Supply Chain Finance: Bigger, Better, Faster
The pandemic put significant liquidity pressure on smaller suppliers and distributors, driving the need for a rapid and high-volume deployment of Supply Chain Finance. Demand for Supply Chain Finance is likely to remain strong, or even increase, as governments withdraw pandemic support, such as bridging loans and grants. This could trigger onboarding bottlenecks and capacity constraints, restricting Supply Chain Finance availability when most needed. However, as Amit Agarwal, Head of Open Account Trade Products at DBS, explains that business can overcome this challenge by having the right funding partner with digital onboarding capabilities.
Supply Chain Finance drivers and enablers are both increasing
The pandemic has been one of the greatest drivers for the current high demand for Supply Chain Finance. At the outset, it quickly became apparent that SMEs, unlike larger corporates, would struggle to access sufficient working capital. Larger corporates, anxious to avoid disruption to their supply chains due to the failure of smaller suppliers, were quick to respond. This caused a sharp increase in the size and number of Supply Chain Finance schemes launched to satisfy the urgent financing needs of smaller suppliers and buyers.
Another driver has been the further shift of major supply chains into ASEAN as businesses seek greater diversification of manufacturing and suppliers, with low-cost markets, including Vietnam, Bangladesh, India and Indonesia, seeing rapid growth. The recently signed Regional Comprehensive Economic Partnership also shows how Asia Pacific trade integration is growing and boosting intra-Asia trade flows. Collectively, these changes are creating new demand for Supply Chain Finance, especially in low-cost markets.
Sustainability is another important driver of Supply Chain Finance volume as it compels greater transparency and accountability in integrated supply chains, thereby reducing the risks of unexpected supply disruption. The maximum benefit is achieved when this is supported by a robust mechanism that facilitates the categorisation, monitoring and reporting of financing of sustainable activities1.
The good news is that Supply Chain Finance demand created by these various drivers can now be easily serviced due to technological and structural advances. For instance, growth in 5G networks makes greater use of internet of things (IoT) and blockchain possible for tasks such as tracking goods and personnel, thereby enabling more efficient and faster deployment of sustainability-linked Supply Chain Finance. This is also supported by cloud computing, which substantially reduces processing costs and supports API connectivity to assist swift onboarding.
An important structural change that also supports better Supply Chain Finance provision is the evolution of ecosystems where entire supply chains participate on a single platform. This means that data analytics can be used more effectively to predict the Supply Chain Finance needs of SME merchants and suppliers.
Supply Chain Finance implementation challenges: two parts of the puzzle
Rapid Supply Chain Finance onboarding of smaller suppliers/distributors has become critical if supply/distribution chain disruption caused by the failure of key partners is to be avoided. Nevertheless, many Supply Chain Finance solutions still require suppliers/distributors to engage in laborious onboarding processes, which deter wider uptake and delay the delivery of much-needed Supply Chain Finance.
There are four main reasons for this:
- Documentation: The documentation executed by banks with anchor corporates and suppliers/distributors is not standardised, so a new Supply Chain Finance programme is likely to require lengthy due diligence by the corporates.
- Anchor Connectivity: High demand for technology resources caused by the pandemic means that many corporates lack the internal capacity for setting up connectivity with the bank.
- Engagement: Anchor corporates are also short of resources to promote the benefits of Supply Chain Finance to suppliers/distributors, though this is less of an issue post-pandemic as more SMEs now appreciate its advantages.
- Bank limitations: Manual processes and limited capacity mean that delays can often be caused by the bank being unable to service the volume of corporate Supply Chain Finance requests.
Hence in some cases, the onboarding of the large corporates that act as the anchor credits for Supply Chain Finance schemes is often slower than onboarding of suppliers/distributors.
Supply Chain Finance solutions requirements: speed and capacity
Fortunately, these challenges are not insurmountable. The potential bottleneck with onboarding suppliers/distributors can be readily overcome with the right combination of technology and process. During the pandemic, DBS rolled out a simple seven screen digital Supply Chain Finance onboarding process that typically takes 30-45 minutes to complete (regardless of supplier location). This makes it possible for suppliers to be onboarded and start receiving funding in less than 48 hours2.
In the case of ecommerce, Supply Chain Finance solutions can achieve even greater efficiencies by taking advantage of real-time supply chain data and predictive analysis to finance buyers/suppliers on digital aggregator platforms3.
When it comes to onboarding anchor corporates, banks can significantly improve the situation by not insisting on using their own documentation. By being prepared to use (either wholly or partially) documentation the corporate is already familiar with, they can sharply reduce the corporate due diligence overhead and accelerate the whole process.
One of the fastest growing demand areas for Supply Chain Finance is the sustainable supply chain. Correctly implemented, Supply Chain Finance can not only provide essential funding, but also enhance transparency to ensure continuous compliance with sustainability. Collectively, this results in improved resilience and sustainable production for the anchor corporate and secure funding for suppliers that can be used to support sustainable working practices.
Effective Supply Chain Finance delivery
Demand for Supply Chain Finance continues to increase rapidly, especially in sustainable supply chains. Successfully fulfilling this demand necessitates overcoming a variety of obstacles, with most relating to onboarding. However, focusing on just improving supplier/distributor onboarding is not enough. Improving corporate anchor onboarding is equally essential and yet is often neglected, thus delaying the whole process. The ideal Supply Chain Finance bank therefore needs to not only be able to deliver on both points, but also have the capacity in terms of balance sheet. In the current Supply Chain Finance environment, speed and capacity are essential, but few can deliver both.
This article was first published by Global Trade Review in November 2021.
1DBS has published a Sustainable and Transition Finance Framework and Taxonomy for this purpose.
2The same approach also works well for distributors – e.g. Haier Group rolled out an integrated financing programme during the pandemic with DBS for its distributors, which gives them online financing for their purchase orders within 24 hours.
3For example, DBS Alternative Lending for Trade