Supply chain finance - future concerns...
David Rae
in Risk Management, Strategic Sourcing, Supply Chain Management, Technology
|
5 Comments
I received a call the other day from the CPO of one of Europe's largest, and best-known companies. He was calling to talk through a blog I had previously written about supply chain finance (Is supply chain finance the elephant in the room).
His call was hugely interesting. He, and his company, has been using supply chain finance for some time and more than €2bn worth of invoices are currently processed through the initiative.
Naturally, his treasury department is interested and wants to know more - what are the risks, the exposures, the benefits, who else is doing it, why isn't everyone doing it... Pretty much the same type of questions we all have about supply chain finance.
It's interesting that the process still seems so rare. While there have been a couple of announcements recently (the Bank of England's potential nationalised SCF, for one, and Sainsbury's deal with RBS and PrimeRevenue, for another) the CPO who called was still struggling to find good examples of similar supply chain finance projects.
His, and his treasury's, concerns, however, went well beyond whether SCF was popular - after all, the benefits it offers in terms of reducing supply chain risk and freeing up working capital are very persuasive.
The main concern was how things might pan out a little further down the line when the relationship with the bank is well embedded and extracting the company from a labyrinth of supply chain finance arrangements is nigh on impossible.
At this point, he said, you are at the mercy of the banks - what's to stop them increasing their cut by raising interest rates, for example?
Food for thought.
View Printer Friendly Version
Email Article to Friend
Reader Comments (5)
The answer to the CPO and Treasurer's question about "what's to stop them increasing their cut by raising interest rates, for example?" is simple: other banks.
Rates will legitimately rise or fall based on the corporate's credit rating in an SCF program. But having more than one bank fund the underlying SCF solution for their company means that CPO/Treasurer ensures from the start that no single bank is the key to providing liquidity for that program and hence engage in the worrisome behaviour referenced.
There other reasons why "multi-bank" is the way to go, beyond this aspect though. For example, what happens if the bank withdraws support for the program/product altogether? Or what if the appetite for the buyer's program is 'tapped out', and there is no appetite for the provision of additional funding as the program grows?
Your CPO would be well-advised to talk to providers in the space who are not banks (PrimeRevenue is one among several, including Demica and Orbian) to get their take on this legitimate concern, and others, as to why single-bank programs offered by banks may not be the best strategy in pursuing SCF for their companies.
The only company offering a true multi-bank solution (ALL live, participating (ie: competing and keeping rates in line) is Orbian.
Their solution offers a single integration at BUYER level, not bank level. This gives the Buyer the opportunity to maintain any number of banks with whom they want to participate in SCF, manage participation volume, and exclude others. This platform facilitates plug and play funding participant management going forward without any supplier disruption.
At the end of the day, we want to know the liquidity is going to be available, the rates are going to remain competitive, and that any funding partner changes are seamless, thereby maintaining the promise of authentic SCF.
So there are two ways in which a multi-bank SCF solution can be created; either directly by the large corporate ( and we all know the challenges there- mindshare, knowledge, technology, etc). The second, and potentially more interesting scenario, would be the same sort of program as the Bank of England is looking at delivering. A nationalized SCF.
Do we know if there are other countries looking into a nationalized SCF scenario?
However, we have a group of clients with AAA debt(Over £20 Billion is funded annually in this sector) and we are considering how to create a market for them, and would be interested to talk to any parties that might wish to explore this option with us.
Brian Leapman