This article by our Financial Solutions Manager Lars Rolf Jacobsen is “Thought of the Month January 2012″ on the European Supply Chain Finance LinkedIn group.
Supply Chain Finance (SCF) programs have the potential to provide value for buyers, suppliers and banks/finance companies. This is because funding is often scarce and expensive for many (especially smaller companies), large buyers push for extended payment terms to reduce working capital investments and banks are forced to reduce the consumption of risk-weighted assets and corporate lending.
SCF can create a win-win situation for buyers and suppliers alike. So, if we agree on the value proposition, the interesting question is why SCF has not gained more traction.
The answer is actually straightforward. No one has been able to provide a Supply Chain Finance solution that realises its full value potential. Existing solutions fail to achieve critical mass, implementation is cumbersome and expensive and existing technology has not been advanced enough to support it.
I think the way to roll out successful and scalable SCF solution is to fully embed it into a single e-invoicing platform that can then handle all information exchanged between companies and financial institutions electronically.
Here are four reasons why integrating e-invoicing and SCF makes sense:
Manual and cumbersome onboarding means only the largest suppliers are targeted. E-invoicing makes it possible to include the long tail of suppliers and gain critical mass.
Currently, the onboarding of suppliers is manual and complex with the buyer and the funding bank having to approach suppliers one-by-one. It’s necessary to explain the business case, the suppliers have to get to grips with the portal itself (which only will be used for this SCF solution) and often legal terms have to be negotiated individually. As a consequence, only 1-2% of the largest suppliers are invited and the potential value in the long tail supply chain is lost. I think this will change when SCF is bundled with e-invoicing platforms. This campaign-driven approach to onboarding is already revolutionising the e-invoicing market. SCF could easily be integrated into this.
It gets even better too, as SCF creates yet another incentive for suppliers to join an e-invoicing platform and so the buyer’s e-invoicing business case is strengthened.
Proprietary platforms from banks lock up customers at the expense of competitive pricing. E-invoicing solutions allow for SCF via a bank independent platform.
Most SCF platforms are owned by banks that decide funding terms and pricing. So what can customers do if the pricing isn’t competitive? They could approach another bank but the switching cost would be high and the buyer risks failure as suppliers will often not be willing to switch. At the same time, bank dependence is a problem for global enterprises as even global banks do not have a presence in every market, which could lead to inefficient pricing in some countries. Another example of the issues related to the ownership of SCF platforms was seen during the current financial crisis when some banks stopped SCF programs due to lack of funding and the enrolled customers had to start all over. If SCF is operated via a bank independent platform, then it is possible to support price competition and multiple funding banks.
Currently platforms are built around single products like SCF. Why not include a portfolio of financial products benefit buyers?
Platforms are currently single purpose; banks have SCF platforms and other providers have tried to build platforms for products such as Dynamic Discounting (also known as Early Invoice Settlement). Of course, banks have no incentive to launch platforms where they cannot profit from lending out money – a product like Dynamic Discounting is simply not profitable for the banks as it is “funded” via a buyer’s excess cash position. Furthermore, current platforms cannot often support multiple products from a technical standpoint. By launching SCF via an e-invoicing platform, more options become available such as combining SCF and Dynamic Discounting in one platform. The e-invoicing provider and the buyer have aligned incentives: launch products that create value for buyers, not the banks.
E-invoicing supports integration to internal workflows as well as other portals operated by the buyers and suppliers.
A key benefit of e-invoicing is that it is possible to integrate existing workflows. And, if integrated with e-invoicing, this will also be the case when it comes to SCF. A good example is the approval flow of invoices. The most advanced e-invoicing platforms are built to create real-time communication between buyers and suppliers via invoice status updates and real time messaging. This means invoice approval flows are already included in the e-invoicing platform and clearly this is also a key element of SCF.
While this might seem like a radical new approach to what are generally accepted processes, there is no doubt that many businesses are currently failing to make the most of SCF. By embedding SCF into the new, emerging generation of cloud-based e-invoicing platforms, buyers and suppliers alike will stand to benefit and the potential of SCF might finally be realised.
