When faced with the choice of cash to fund a corporate finance strategy or cash to meet a 30-day supplier schedule, the revenue-generating activity will obviously be more alluring. However, what happens if the supplier goes out of business in the meantime? The fact that there is a USD 1.5 trillion shortfall in global trade finance makes this concern even more real, especially if those suppliers are located in emerging markets. According to the Asian Development Bank (ADB), 40% of global trade finance rejections are in Asia Pacific, with small and medium-sized enterprises (SMEs) often the most severely affected. Enter supply chain finance (SCF) or, the focus of this article, payables finance – a buyer-led SCF technique through which sellers can access liquidity by means of receivable purchase. Traditionally, banks and corporate buyers have historically prioritised the “short tail” of the supplier portfolio – covering the majority of the procurement volume. Yet global programmes, improved technology, and partnerships between third party providers and financial institutions have all made it more possible than ever to reach SME suppliers with liquidity that transforms businesses and economies.
An increasingly global and innovative business
Payable finance, today, helps corporates of all shapes and sizes, with demand growing rapidly across Asia and Latin America. In fact, many of our clients now expect programmes that offer not only cross-border but also cross-regional capabilities. While working capital management has traditionally been the primary objective of many payables finance programmes, increasingly important motivations include the need to shore up certain points of supply chain vulnerability, corporate responsibility and long-term sustainability. This has helped broaden the reach of supply chain finance to emerging markets. One key development is SCF programmes executed in partnerships between development and commercial banks. An example of this is the deal announced on 22 November 2017 by Deutsche Bank and ADB to provide more than USD 200 million a year in financing to Asian SMEs to Landmark Group, a Middle East retailer. Most of the suppliers that stand to benefit from the arrangement are located in Bangladesh, the People’s Republic of China, India, Sri Lanka and Vietnam. While SCF dominance still largely resides with five or six banks, a new generation of non-bank platform providers have also increased their share of the market – advertising enhanced digital interfaces, simplified implementation processes, and new business models – further extending the market’s geographic reach and appeal. However, as the business has expanded – becoming increasingly global – new complexities and challenges have emerged.
Mitigating the challenges
1. Local nuances
There are additional layers of complexity involved – in terms of regulatory, legal and operational challenges – if a buyer and its suppliers are located cross-border and cross-region. A successful global payables finance provider will therefore need to have people on the ground who understand the local environment – in particular the regulatory environment – and who can respond to the supplier in the same time zone and the same language. An effective onboarding process is about more than just systems and technology. It is about the people you put in front of the suppliers and the service you provide to them. Small and medium-sized suppliers in particular want to talk to a person in their own country and in their own language. Electrolux, an appliance manufacturer with a global network of more than 1,000 strategic suppliers, is a good example. Until 2011, Electrolux ran a series of localised and regionalised payables finance programmes in Europe, North America, Chile, and Brazil. In 2012, the company rolled this out globally, with the help of Deutsche Bank. Initially focused on cross-border flows for its Asian suppliers, the programme quickly expanded to cover all regions and flows. In a recent payables finance paper, the company’s Director of SCF outlined that the success of the programme has hinged on its buying entities and suppliers being supported (both in an operational and legal sense) locally, even when, for example, the buying entity is located in North America, and the supplier in Asia.
2. The need for diversified funding sources
As the market continues to grow, and spread geographically into emerging markets, so does the size of payables finance deals demanded by corporates. Some programmes (particularly those of the largest MNCs) have become so enormous that they now outstrip the funding capacity of a single bank. Leading banks have created capacity for these enormous programmes by forming syndicates with other banks. However, only a handful of players currently have the capabilities and expertise to lead such syndicates. Managing a multi-bank payables finance solution also introduces new challenges, with respect to technical and data compatibility issues, reporting requirements, and risk and compliance needs of all participants.
Moving forward, there is hope that further financing capacity can be created through new linkages with the capital markets and the development of a deep secondary market for trade finance assets. However, in practice, this will take some years to crystallise.
3. Ensuring safety and soundness
The growth of the payables finance market can bring risk, however, and it is worth addressing the future with caution. A key requirement, especially when working in emerging markets, is fulfilling Know-Your-Customer (KYC) and Anti-Money Laundering (AML) obligations in the onboarding process in order to mitigate financial and reputational risk (for all parties), and not compromise the entire trade ecosystem. Instead, the emphasis moving forward should be on enhancing the efficiency of compliance processes through the use of new technology and utilities such as SWIFT’s KYC Registry and IBM’s solution, rather than advocating solutions that are light on compliance, or providers that are willing to take shortcuts in the process.
Security is now perhaps the most important consideration when enacting a global payables finance programme. Corporates have to be completely sure that their funding structure meets appropriate accounting standards. They need to be sure that the legal documentation is secure and enshrines all rights, duties and obligations of the provider. And, last but not least, they need to be sure that their programme is compliant with global, national and regional regulation, and in a reputable manner. By meeting these challenges head-on, we can open up many more opportunities for providing finance to emerging market companies, in order to bridge the trade finance gap.
About Anil Walia
Anil Walia heads Deutsche Bank’s SCF Sales in Europe. Walia was involved in some of the first SCF transactions that took place in Europe, and has been a key contributor to the growth and evolution of the market.
About Deutsche Bank
Deutsche Bank is a leading transaction bank and the world’s biggest Euro clearing bank. Its trade finance and cash management offering supports corporates and FIs with domestic and cross-border payments and international trade transactions.
This editorial was first published in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2018. The Guide gathers leading solution providers, consultants, associations, banks and corporates that share their latest insights, technologies and best practices in B2B payments, real-time fraud prevention, instant payments business opportunities, and supply chain sustainability.
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