If Supply Chain Finance is to Grow, Where are the Banks?

Everyone going to Supply Chain Finance conferences hears the stories of how popular SCF has become and how many lenders are looking to move downstream to provide SCF or Payable Finance beyond just the big rich corporates.

I call Bullshit.  I have talked to a number of regional banks who have either downsized their SCF offering or have found it too problematic to develop a platform, build origination, and meet internal compliance standards.   I have seen 99% of the challenge is around servicing, sales, and marketing and spending time on supplier enablement and onboarding.  When banks or service providers win mandates to implement deals for large companies to connect their supply base with early payment, the work just begins.

Why not just buy into programs from Citibank , JPMorgan, PrimeRevenue or Orbian?  It’s easier, we can grow our book, no relationship issues, and we dont even have to do any KYC.  So what if we dont get paid for any of that work.

Today, originators have to jump through compliance hoops to onboard companies.  Are they running the names through their payment filters?  What about John Doe who is the officer, how do you validate those people? Did you get an article of Incorporation or Certificate of Incumbency?  What about the Board Resolutions for public companies.

But where does that leave companies – strictly in the big boy hands with a lack of choice.

It’s how it works now in most industry sectors – you want options, we have options – Bell Mobility or Rogers for Telecom, or Air Canada or Westjet, that’s your option. Same with Supply Chain Finance.

It has been estimated the global supply chain finance sector reached US$450 bn in 2016, but how are we going to reach companies in the under $5bn space?  Regional banks cant afford to invest in the capabilities to do it, and for larger banks, they will pick the cream of these companies.

Yes, the middle market presents unique challenges for SCF.  Lower rated or non rated companies do not have the leverage of a Multinational investment grade company, so rates are higher to begin with and there are likely to be less suppliers to onboard. Secondly, these companies do not have the leverage to push terms out as aggressively as a Coca-Cola or Anheursier Busch, therefore not accruing the DPO benefits.

The other issue is funding.  New Basel III capital rules make the cost of capital expensive for non investment grade corporates. SCF is an unsecured loan to the buyer, and banks do not want to build up a portfolio of non secured loans to non investment grade middle market companies.  Arranging funding for a single B rated company is much more difficult than an Apple or Coca-Cola. Companies need to assess if their platform provider can arrange finance for their suppliers and how they do that or are they a pure Technology play.

I am currently conducting a KYC Best Practice around Supplier Finance programs to help the Financial community become more aware of better practices and methods when onboarding suppliers to various supplier finance programs.   Ultimately supplier acceptance rates are just too low, and this is probably the biggest reason why.  I speak to corporates who tell me they go through hell to get a Bermuda bank account or wherever, but just arent going to do it for SCF when they have alternatives.

So again I ask, if SCF is to grow, is it just from the Multinationals that will embrace it in more legal entities and across more geographies? So far, that appears to be the case.  But perhaps we can find a SCF lite solution that can help companies under $5bn.  Right now, I dont see regional banks investing here, its just too easy to buy into programs and not build.

Happy to talk further on the subject, feel free to contact me at dgustin@globalbanking.com

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