www.ifc.org/ThoughtLeadership Note 39 | June 2017 Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks In most emerging markets, small and medium enterprises, or SMEs, lack access to the credit and liquidity they require for their daily working capital needs. This is partly due to the fact that the credit risk of such businesses is typically difficult to assess and their working capital needs are unpredictable. In most countries these businesses operate primarily in the retail and wholesale trade segments, and banks have generally not done enough to finance their domestic or international trade operations, especially open account transactions. Supply chain finance structures offer an alternative solution to finance the trade flows of these enterprises, with benefits for all stakeholders, including large enterprises, their SME trade counterparts, and financial institutions. This type of financing helps banks extend working capital finance to SMEs by leveraging commercial and trust relationships between the SMEs and corporates; it helps large corporates improve their working capital management and decreases supply chain disruptions; and it enables banks to better assess, measure, and manage the risks of extending financing to SMEs. Supply chain finance is a broad category of financing with make it clear that it is a very attractive market opportunity for multiple products, and it contributes significantly to global banks. trade finance, which has an estimated financing gap of $1.9 trillion annually around the world.1 According to the Aite Supply chain finance has traditionally been driven by Group, the estimated potential volume of reverse factoring, one international banks that focused more on cross border trade, but of the common supply chain finance products, ranges from its adoption has been slow due to weak recourse environments, $255 to $280 billion, globally.2 as well as scalability and origination costs. However, in recent years there has been a shift toward digitization and automation Growth in the supply chain finance sector is rising steadily. In of both supply chain finance transactional flows and supply the period between 2008 and 2014, domestic factoring volume chain financial solutions. Leveraging the wide range of trade increased on average by six percent per year across 70 countries and transactional data, rapidly growing technology platforms in Europe, the Americas, Africa, Asia and the Pacific. are now playing a crucial role in increasing transparency by International factoring volume grew on average 16.6 percent providing risk profiling credit information for banks to gain a per year.3 Moreover, research conducted by Demica shows that larger share of the market. supply chain financing at major international banks is growing by a rate of 30 to 40 percent a year, and much of the expected According to Enrico Camerinelli of the Aite Group, the key future growth will be driven by local supply chains.4 trends in supply chain finance are its ability to:  Transition from paper-based transactions to electronic Companies can use supply chain finance to significantly invoicing increase their economic value by extending days payable  Move from a buyer-centric model to a distributed network outstanding, reducing days sales outstanding, reducing of buyers and suppliers with no defined central anchor automation related costs, and boosting trade volumes as a result  Use transactional data to assess the credit worthiness of of greater economies of scale. “The strategic relationship between supplier, buyer, and a bank would naturally prevent potential borrowers.6 either party from failing to deliver on mutual contractual Supply chain finance not only provides market trends and obligations,” according to Eugenio Cavenaghi of Banco prevents disruptions, but also helps banks better manage risks. Santander.5 The compelling benefits of supply chain finance André Casterman, a member of the ICC Banking Committee states that “a big innovation in the market is using transactional data for risk assessment and mitigation. The data from the monumental task that requires banks to clearly understand the physical value chains and payment data collected through goals of the program, as well as current capabilities and gaps. technology providers can be used to enhance the knowledge of Supply chain finance solutions can take various forms in order the credit-worthiness of a particular enterprise, industry, or to address different challenges. A bank considering launching region.” The playing field has changed, propelling the supply or scaling up its supply chain finance business typically has the chain finance sector forward. following two options: (1) use a bank-led platform, either developing an internal IT infrastructure or adopting another Automation Considerations bank’s platform; (2) contracting a bank-independent platform Technology, either in-house or multi-bank platforms, is central through: (a) licensing the technology solution from a to any successful supply chain finance program. When selecting technology platform; (b) outsourcing the automation services to the technology, three important factors need to be considered. a third-party platform such as Software as a Service; or (c) These are automation, simplicity, and scalability (Figure 1). participating in a marketplace as one of multiple funders. The nature of supply chain finance platforms is quite diverse, making selecting a well-suited supply chain finance platform a Figure 1. Success factors for an effective supply chain finance technology solution Automation Simplicity Scalability Key Features: Key Features: Key Features: • Speed of transactional flow • Intuitive interface • Ability to scale up • Data collection from • Structured workflow, easy transactional volume physical supply chain flows accessibility by all parties • Efficient problem solving • Reporting functionality • Flexible connectivity to with integration and • Integration with the core various core systems operationalization banking system Key Benefits • Ability to extend offering to Key Benefits: • Ease of use for ultimate user more than one product • Increased productivity • Minimum level of training Key Benefits: • Timeliness of invoice required for staff and trade • Reduced number of errors delivery counterparts. • Unconstraint business • Multi-party transaction growth visibility • Efficiency Source: IFC Figure 2 illustrates IFC’s approach to the segmentation of However, developing such a platform from scratch can be supply chain finance platforms. highly complex, delaying the launch of a supply chain finance program and invariably requiring a substantial financial Bank Led Platforms investment. Bank led platforms, especially those developed internally, provide a high level of flexibility and can be highly Development, implementation and maintenance make this configurable, enabling easy integration of treasury, option expensive and less adaptive. Big banks such as Citibank, procurement, and IT work streams. In such a scenario, banks HSBC, ICICI Bank, Deutsche Bank, Santander, and JPMorgan are the sole owner and funder of the program, which establishes Chase manage their individual proprietary supply chain finance exclusivity rights to the supply chain solution and strengthens platforms. However, these institutions are pioneers in supply its connection with clients, providing the bank with a chain finance and their systems are well integrated into their competitive advantage. transaction banking capabilities. . This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Figure 2. Supply chain finance technology solutions engagement categorization ENGAGEMENT VCF Technology Platform SCF Technology Solutions Bank-Led Outsourced Internally Other Licensed SaaS Developed Bank’s Marketplace FUNCTIONALITY Settlement Product Integrated Processors Providers Services Source: IFC (SCF = Supply chain finance; SaaS = Software as a Service). Smaller financial institutions may also choose to partner with (FinShare), Orbian, and Demica work with banks on white- another bank to use their technology platform. This allows the label solutions, along with their own proprietary offerings. In institution to provide additional financing while avoiding the addition, to ensure that first-comer benefits are fully explored credit process and the additional cost of hosting a platform. in a given market, financial institutions could consider an However, this option is exercised more in a syndicated supply exclusive relationship for a given time period, on a case-to-case chain finance transactions and is not prevalent due to data basis, with an external technology provider. sharing issues. Software as a Service. The financial institution can also use an The number of independent third-party platforms has increased external software company’s services on a ‘Software as a significantly. According to Casterman, “the financing option Service’ basis, where the provider is responsible for data provided by business-to-business platforms is an important aggregation and hosting, for managing the transactions, and for development in the market.” He adds that AP Ariba and communication with stakeholders. In comparison to the Basware are among the largest Purchase-to-Payments networks licensed solution, this option features faster implementation, facilitating financing. They collaborate with financial up-to-date technology, low integration requirements, and low institutions to combine their transaction data with the costs. participating bank’s balance sheet to satisfy funding requirements.7 So, depending on the needs and goals of Such a solution typically has a standardized set of the supply chain finance program for the bank and the functionalities and therefore may be less customized and businesses, the external platforms can be contracted in three tailored toward the specific needs of each financial institution. different ways: (1) licensed, (2) Software as a Service; or (3) The bank also carries the business risk of the technology marketplace. company by contractually hiring it to manage the supply chain finance related business processes. Some examples of the Licensed. Financial institutions can buy a readily available Software as a Service model used in the supply chain finance solution and license it. The license agreement with an external space include Kyriba, Taulia, and Prime Revenue. supply chain finance platform may include installation, integration with the core banking system, and ongoing support Marketplace. Technology solutions can be enabled for and maintenance—all undertaken under the platform’s brand. stakeholders along the supply chain through the marketplace, The financial institution can also white label the solution and providing them with access to a wide range of financial present it under a new name. White-labeled solutions provide institutions and enabling them to sell invoices directly to great marketing benefits, although they increase the cost of investors, including banks, hedge funds, and private equity implementation. Platforms such as Premium Technology firms. In such a model, the suppliers and buyers can choose a funder among investors registered on the platform and based on This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. the specifics of the transaction, geography, and price. The bank Product offering. In addition to process management, can also agree or disagree on finance specific transactions. The platforms such as PrimeRevenue, GT Nexus, Premium marketplace can also work as an auction, allowing various Technology, GSCF, GTC, Misys, and Octet provide financial investors to bid and participate in the invoice auctioning. institutions with an automated system for managing their trade Platforms such as Prime Revenue, Ariba, Orbian, Nafin, accounts through various structured supply chain finance Bolero, and the Receivables Exchange are examples of supply products, including invoice discounting, purchase order chain finance marketplaces. financing, reverse factoring, and distributor finance. Figure 3. Functionality of supply chain finance platforms Integrated services. In order to ensure a seamless and efficient supply chain finance program it is crucial that all participating SETTLEMENT parties—both the supplier and buyer treasuries, sales, PROCESSING procurement, IT, legal, and the financial institution—clearly understand the processes, responsibilities, and pricing involved. Technology providers such as Demica and Prime Revenue can PRODUCT provide an advisory role to stakeholders on various related OFFERING matters, including assisting with the complicated onboarding process. Such services might lie in the following areas: INTEGRATED SERVICES Source: IFC Service level functionalities of supply chain finance platforms A bank can select the technology platform best suited to its requirements from a range of vendors and at varying degrees of functional complexity. Market practitioners define various segmentation methodologies of the platforms depending on their functionality. Alexander Malaket, a member of the ICC Banking Committee, for example, defines three types of supply chain finance platforms: (1) payment processors for trade Source: IFC settlement, (2) package providers for standardized products and financing, and (3) global trade management providers for It is important to consider that the above categorization is not payment settlement, distribution of risk, cash management, and mutually exclusive and that there is a degree of overlap owing other comprehensive services. Banks can select platforms that to the emerging nature of the industry. Another dimension to best match their needs and fill the gaps of their own technology consider when looking at technology platforms is the anchor infrastructure. focus and the product range. Settlement processing. Platforms such as Ariba, Oxygen There are platforms that focus more on international and tier Finance, and GT Nexus support the electronic flow of trade one anchor companies, while the emerging platforms place documents and information, document exchange, automation of greater focus on tier two and/or regional and local corporates. payments, e-invoicing, data matching, and reconciliation In addition, the range of products offered by the platforms between buyers and sellers. Such platforms provide banks with varies, especially when it comes to their ability to offer transparency on buyer and supplier transactions, simplifying distributor finance solutions.8 financing decisions and allowing buyers and suppliers to collaborate on a single platform. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Emerging Trends in Supply Chain Finance Figure 4. Competency framework of a successful supply chain finance program Supply chain finance securitization Supply chain finance trade payables and receivables can be packaged into securities and distributed to capital markets along with other types of derivatives. Some platforms (for example, the one offered by CRX Markets) offer an auction-based securitization platform that provides various types of investors with access to this type of instrument. New solutions are appearing in the market that have the ability to reduce the risk of a single issuer, distribute an exposure across several suppliers in a bundled security, issue it in capital markets, or sell it directly to private or institutional investors. Alexander Malaket says that “securitization is part of the market and gains attention in periods where banks experience balance sheet limitations and constraints and must remove trade business from the balance sheet. Fintech companies will have a role to play in these securitization processes which strive to diversify the risks.”9 Blockchain technology. With innovation occurring in the financial technology space, banks are looking for new ways to compete. According to Casterman, “blockchain technology can boost purchase order financing by providing greater security, better efficiency, and higher confidence in the data used for making financial decisions. Today, purchase order financing is quite underutilized, since it often requires a confirmation Source: IFC through letters of credit or other instruments. Blockchain can ease this requirement and enable purchase order financing for Operational model. A supply chain finance program requires wider use by SMEs.”10 a clear operational structure within the bank. This includes a According to the Global Trade Review, a number of institutions well-defined place in the organizational structure, clear including Standard Chartered Bank, DBS Bank, and Infocomm responsibilities, and streamlined processes. To achieve these it Development Authority of Singapore are discussing the is important to quantify the business opportunity for supply possibility of developing a blockchain-based invoice trading chain finance and gain a thorough understanding of the platform. It is based on Ripple’s distributed ledger technology operating and legal environment that will define the types of for tracking invoices, backing loans to suppliers, and reducing products and service offerings required for a specific market. It the risk of invoice duplication while maintaining client is equally critical to design good methodologies to segment not confidentiality.11 Such a platform would allow banks to convert only the corporate clients, but also their suppliers and invoices into digital assets on a distributed ledger. Participants distributors, along with having an appropriate coverage and get a cryptographic identity, while information on the status of commercial model to target, engage, and service clients in the invoices is accessible to all users, allowing third parties to supply chain. verify the authenticity of trade documents. Products and Services. When designing the product strategy and choosing which type of supply chain finance products to Building Competencies Beyond Technology for Sustainable offer, it is important to understand the market size and Supply Chain Finance Solutions competitive landscape in order to innovate and find the Technology solutions are an important factor, although they are appropriate offering that will quickly gain a sizeable market not the only driver of success when launching a supply chain share in the market, as well as the legal and financial finance program. There are other important factors, infrastructure landscape (such as moveable collateral registries) summarized in Figure 4. that will help to identify the most demanded and scalable supply chain finance products. A detailed product design with good accompanying credit policies and a product implementation This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. plan are key to successfully launching the new product supply Creating a supply chain finance program involves a complex set chain finance offering. of processes and procedures, which requires a strong central coordination function with a dedicated supply chain finance Sales and Delivery Channels. When designing the sales team. The team has to be responsible for gaining the buy-in model, financial institutions must establish a cost-benefit from various stakeholders in the bank (for example, analysis (for example, peer group comparison of working corporate/commercial, retail/small business, credit, capital efficiency) for each corporate client chosen to join the compliance, IT, legal, and HR), which often entails clear profit supply chain finance program. It must also create an onboarding sharing/shadowing arrangements, and a strong commitment mechanism for suppliers and distributors, detailing the from management to drive the program through inception to functionality of the program as well as the products, implementation. technology, and benefits of participating in the program. In In addition, this team also coordinates the external relations addition, a suitable sales outfit is required to allow the bank to with third parties and partners who work in the supply chain rapidly acquire, onboard, and manage a portfolio of new clients. finance space. To achieve efficiency while keeping operational costs low, financial institutions must tailor their service offering based on Conclusion the size of the targeted business. Supply chain finance can help banks grow their SME portfolios HR & Systems. Banks need to create the proper incentive and in a sustainable and risk-mitigated manner. The industry is reward mechanisms to align their sales force and achieve the rapidly evolving, with local and regional financial institutions growth and scale of the program. Training is often needed to realizing the inherent opportunities within their corporate equip the front line team, both corporate and SME staff, with portfolios. Market trade flows and the increased availability and the necessary technical and operational skills to sell and fully proficiency of technology platforms has made supply chain service clients in the supply chains. finance portfolio growth more feasible. Fortunately for financial institutions, there are multiple options Credit Risk Management. A number of areas need to be in beyond building an internal supply chain finance IT solution, place to successfully and safely scale up the supply chain including external technology providers. finance program, including designing the appropriate credit policies detailing the anchor client classification criteria and At the same time, financial institutions need to understand the corresponding buyers and suppliers. Industry benchmarks can market for supply chain finance and make the best use of also be established to improve the design of risk and pricing technology to create a solid supply chain finance program that profiles. is successful, scalable, and sustainable. For more advanced cases, the use of application and behavioral scoring models can help to support the credit differentiation Qamar Saleem is IFC’s global technical lead for the SME process, while installing early warning systems will help the Banking Practice Group and also the global lead of IFC’s bank to anticipate adverse movements in its portfolio and Supply Chain Finance advisory program for financial minimize expected losses. A well-structured collections institutions (qsaleem@ifc.org) framework and an active client management approach at the corporate and SME level are key to minimizing losses when late Martin Hommes is a Global SME Banking specialist and one of payment cases arise. the co-champions of IFC’s Supply Chain Finance advisory program for financial institutions (mhommes@ifc.org) Management Dedication. According to Eugenio Cavenaghi, Head of Trade, Export and Supply Chain Finance at Banco Aksinya Sorokina is an SME banking officer at IFC, working Santander, “the major challenge for banks in establishing a across regions to help financial institutions become more supply chain finance business is aligning the interests of various competitive, efficient and innovative (asorokina1@ifc.org) internal stakeholders. Senior management and business line leaders should understand the importance and benefits of Acknowledgments supply chain finance which includes high returns, low risk, and The authors would like to extend special thanks to contributors a strengthened relationship with the clients. Once the interests Wendy Teleki, Farzin Mirmotahari, Nuria Alino Perez, Nevin are aligned, the institution should mobilize the necessary Turk and interviewees Alexander R. Malaket, André resources. In order to establish a well-functioning supply chain Casterman, Enrico Camerinelli, and Eugenio Cavenaghi for finance business, the bank needs to allocate significant their time and highly valuable insights. resources, both human and financial.” 12 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. About IFC and its supply chain finance practice IFC, a member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets. Working with more than 2,000 businesses worldwide, we use our capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In FY16, we delivered a record $19 billion in long-term financing for developing countries, leveraging the power of the private sector to help end poverty and boost shared prosperity. For more information, visit www.ifc.org. IFC has a strong track record of enabling access to finance to small and medium enterprises through supply chain finance programs, and it has successfully completed investment transactions and advisory projects with both large companies and financial institutions. Focusing on financial intermediaries, IFC offers a range of investment and trade finance solutions through the Global Trade Supplier Finance Program, a $500 million multicurrency finance program launched in 2010 to provide affordable short-term financing to suppliers in emerging markets. In addition, IFC offers comprehensive supply chain finance advisory services that help client financial institutions launch new or scale up existing supply chain finance programs through market research, business model design, product development, sales process enhancement, technology set up, and credit and risk management. IFC as a trade finance counterparty and an investor in the financial technology market works with Nafin, GT Nexus, and Prime Revenue platforms. 1 Malaket Alexander, “Leveraging Supply Chain Finance for manufacturer to cover the holding of goods for resale and to Development,” International Centre for Trade and Sustainable bridge the liquidity gap until the receipt of funds from receivables Development, September, 2015. following the sale of goods to a retailer or end-customer.” See 2 Enrico Camerinelli, “A Study of the Business Case for Supply BAFT - Euro Banking Association (EBA) - Factors Chain Chain Finance,” ACCA and Aite Group, 2014. International (FCI) - International Chamber of Commerce (ICC) - 3 Factor Chain International Statistics (2008-2014), International Trade and Forfaiting Association (ITFA), Standard https://fci.nl/en/about-factoring/statistics. definitions for techniques of supply chain finance, 2016. 4 David Bannister, “Demica report shows strong growth for 9 Comment by Alexander Malaket to IFC staff, 2016. supply chain finance,” bankingtech.com, May 29, 2013, 10 Comment by André Casterman to IFC staff, 2016. http://www.bankingtech.com/144222/144222/. 11 “Banks develop blockchain platform for trade finance,” Global 5 Comment by Eugenio Cavenaghi to IFC staff, 2016. Trade Review, Dec. 17, 2015. 6 Comment by Enrico Camerinelli to IFC staff, 2016. 12 Comment by Eugenio Cavenaghi to IFC staff, 2016. 7 Comment by André Casterman to IFC staff, 2016. 8 Distributor finance is also known as buyer finance and is defined as “the provision of financing for a distributor of a large This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.