The Journey to Multi-Tier Finance

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The broad theme of supply chain finance, where large investment-grade corporates moved days payable outstanding (DPO) for a handful of big suppliers and goals were achieved — is now a very mature product, coming under increasingly tighter accounting scrutiny.

So what’s next? 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. That’s not to say there haven’t been efforts: Can Source-to-Pay Networks Go Beyond the Approved Invoice?

There are several ongoing efforts, for example:

  1. Buy invoices when submitted, not approved = Previse
  2. Use bespoke models to do some form of inventory finance = several players, such as Hitachi Capital
  3. Go further and do purchase order finance — see: Purchase Order Finance, the Tough Nut to Crack

But what about this concept of tying technology together with extending finance beyond an anchor company and its suppliers, what some call deep tier or multi-tier finance?

Certainly, efforts are underway.

The University of Cambridge Institute for Sustainability Leadership (CISL) led a project to understand how to scale up the role that banks can play in supporting the shift toward sustainable soft commodity supply chains called Trado.

Trado was supported by BNP Paribas, Barclays, IDH the Sustainable Trade Initiative, Rabobank, Sainsbury, Sappi, Standard Chartered and Unilever, with funding from the UK Department for International Development (DFID); the start-ups were Halotrade, Meridia, and Provenance, and the project was led by CISL.

Trado conducted a live pilot involving a Malawian tea supply chain, with actual deliveries of tea and actual payments. The pilot’s supply chain involved a large end-buyer, an intermediate processor, an international bank and 225 first-mile smallholder producers.

They found a number of key lessons learned; a sample include:

  1. Tracking certain commodities is not simple — Current tea production processes do not enable tracking of raw goods into the produced goods purchased by a specific end-buyer.
  2. Generating value for the processor is key to driving adoption of the Trado model in a tea supply chain.
  3. ESG Data Collection is not trivial — The pilot relied on a combination of smallholder data provided by the processor, and individual profiles with data manually collected by consortium member Meridia.
  4. Future models could disrupt balance sheets — Depending on the agreement between buyer and supplier, a full purchase order could be financed earlier but has implications for delivery risk and recognition of title earlier (and inventory).
  5. Digitizing trade finance documentation further to bring forward the release of finance is critical.

Source: Trado report; University of Cambridge Institute for Sustainability Leadership

The reality is this is hard. Companies spend a lot of time on how to reduce inventory in their supply chain and the issues around ownership, structures, tax planning, transfer pricing among related parties, etc. are huge. Cross-border transactions add further complexity. While technology is necessary, it is not a sufficient condition to deploy multi-tier finance.

There are many solution providers trying to involve anchor companies and their ecosystem. The key will be showing the anchor value propositions that can tie together at least one or more of the following — cash flow optimization, better contractual supply chain pricing, and driving ESG sustainability goals.

This is a journey, not a destination and worth closer examination in 2020 as many projects seek market feedback to validate multi-tier finance.

Happy to exchange views on the subject. I can be reached at dgustin (at) globalbanking.com

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital.

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