The ICC today released an official set of definitions for supply chain finance (SCF) and its techniques. The challenge now, says the ICC, is to convince supply chain financiers, many of whom have been operating their own set of SCF definitions for years, to adopt these new official definitions.
Defining supply chain finance (SCF) has always been a recurrent problem among trade financiers and corporates. A lack of industry definitions has hampered the debate on how to improve SCF solutions, and worse, often confuses firms seeking to use SCF products. Having an official set of SCF definitions is a clear win for the trade industry. However the challenge for the ICC now is to push SCF practitioners to adopt these definitions.
The new ICC report was launched today at an ICC Academy Supply Chain Finance Summit in Singapore and defines both supply chain finance and the common techniques used in supply chain financing.
The document, which has been almost two years in the making, seeks to address confusion among stakeholders as how supply chain finance and its associated techniques should be defined. It includes definitions and descriptions of eight identified core techniques and the Bank Payment Obligation (BPO) as an enabling framework for supply chain finance.
These new official ICC definitions will need to be adopted widely by the industry if they have any chance of clearing the existing levels of confusion in the market place. However, SCF platforms and firms may be reluctant to give up their existing SCF definitions which would inform a lot of the taxonomy behind nearly all of the SCF platforms, products and most of their marketing.
“We do recognise that a number of the larger institutions had invested a lot of time in developing their own terminology, which is part of the reason that you’ve got all these different nomenclatures sometimes working at cross purposes,” says Alexander Malaket, deputy head of the ICC Banking Commission’s executive committee, and one of the authors of the new SCF definitions.
The initiative was jointly developed by the ICC Banking Commission (acting as project facilitator), BAFT, the Euro Banking Association (EBA), Factors Chain International (FCI) and the International Trade and Forfaiting Association (ITFA). The International Factors Group (IFG), one of the original sponsoring associations, is now integrated with the FCI.
The drafting group worked under the guidance of the Global Supply Chain Finance Forum Steering Committee and consulted the members of its five participating associations – including non-bank stakeholders – to come up with a set of definitions that matched industry experience.
Malaket explains: “The idea is to create a common view of what supply chain finance is at the master definition level, and then at the techniques level.”
The document defines supply chain finance as the “use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions. Supply chain finance is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform”.
Now that the document is in the public domain, the next challenge will be advocating for its adoption, says Angela Koll, specialist in project management for trade and supply chain finance at Commerzbank. “For a number of years we didn’t have terminology, so market participants – banks, corporates, and providers – all used their own definitions.” Convincing those participants to give up their old habits and adopt the standard definitions will be tough, she says, and will only be achieved if they can see the added value of harmonised terminology.
So where is that added value? According to Malaket, it lies principally in improving efficiency in the use of supply chain finance. “I think that clarity and transparency around terminology and language will encourage more effective communication about the options and will encourage an education process among users and stakeholders across the industry,” he tells TXF, “So from my perspective, although I don’t want to overstate the impact of the nomenclature and terminology document, I think the clarity that will flow from it should lead to greater and more effective usage of supply chain finance structures and solutions.” Koll adds, “I noticed in discussions at supply chain finance conferences that participants and panellists often discussed what supply chain finance is, what’s in, what’s out, and that we didn’t have a common language. I think that we should no longer be discussing what supply chain finance is – instead, we should have a more valuable discussion about the development of supply chain finance. If we want to have more value-added discussions, we need a common language.”
Koll also hopes that clearer definitions will encourage greater uptake of supply chain finance among small and medium-sized enterprises (SMEs). “In Germany, for example, we have a significant number of SMEs,” she says, “They need – maybe more so than others – to understand what supply chain finance is. They need guidance and definitions. They need to know exactly what different solutions there are in the market and they need to know what belongs to supply chain finance and what is an extended solution for supply chain finance.”
Koll and Malaket both recognise the fact that standard terminology is only the first step in improving the efficiency and uptake of supply chain finance. Looking forward at what the next steps might be, Malaket says, “It might be some guidance from the industry; it might be a set of rules around supply chain finance and around some of the techniques in supply chain finance that have been defined. In the document, we try to put supply chain finance in the broader context of international and trade financing. We try to articulate its relationship to traditional trade finance and create a bit of a road map to explain how we see the pieces fitting together.”
Both are keen to point out that the definitions are a “living document,” that will continue to evolve in line with market feedback. TXF looks forward to seeing how that evolution plays out in the long term.
An unmissable opportunity to examine how we can innovate within export finance and ensure that it remains a core business for financiers, insurers, exporters and borrowers alike.