Global Supply chain finance’s (SCF’s) original value proposition is to facilitate access to finance by arbitraging an “anchor” buyer’s lower funding costs on selected suppliers’ behalf. This principle of SCF would lead one to believe that almost all existing SCF programs are running with strong credit-rated buyers. In this report, Aite Group uncovers that, contrary to general expectation, a significant portion of current SCF programs are anchored around sub-investment grade companies.

Most frequently used SCF models’ origination platforms attract companies that want to sell their receivables and match these with the funding eligibility criteria established by funding providers. But the lion’s share of origination is now being taken by newly entering companies from the peer-to-peer (P2P) lending space, which lend money to individuals or businesses by matching lenders directly with borrowers through online services.

The initial model of bank-centric SCF platforms, in which banks were both originators and funders, has now morphed into a model with a variety of specialized participants that cover a wider spectrum of necessities and offer more tailored solutions. The SCF market is therefore morphing into more articulated schemes, with various models available to service the needs of corporate clients.

Banks fear losing control of the SCF marketplace unless they resolve major pain points in the areas of

LACK OF COMMON TERMINOLOGY: The matter is so sensitive that the Global Supply Chain Finance Forum—an initiative of a number of sponsoring industry associations facilitated by the International Chamber of Commerce (ICC) Banking Commission —recently published and championed a set of commonly agreed standard market definitions for supply chain finance and SCF-related techniques.  The initiative intends to help create a consistent and common understanding about SCF, starting with terminology definitions and following it with advocacy in support of global adoption of the standard definitions.

SCF PROGRAMS “BUREAUCRACY”: The administrative bureaucracy around the setup of an SCF program is still significant. Not all suppliers are invited to the anchor buyer’s SCF program. Banks require frequent credit checks, which distract from business and turn SCF programs into an administrative nightmare.

LENGTHY ONBOARDING PRACTICES: Onboarding refers to the bank’s ability to bring new suppliers into the SCF system. It is often perceived as a daunting task because it demands that companies change their existing process and adopt a new one. For large and midsize companies, the change may seem normal, but for small companies, this disruption may be a major roadblock to implementation. Slow adoption of SCF programs does not depend on lack of demand from companies. The steering wheel is squarely in the hands of banks (could it be otherwise?) that are either unable to comply with KYC controls or unwilling to cannibalize the very profitable income of their factoring business units. Nothing prevents banks from putting their factoring business under the wider supply chain finance umbrella. If they choose not to, banks will remain product-centric dinosaurs in the eyes of their corporate clients, despite all the marketing efforts and attempts to declare their dedication to a client- and solution-centric “cause.”

LEGAL AND ACCOUNTING TREATMENTS: Corporate chief financial officers presented with SCF schemes are concerned about applying the correct balance sheet treatment to avoid the reclassification of trade indebtedness as bank debt under certain transactional structures. The case of Moody’s Investors Service reporting that Spanish environment and energy group Abengoa SA’s largescale reverse factoring program had debt-like features proves the highly sensitive nature of the matter. The treatment of SCF transactions in trading parties’ books has implications for balance sheet presentation of the relevant assets and liabilities. Common practice suggests a case-by-case approach. In view of the sensitivity of the issues raised, the varying accounting rules and practices applicable on a country-by-country basis make this a highly competitive area for banks.

THE IMPACT OF TECHNOLOGY: Traditional SCF programs look at a company’s profitability, cost of goods, sales figures, and growth projections. Collecting and interpreting data can take weeks, given the lack of standards in both documentation and pricing methodologies. New programs leveraging big data from global business networks are revolutionizing business across all industries and now also SCF. Funding decisions on the trading partners’ performance history instead of the buyers’ or the suppliers’ credit open up the flow of capital into the supply chain and reduce costs and risks.

THE (THREATENING) ROLE OF NEW ENTRANTS: New entrants, including P2P lenders, dynamic discounters, and early-payment marketplaces help buyers and suppliers efficiently exchange purchase orders and invoices, and accelerate cash transfers using innovative technology. Private investors, financial institutions, or even buyers are able to provide funding for these new solutions as the asset class opens up to nonbank lenders. These players are having the most impact financing SMEs, challenging the banking industry by helping those companies and increasing working capital efficiencies.