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SCF: You say tomato, I say tomato, let’s call the whole thing off?

Is it time for supply chain finance to be rebranded? Looking 10 years out is a good way of focusing the mind. Even though there’s a big industry around SCF, will we still be looking at it in the same way in 2029? Katharine Morton looks at what may need to change.

You say potato, I say potato, potato potato, tomato tomato, let’s call the whole thing off? Gershwin’s classic, first sung and danced (on roller skates) by Fred Astaire and Ginger Rogers (backwards on skates in her case!) in the film ‘Shall We Dance’ (1937) doesn’t look so good on paper, but it has been playing on my mind. What’s in a name? Financing the supply chain of the future may not involve the term supply chain finance (SCF). So, for many reasons (some of which I’ll consider here), is it ripe for a rebrand?

At the keynote ‘21st century vision for trade’ session at the ICC’s Trade and Supply Chain Finance in London on 14 November, I asked whether we will still be speaking about SCF in the same way in 10 years’ time, will it even exist as a concept.

“I hope not,” says James Binns, managing director, global head of trade and working capital at Barclays. He thinks it will be all about cross-border trade and working capital management. “I try and encourage [companies] to think about understanding what the cost of funding is in their supply chain and how that's impacting the unit cost of what they're buying from their suppliers and how, in a more transparent world, and a fairer world, in terms of risk allocation and capital allocation across those supply chains, you can actually start to bring down the cost of production.”

Both buyers and suppliers can start to share from those types of considerations. Supply chains in the future that are good or better at doing that will be the ones that thrive over other supply chains. “While I've used the words supply chain or the words supply chain finance liberally in my explanation, personally, I hope that the current connotation of supply chain disappears and people start talking about ‘what's the cost of funding’, ‘what's the efficient cost of allocation of capital across ecosystems’, and ‘supplier ecosystems’,” Binns says. 

Technology is lending a hand. Michael Vrontamitis, head of trade, Europe and Americas at Standard Chartered, adds, “the evolution of credit models will lead to banks improving their product suites. Machine based learning is improving our ability to extend credit. That will enable us to offer cheaper credit, further down the supply chain over a period of time, by understanding the interaction between the buyer and seller.”

All that will be critical to help close the trade finance gap, bankers argue. Accurate pricing of risk is at the heart of this. The ICC Trade Register is one resource the banks are using to help demonstrate the quality of assets they are putting on their books that ultimately should have an impact on the capital models applied to trade to help with developing new products.

Skating backwards: reverse factoring in the spotlight

Rewinding a little (skating backwards in roller skates, if you like), SCF has always struggled with its identity. An umbrella term for a series of financing processes along the supply chain, whose specific standard terms were defined (at some considerable length) by the ICC in 2016.

Some argue that it’s not SCF per se, but one specific tool within it – reverse factoring – that’s a concern. Arguably, the processes around the clumsily-named reverse factoring (widely still called ‘confirming’ in the Spanish speaking world) are what most think of when they say SCF.

Moody’s put out a report on 19 September that reverse factoring’s popularity comes with high but hidden risks, that few corporates reveal their use of it, and both corporate users and investors may not be able to see their exposure in the absence of disclosure. The defaults of Abengoa (whose extended payment terms in its SCF programme created ‘debt-like features’ according to Moody’s) and UK construction firm Carillion are both frequently cited as examples of where SCF may have weakened the companies’ liquidity, and contributed to their downfall (not forgetting the effects on their suppliers).

Mark Evans, MD Transaction Banking at ANZ, doesn’t think there needs to be a wholesale rebrand. “Part of the reason why we [at the ICC] put the standard SCF definitions out there was to draw a line between supply chain finance versus someone financing someone’s supply chain, which is still a loan, rather than rebranding the whole SCF term.”

Evans is keen to note how low risk payables financing is. “SCF, including payables financing, has been included in the ICC Trade Register for the first time this year [for the 2018 register] and the products have proven to be no worse risk than trade business, and in some cases, better,“ he says.

What about banks’ response to headline events at Carillion/Abengoa or the controversial use of SCF in Vodafone/GAM Greensill SCF Fund? By coincidence, Greensill’s CEO, Lex Greensill, puts his positive point of view on reverse factoring in AFR on 20 November.

Nonetheless, as one senior banker says, “There’s still a lack of understanding of trade, and there’s a grey area in open account, what documents do I have, short term sales, pricing liquidity properly, people need to know what’s going on and where SCF fits in. Some programmes are pure funding vehicles.”

Weird markets mean weird outcomes

The criticism that some programmes are pure funding vehicles hits home with a head of trade at a US bank. “SCF has replaced commercial paper (CP) programmes on one level for some companies and banks,” he says. “It’s taking the place of CP in some players’ minds, corporates are generating funding from operating free cash flow.”

But the way risks are measured and priced are fundamentally different. And that’s all very well for highly rated anchor corporates, but if their ratings soften (as happened with GE before it ported its GE Capital-backed SCF to MUFG) and for other early creators of large SCF programmes), things can get weird. Weird markets – with central bank interventions driving low/negative interest rates aren’t helping.

Another criticism persists that many reverse factoring programmes are not catering for the needs of smaller suppliers and that many bank-led programmes don’t engage with onboarding the long tail of smaller suppliers.

All the bankers I’ve spoken to on the subject agree that, at the very least, education is important. “I don’t think it’s time to rebrand, but ongoing efforts are needed to reflect the technology used and encourage banks and non-bank investors not to loosely use supply chain finance [as a term] – it’s more a need to educate rather than rebrand. Things have become too complicated in some people’s eyes and the brand ‘supply chain’ has been allowed to be diluted,” says Evans.

What can help? “Thought leadership, making sure key messages get through and the opportunity to contribute to the communities in which we operate through values-based solutions,” Evans says. “For instance, we’re exploring sustainable financing opportunities in supply chains through anchor clients that are financially sound to enable and reward risk-managed and compliant activities.” 

“Similarly, when done properly there can be real benefits for suppliers to work with their customers to ensure they mutually leverage their respective ‘buying’ power, ensuring the end- to-end costs of supply are managed as efficiently as possible,” Evans adds. “There is a misconception in some areas that this only results in additional fees or interest costs being incurred by SMEs who supply to larger companies but this is not the basis nor intent of the product and that needs to be better understood. We are working with industry participants and bodies such as ICC and BAFT to help get the message out there.”

Actions at industry level

That’s encouraging, and other banks and non-bank SCF providers such as Orbian are working with some corporates to incentivise their suppliers on sustainability via their SCF programmes. TXF will be looking more closely at financing sustainability along supply chains shortly.

Nonetheless, the unease about the term SCF among some banks persists and is palpable. As one senior banker at another US bank says, “We’re talking at an industry level in organisations such as BAFT to look to signing up to supply chain principles as the industry is looking to define what we’re calling supply chain finance. That means creating a set of principles to adhere to rather than bandying around SCF – and if you don’t adhere to them, we won’t call it SCF.”

But, you say potato, I say potato. Another senior banker at a Japanese-domiciled bank points out: “The question is if you rebrand SCF, would you change it?” He continues, “If you change the label from red to blue the flipside is still visibility [of the underlying], regulators are asking banks to know where trade is coming from and going to, but they also need to know what’s under the bonnet and what’s going on. Don’t pretend. It doesn’t need rebranding but risks need to be understood better. You can’t abdicate responsibility as people got burnt, for instance, with Carillion, but you need to share information more effectively.”

Articles on SCF, you may think, are like buses, and David Gustin, contributing author at Spend Matters doesn’t pull punches. “SCF is balance sheet manipulation with a smiley face,” he says in a thought-provoking recent article. To be fair, he does also note the good things SCF can do.

I do not expect SCF to be rebranded any time soon, and there’s a whole industry, both in the bank and non-bank financial services sector that come under its ample umbrella. So, to quote the song, “We’d better call the calling off, off”…for now. Ask me again before 2029.


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