Cross-border supply-chain finance: An important offering in transaction banking

Abstract

Supply-chain finance (SCF) is growing in importance for transaction banking. In this paper, SCF is defined as the use of financial instruments, practices and technologies to optimise the management of working capital and liquidity tied up in supply-chain processes. SCF is largely driven by events in the physical supply chain. SCF is gaining the greatest momentum in local, domestic trade transactions. The current European cross-border SCF market size is still small, and is not yet as mature as that in the USA. Nevertheless, there is a growing demand from clients for cross-border SCF solutions. Bankers see double-digit growth (between 10 and 20 per cent) in cross-border SCF programmes (in terms of turnover) in Europe and the US over the next few years. Emerging countries in Asia and Latin America represent further opportunities for SCF adoption, given their trade focus. SCF is increasingly seen as a tool that could bring benefits to multiple parties across the integrated supply chain. Corporates are thereby recognising the working capital benefits of SCF, as well as its capacity to minimise supply chain risk and build better relationships with their suppliers. Initially, SCFs were offered by international banks as a way to counteract a contraction in traditional payment fees, to optimise the use of risk-weighted assets (RWAs) and to identify additional sources of revenue in the working capital cycle. The industry of SCF services, however, is being revolutionised. New, innovative, non-bank players such as peer-to-peer lenders, dynamic discounting providers and others have entered the market, enabling SMEs to optimise their working capital, thereby challenging the banking financing industry. SCF is expected to grow not only in terms of turnover, but also in scope and appeal. As buyer–supplier relationships will continue to evolve and mature, the level of integration will move further up the value chain. This will also trigger buyer-centric SCF programmes to become increasingly available. There is likely to be an increase in syndicated supply chain programmes and greater integration of SCF solutions with capital market instruments. The main challenge for banks and innovative service providers is to translate the complexity of SCF into a proposition for corporates that is easy to understand and communicate.