutions support this view. The AFP’s corporate cash survey found during the second quarter of 2019, U.S. businesses continued to build their cash and short-term investment holdings. This is intuitively supported by events like the corporate tax cut last year.

But this narrative is highly misleading.

Goldilocks, Capital Structure and Supply Chain Finance

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

Ahhh. This porridge is just right.”

— from “Goldilocks and the Three Bears”

The Goldilocks principle is named by analogy to the children's story “The Three Bears,” in which finding the right temperature for porridge took some sampling.

So how do you make sure the porridge is just right if you are today’s middle market treasurer and need to balance liquidity, access to capital (and if rated, a quality rating), and ensuring the right amount of cash?

Most middle market companies are not flush with cash. In fact, when thinking of capital structure, there are many things that keep the CFO/treasurer up at night.

What’s the Big Deal Behind Vodafone’s Supply Chain Finance Program?

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

In a recent TXF article on Vodafone's supply chain finance program and its early pay program, Oliver Gordon, features editor, said: “Vodafone has been using complex financial engineering devised by GAM and Greensill to enable it to profit from and invest in its own SCF offerings and bolster its DPO (days payable outstanding).”

Personally, I have no problem with a company wanting to use its cash to self-fund an early payment program for their suppliers in exchange for discounts. Many large corporates implement some form of dynamic discounting that enables their long tail suppliers, and specific segments — diversity suppliers, choice suppliers, small businesses — access to early payment once an invoice has been approved. In fact, this practice has been going on for decades and now technology allows companies to systematize it and offer it to select suppliers, different supplier segments or all suppliers.

I also have no problem if a company wants to use this construct to invest in their own payables or some other company’s payables. But this does bring up three important questions.

Addressing S2P Platform Misconceptions Around Early Pay Programs

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

Few source-to-pay platforms, payment processors or other networks have been able to develop early pay dynamic discounting management (DDM) or supply chain finance solutions that have added significant revenue to their enterprises. (See Why Platforms Need to Monetize Their Supplier Ecosystem.)

This comes at a time when these platforms are building new capabilities to boost revenues, including providing supplier invoice aggregation services; adding payment functionality; and helping clients migrate to cloud solutions.

From my conversations with many S2P platform vendors and payment processors, I hear three buckets of objections:

Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance

Today, banks are by far the dominant player in providing supply chain finance, and do so in four ways. And many Fintechs that offer source-to-pay (S2P) and other supply chain collaboration solutions still have a strategy of using their clients’ house banks for supply chain finance. While it makes things easy if the customer can bring their own bank, it does not come without risk.