Businesses across all industries have been forced to find solutions to a rapidly evolving market environment since the outbreak of coronavirus last year. For many firms, the economic challenges of COVID-19 have heavily disrupted their supply chains. But supply chain finance has provided a valuable lifeline during this highly turbulent time.
SCF is not only improving working capital and supplier relationships but also helping businesses overcome supply chain challenges predominately caused by the coronavirus pandemic. And it’s boosting the global economy in these challenging times by allowing businesses to expand their presence in new markets and foster new trading relationships.
The stats certainly show the huge potential of supply chain finance. According to research from Coalition, international SCF income increased by 4 % last year. This was exacerbated by strong growth across markets such as the US and Europe. Additionally, global SCF revenues rose at the onset of the pandemic in Q1 2020.
A huge market opportunity
Supply chain finance is a big area of business for banks and other major financial institutions, but the way they offer this service is rapidly changing. Increasingly, they’re losing market share to fintech firms and other lenders with more innovative SCF models.
For example, dynamic discounting services, P2P lending websites and challenger banks are developing technological solutions that improve the efficiency of payables, receivables and other types of cash transactions. And as investors and consumers continue to back these innovations, the supply chain finance market will evolve significantly in the coming years.
Businesses are also increasingly looking for financial solutions to help their supply chains recover from the adverse effects of the coronavirus pandemic. In particular, there’s an onus on fintech companies to meet their ESG responsibilities by supporting firms that have experienced supply chain disruption over the past year.
Due to this changing market, traditional banks and financial institutions - many of which still rely heavily on legacy technologies – are being forced to digitally transform and modernise their supply chain finance offerings. Although that requires significant time and investment, it's a unique opportunity for banks to capitalise on the gains of an exciting new industry.
Ultimately, the rise of new innovations in the supply chain finance market provides benefits for both businesses and suppliers. However, they also meet the aims of the exchequer, procurement industry and commercial department. Moreover, banks will undoubtedly steal more market share from fintech companies by digitising existing supply chain finance offerings.
NTT DATA notes that the digitalisation of the supply chain finance process is a trend with increasing weight in the priorities of the banks and corporates. Therefore, we are collaborating with multiple entities to implement and modernize their systems to offer a more digitalised supply chain finance service.
Challenges to overcome
While technology-driven supply chain finance presents major opportunities for buyers, suppliers and the entire financial services industry, it’s not without challenges. Firstly, credit reporting companies often view supply chain finance as a risky area. And this perception has only grown due to the economic uncertainties of the pandemic.
In a previous report, S&P Global Ratings branded it as a “sleeping risk”. It says poor disclosures can not only negatively affect a firm’s underlying health but also cause capital to be mispriced or misallocated.
The risks associated with supply chain finance are highlighted by high-profile events like the demise of Greensill Capital. In Greensill´s case, it has appeared that financing was provided to borrowers on hypothetical future invoices and from customers that did not yet exist. This situation could damage investors’ confidence in SCF and result in additional regulatory inspections.
However, this case has shown the importance of investors having proper control of their investments. The banking sector has set standards and principles that should help increase the understanding of SCF as a product while protecting against these practices. Moreover, banks need to continue creating more robust risk controls frameworks to prevent harmful practices from happening again in the future.
There are also adoption challenges. Like any other novel innovation, supply chain finance platforms can be a new and daunting area for organisations used to legacy systems. Companies adopting these technologies will need to train their users on how to use and get the most out of them.
This can take time and financial investment. NTT DATA is helping companies implement product solutions, apply platforms and solutions to improve risk control models, improve pricing (including ESG related models), and integrate with legacy systems seamlessly.
Regardless of the positives and negatives of SCF technology, what’s certain is that the market is quickly transforming as organisations look for more agile and intuitive approaches to supply chain finance. Because of this, many different SCF innovations are coming to fruition.
For example, NTT Data has developed an SCF solution that brings together banks, buyers, suppliers and other possible funders on a single platform. Based on the SAP Ariba Network, it provides suppliers with an invoice financing service in their own SAP Ariba screens. The platform aims to digitise and simplify supply chain processes end-to-end while enhancing working capital management and risk vision.
NTT Data’s platform equips banks with an additional invoice channel and reduces their front-end development costs. It also gives buyers the capability to control all their financing programs on a single platform. And suppliers can request discounts from different programmes and banks without having to log into several banking platforms.
Unlike traditional supply chain finance services, NTT Data’s platform works across multiple currencies and geographic locations. So, regardless of where buyers and lenders are based across the world, it offers the same user experience for every user. Moreover, it allows banks, buyers, suppliers and any other actor to gain a 360-degree view of supplier onboarding information, payments, all the KYC supplier requirements and other crucial data. They can also trace payments and track relevant KPIs using comprehensive dashboards.
Overall, new supply chain finance technologies offer enormous value for banks, buyers and suppliers. They can enable banks to enhance the experience of existing SCF services, buyers to improve liquidity management and partner relationships, and suppliers to simulate and request finance quickly and easily.