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Technology is revolutionising
The missing link

supply-chain finance
Squeezed suppliers and big corporate buyers stand to benefit
Print edition | Finance and economics
Oct 12th 2017
 IN 2015 Kiddyum, a small company from Manchester that provides frozen
ready-meals for children, won a contract from Sainsbury’s, a big British
supermarket chain. Jayne Hynes, the founder, was delighted. But sudden
success might have choked Kiddyum’s cashflow. Sainsbury’s pays its
suppliers in 60 days; Ms Hynes must pay hers in only 30.

In fact Kiddyum gets its cash within a few days. Once approved by
Sainsbury’s, its invoices are loaded onto the supermarket’s supply-chain
finance platform, run by PrimeRevenue, an American company. The Royal
Bank of Scotland (RBS) picks up the bills, paying Kiddyum early. Kiddyum
pays a fee which, Ms Hynes says, is a small fraction of the cost of a normal
loan. Sainsbury’s pays RBS when the invoice falls due.
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Suppliers, of course, have always needed finance for the gap between
production and payment. Traditionally, they could borrow on their own
account, or sell their receivables—unpaid invoices—at a discount to
businesses known as factors. Modern supply-chain finance, now some 25-
years-old, also lets suppliers piggyback on the creditworthiness—and lower
borrowing costs—of big corporate customers. Cash replaces receivables on
their balance-sheets. Buyers can lengthen payment terms (from 60 to 90 days,
say), knowing suppliers are less likely to fail for want of cash. Banks acquire
good-quality assets.

Definitions of supply-chain finance abound and its scale is hard to pin down.
But it is agreed that it is growing fast. BCR Publishing, which reports on the
industry annually, estimates that at the end of 2014 banks and factoring
operations had €40bn-50bn ($48bn-60bn) of “funds in use”. Thomas Olsen of
Bain, a consulting firm, reckons (on a broader definition) that the market is
expanding by 15-25% a year in the Americas and by 30-50% in Asia, with
food and retailing among the most active industries. Naveed Sultan, who
heads Citigroup’s trade-finance and treasury divisions, says supply-chain
finance is the fastest-growing area of his trade business.

Unmet demand looks enormous. Even domestic supply chains are extensive.
A new study by Mercedes Delgado of MIT’s Sloan School and Karen Mills
of Harvard Business School finds that American firms supplying other firms
employ 44m people. Of those, employers of 26.8m are involved in
international trade. So far financing programmes have largely focused on big
corporations and their first-tier suppliers. Among the obstacles to growth are
know-your-customer and anti-money-laundering rules. The Asian
Development Bank estimates the annual global “finance gap” in trade
finance, a related field, at $1.5trn. Anand Pande, head of supply-chain
finance at iGTB, which provides technology to banks, calls supply-chain
finance “a land of unrealised promise”.

That is true for both banks and borrowers. Eric Li of Coalition, a research
firm, forecasts that this year large banks’ revenues from programmes
instigated by big buyers will be $2.8bn, 28% more than in 2010. If supplier-
led finance is included, growth has been just 18%, far less than for lending
volumes. Margins have been squeezed. The market is fragmented, Mr Li
notes. After the financial crisis, many banks cut back their foreign operations.

Only connect
They also face competition. Technology firms are pushing into supply chains.
Online lenders have made less impact than third-party platforms that match
buyers and suppliers to sources of finance. PrimeRevenue, for instance,
connects 70 lenders, including 50-odd banks, to 25,000 suppliers with $7bn-
worth of invoices a month. There is also space for specialists. Innervation
Finance, based in New York, manages programmes for buyers offering
finance to “diverse” suppliers (eg, run by people from ethnic minorities,
women, veterans, the disabled or gay people) in banking, manufacturing and
pharmaceuticals. Mark Ferguson, the chief executive, says the cost of capital
for such firms may be two or three times that of other small businesses.

More banks are setting up programmes. Bank of Baroda, a public-sector bank

that is India’s fifth-biggest by assets, began only a few months ago. Litesh
Majethia, who runs the supply-chain business, admits that rival banks are
already established. But with small and medium-sized Indian firms facing a
funding gap of $400bn, he says, there is plenty of room; and a spanking new
digitised system is a plus.

Banks are not, however, being overthrown by technological upstarts—as, say,

high-street retailers have been by Amazon. Symbiosis is the rule. Two big
banks, HSBC and Santander, have allied with Tradeshift, an invoicing,
finance and procurement network that connects over 1.5m buyers and
suppliers worldwide. HSBC has also joined forces with GT Nexus, a global
supply-chain management platform. Banks can tap into a new pool of
customers; companies in the tech firms’ networks can find finance more
easily. Smaller local banks, however, may lose out as the market expands,
and suppliers spurn them to borrow more cheaply from larger lenders.

Technology is opening up more possibilities. C2FO, another financial-

technology firm, matches suppliers’ requests for payment at a date and
interest rate of their choosing, with buyers willing to lend. Typical supply-
chain finance, says Sandy Kemper, C2FO’s boss, is far less flexible. His
platform is available to smaller suppliers. Back-to-back deals along the chain
are even allowing third- and fourth-tier suppliers to join in. No bank is
involved, though the firm has recently teamed up with Citigroup. Citi can
lend to more companies; C2FO gains access to the giant’s clients.

More is in the pipeline: banks are exploring, for example, how blockchain
technology might align the flow of data and money more closely with the
flow of goods. Bain’s Mr Olsen sees several business models emerging, some
led by single banks, some by groups of them, and others by platforms, big
companies and e-commerce firms such as Amazon and Alibaba. Not every
bank will win. The smaller fry in the world’s supply chains just might.

This article appeared in the Finance and economics section of the print
edition under the headline "The missing link"
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