What is Supply Chain Finance??
Supply chain financing is a concept that refers to a set of financial options that can assist vendors with working capital while also providing supply chain reliability for customers. It’s a technology-based company with funding mechanisms that reduce transaction costs and increase productivity for all stakeholders involved. It is more effective where the buyer has a higher credit score than the seller and has more accessible access to money. It provides buyers and sellers with short-term credit that helps them maximize working capital.
Now looks at how this process works??
When a customer puts an order with a supplier, the supplier completes it and sends the buyer an invoice. The buyer then accepts the invoice and confirms that it can reimburse the financial institution as the invoice matures. The seller then sells the invoices to the financial institution for a discounted rate and collects instant payment. Finally, as the invoice is about to be paid, the customer owes the financial company the invoice’s worth.
Most systems have various models relating to consumer benefits, partners, and so on. There are four potential future supply chain finance models and what each will imply for market players, namely banks and FinTechs.
Model 1: The bank is in control. Reimagining customer journeys, upgrading infrastructure and providing AI-enabled finance help banks boost end-to-end service. They overcome long-standing problems like onboarding, procurement through the entire range of vendors and invoices, and scaling of their overall capacity to supply credit by successfully building on the power of their corporate customer portfolios and proven mechanisms for credit decisioning and provision.
Model 2: Partnerships led by banks. Banks collaborate with software vendors to provide applications (ERP integration, third-party data), but they maintain control of the user experience. After that, banks go beyond the various (but mostly superficial) collaborations with fintech or technology platforms to build genuinely streamlined and interactive SCF journeys that cover sourcing, invoice production, and financing. This is achieved by APIs and connectivity through the supply chain, spanning digitally native, invoice-agnostic SCF networks that cover a buyer’s entire list of vendors and a seller’s entire list of invoices.
Model 3: The platform is in control. Non-bank networks will scale and include SCF across the entire business value chain, connecting to banks and non-bank finance providers. They build on existing technologies, such as accelerated delivery and onboarding of suppliers’ invoices and platform versatility to accommodate various invoice forms and SCF goods, allowing platform vendors to become the go-to source for invoicing data and financing. Banks and other ERP networks are reduced to secondary sources and underlying “pipes” in this model.
Model 4: Supply-chain finance network with a wide range of options. A diverse selection of service providers coexist, each catering to a particular set of requirements. We can see a continuing niche-based development of SCF (for example, in e-commerce or apparel distribution), catering to the entire range of vendors and specialized in credit appraisal for specific sectors, given the current fragmentation.
Summary
To conclude, there is a fundamental discrepancy in authority in all models. The jurisdiction of each model system varies, with single banks, multi-banks, and separate networks collaborating. Based on the running expense, customer loyalty, and other factors, each model has advantages and disadvantages. Platform-led models and diverse supply-chain finance ecosystems are more likely to be multi-bank than the current, typically single bank-led models. Multi-bank models allow for greater solution penetration across different corridors and consumer segments and some solution standardization by definition. They do, however, necessitate more work to incorporate, and seeking an approach that meets the needs of various banks is not easy. Banks should weigh the advantages and costs of joining multi-bank initiatives, including the trade-off of greater size and scope vs. uniqueness of the offering. This is particularly true for those who see supply chain financing as a unique selling point for their corporate clients.
