Platform power: Eeny, meeny, miny, moe – with which provider shall I go?
TXF’s Hesham Zakai ventures into the brave – but not so new – world of supply chain finance vendors and their respective offerings.
The market for supply chain finance solutions is a broad and burgeoning one, with an abundance of established and up-and-coming players jostling for position. This competitiveness creates a healthy choice for corporates looking to adopt a supply chain finance programme. But with great choice comes great responsibility. (A bit like picking first from a Christmas chocolate selection, but with the added pressure of the choice you make resulting in a tangible impact on your entire company’s working-capital position).
In a sign of the oft-confusing nature of the landscape, there are also about as many supply chain finance definitions as there are providers. No wonder the International Chamber of Commerce Please wait... (ICC) launched a multi-association major undertaking with the Herculean task of harmonising the sector’s terminology – an undertaking it is still finalising nearly 18 months later.
To simplify matters – or rather make them manageable – this article takes as its starting point a corporate concerned with liquidity and the robustness of its supply chain, looking for a solution that would allow it to effectively help finance its suppliers through some form of early payment of invoices. This certainly narrows the parameters, but corporates are still confronted with a series of choices on the road to adopting such a solution.
The first fork in the road is deciding whether to opt for a bank proprietary or bank agnostic/multi-bank model. Both options have their benefits and drawbacks and a corporate will usually opt for one or the other for a variety of reasons, including whether they consider i) not being dependent on one single institution (and therefore the ebb and flow of their liquidity) or ii) deepening their relationship with their existing house bank, to be the bigger priority for them.
For those that go with a bank proprietary solution, they will often do so with their main relationship bank. The guide that follows, however, is aimed at those who instead venture into the brave but now not-so-new world of multi-bank supply chain finance providers.
It is accompanied by a strong caveat that neither the list of features nor the service providers are comprehensive; such an undertaking would be more Herculean than that of the aforementioned ICC’s.
Instead, it provides information about a set of providers that would be useful to corporates assessing prospective supplier-financing programmes. These include dynamic-discounting processes, information on how buyers can self-fund their programmes and on whom the burden of supplier onboarding and compliance falls.
In addition to the features detailed in the table, Enrico Camerinelli, senior analyst at Aite Group Please wait... , adds that corporates should also consider an additional two factors: “The service provider’s capability in assisting the corporates with dealing with accounting and tax treatments; and the flexibility of their technology platform to integrate with bank back-office systems and corporate ERPs (Enterprise Resource Planning).”
The table indicates that while there are a number of common factors in the offering of service providers, there are also key differentiators – particularly in the area of funding sources and financing rates.
Orbian was one of the earliest innovators in the supply chain finance space and the size and scope of some its programmes can draw comparisons with some of the major bank players. Where it is increasingly appealing to a broad customer base is in the ease of use of its capital-markets model, whereby it raises funds through the issuance of notes to accredited investors.
Despite its straightforward link to bank and capital-market investors, the option is also available for buyers to purchase the notes themselves and, therefore, effectively self-fund their own supply chain.
This flexibility is also a central tenet of Taulia Please wait... ’s offering, which aims to respond to different buyer strategies.
“The buyer’s strategy could be working capital optimisation, in which case they would primarily go for a third-party financing option,” says Matthew Stammers, Taulia’s European marketing director.
“Many large corporates are now primarily self-funding, but through a vehicle that allows third-parties to come in as well, affording them more flexibility,” he adds.
Self-funding can be a positive solution for corporates when they have excess liquidity. However, when that is not the case, or when they would prefer to distribute that excess liquidity in a different business segment, such as an M&A, the ability to easily put the funding burden back onto the market is a welcome one – for the buyers and suppliers.
“It’s great for buyers because they can be confident that their suppliers will not experience an on-off shock situation,” says Stammers.
Going, going, gone...
While Taulia’s financing rates are determined by crunching a huge amount of data, including leveraging its 600,000-strong supplier database, CRX Markets Please wait... takes a different approach.
CRX Markets has an auction model, which sits alongside a more standard financing model. The auction process works through securities being offered to investors in a pre-announced auction that runs for five minutes. Investors submit their bids for each security and are able to see all competing investor bids (anonymously) in real-time. Needless to say, the highest bidder wins.
The corporate client can influence the auction’s parametres in three key ways: 1) Excluding certain investors from being able to bid; 2) Setting a pre-defined price range for the security; and 3) Purchasing the invoices themselves.
The ad hoc nature of an auction can remove an element of certainty and consistency from the process, but CRX Markets argues that it leads to better financing rates for the programme, based on a price that fully reflects the supply-demand dynamics of the market.
“Today’s supply chain finance offerings are still dominated by banks or platforms working with banks on fixed-price arrangements. Hence, the respective banks determine pricing in most supply chain finance programmes. Multiple credit risk, liquidity and regulatory-capital considerations are factored into the pricing of banks and then matched against the general client relationship with the corporate,” explains Urs Strewe, chief operating officer of CRX Markets.
“The CRX pricing approach invites investors to a fair and transparent, yet competitive, auction with suppliers benefiting from the lowest available financing rates,” adds Strewe.
The success of a supply chain finance programme often comes down not to who is financing it or how the rate is set, but to the extent to which the service provider is able to onboard suppliers onto a buyer’s programme.
“Too many people neglect the onboarding process, but it is absolutely critical,” says Oliver Belin, vice-president of receivables finance at PrimeRevenue Please wait...
This is an area in which the leading non-bank players have been able to steal a march on their banking counterparts, leveraging their technology and resource capabilities in this area.
Says Belin: “Supply chain finance has to be sold three times: firstly to the buyer, then the supplier, then the funder who has to come and finance the solution.
“Most banks neglect the second point – because it is a lot of effort and legwork, so what you tend to see in most bank-led programmes is that there are 20, 30, maybe 50 suppliers in each programme focusing on the top suppliers who are willing to join the programme.”
In a bid to penetrate deeper into a buyer’s supplier base, PrimeRevenue introduced SciEnable with the hope of making the onboarding process simpler and faster.
It is a web-based interface where the buyer has a link to a portal in multiple languages that educates the supplier on the programme. It includes a message from the buyer’s CFO; gives them a case study; an interactive calculator so they can calculate their pricing; and a video demonstrating the different steps.
“This allows us to reach suppliers with as low as $100,000 in annual revenue. Then the most important part of the onboarding phase is registration. Based on the need of our funders, the registration part is adjusted so that we collect the relevant KYC information needed,” says Belin.
This information is then packaged and made available to funders, who review it but are required to also carry out their own due diligence and necessary compliance checks.
Kryiba, which counts 1,000 corporate clients globally, does not currently offer a compliance-checking process, leaving that to the banks involved in its programmes – although they are looking into the possibility of developing such mechanisms.
Its emphasis is presently placed on other aspects of its offering, such as a strong user interface.
“We come into these programmes from the treasury-management space, so we leverage the existing knowledge we have of our client base,” says Abhinav Saigal, director of supply chain finance at Kyriba Please wait... .
Kyriba provides a number of tools to allow corporates to look back on a programme and assess where it is proving successful. This is an essential step in the evolution of supply chain finance, as in order to justify the investments made in it, tangible results on a buyer’s accounts and supply chain has to be demonstrated.
Says Saigal: “We offer all of our clients detailed reporting and analytics tailored to their requirements, which can then be transformed into downloadable reports.”
Combining the old and the new
Evidently, even within the field of non-bank supply chain finance providers, banks still have an important role to play – and not just in the funding domain. With compliance checks, for example, they are still incredibly well positioned to do this given their comprehensive networks, systems and databases. In an environment where regulation continues to provide a challenge, this is an evermore-valued asset.
The innovative nature of this market certainly means it is a constantly transforming one in which no one player can sit on their laurels, feeling secure of their position without keeping up with the changes – implementing key changes quickly is necessary to stay ahead.
Yet at the same time, the fundamentals of good service provision are timeless – and so even in a quickly moving environment, the importance of reliability, a strong track record and a secure infrastructure cannot be overestimated.