In terms of global trade, supply chain finance (SCF) stands out as a critical element, enabling businesses to optimise their working capital and strengthen supplier relationships. Through the years, SCF’s role has evolved, and it has become more integral to operational resilience and financial strategy.
2023 in Review: The State of Supply Chain Finance
The past year has been pivotal for SCF, marked by a significant adaptation to the post-pandemic recovery, volatile market conditions, and the increasing importance of digital transformation. Companies have leaned heavily on SCF solutions to mitigate disruptions and enhance liquidity. Furthermore, the surge in inflation rates across major economies has underscored the need for efficient capital management, placing SCF at the forefront of financial strategies aimed at sustaining growth.
Worldwide supply chain finance volumes have increased by 21% YoY to US$2,184 billion, and funds in use have increased by 20% YoY to US$858 billion, according to BCR Publishing’s World Supply Chain Report 2023. Strong growth in Asia and Africa, where volumes have improved by 28% and 39%, respectively, supports this gain. Other markets’ growth, such as that of the Americas and Europe, has continued on a solid 15%–30% upward trajectory.
According to Flow Magazine, the SCF sector is undergoing a number of developments that are the reason for this high demand.
The magazine states that there are new entrants in the market who view SCF as a reasonably safe investment during these difficult times. However, it also anticipates that there will soon be revised and more stringent reporting rules, and the increased transparency may encourage the new hires to stick with SCF in the long run.
The magazine also mentions that digitalisation, a long-standing industry aim, appears likely to finally pick up steam, propelled by modifications to UK law and the increasing number of fintech-bank cooperation.
When combined, the rapid expansion and numerous modifications have the potential to completely alter the SCF market, according to the magazine.
Digital Transformation and Structured Financing
Companies globally are focusing on enhancing supply chain resilience through various strategies, including the adoption of structured financing solutions like SCF. These solutions offer treasury teams greater agility and visibility, which is crucial in managing the increased uncertainty and pressure on supply chains. The move towards digital business models has also increased the demand for fast and streamlined transactions, with structured trade financing becoming more prominent. This includes receivables finance, which decreases day sales outstanding, and supply chain finance, which elongates payables, adding more cash to the balance sheet.
Regionalisation and Sustainability Focus in supply chains
The Covid-19 pandemic has accelerated the trend toward regionalisation of supply chains, with companies aiming to be closer to their markets for better control and resilience. This is coupled with a focus on sustainability, where companies are increasingly required to demonstrate progress on environmental, social, and governance (ESG) goals. The emphasis on ESG integration and the desire to reduce the overall number of suppliers for quality rather than quantity also reflect in how companies choose their partners.
Adoption of Digital Technologies
There’s a significant push towards digitisation, with companies investing in technologies to improve supply chain visibility, automate processes, and support online and e-commerce channels. This includes the adoption of Internet of Things, cloud computing, and AI to create new data sources, improve efficiency, and ensure supply chain optimisation.
Companies are significantly leveraging digital technologies to enhance their supply chains, focusing on improving efficiency, building resilience, and addressing Environmental, Social, and Governance (ESG) issues. According to PwC’s 2023 Digital Trends in Supply Chain Survey, despite some progress, there’s a recognition that more can be done to elevate supply chains in the digital age. Challenges such as focusing on short-term priorities and a lack of utilisation of available technologies for long-term value creation persist. There’s a consensus on the need for increased technology investment to identify and manage supply chain risks, with 86% of executives agreeing on this necessity. Moreover, a significant portion of respondents expects digitising their supply chain to require employee upskilling, yet only a small fraction considers digital upskilling a top priority.
Supply Chain 4.0, as described by McKinsey, represents a leap towards a highly automated and fully integrated supply chain, leveraging data and analytics for decision-making. This evolution involves advanced logistics, additive manufacturing, and warehouse automation, significantly reducing operational costs and environmental impact. The shift towards more advanced user interfaces and robotics in warehousing, alongside the use of autonomous vehicles, underscores the rapid transformation in how physical goods are managed and moved. Moreover, performance management within supply chains is becoming more real-time and data-driven, facilitating a more proactive approach to managing exceptions and improving overall efficiency.
Digital Transformation
The acceleration of digital transformation in supply chain finance has been notable in 2023, with the adoption of digital platforms becoming essential for operational efficiency and innovation. These platforms have facilitated automated invoicing, real-time visibility into transactions, and streamlined dispute resolution processes, significantly enhancing operational efficiency and stakeholder relationships.
The integration of blockchain technology has been pivotal in enhancing security and transparency within supply chain finance operations. Blockchain’s decentralised and immutable ledger system has provided a secure framework for transactions, building trust among all parties involved. Additionally, the application of Artificial Intelligence (AI) and machine learning has further propelled SCF’s effectiveness by improving risk assessments and forecasting. These technological advancements have enabled more informed decision-making, crucial for navigating the complexities of modern supply chains.
Adaptation to Post-Pandemic Recovery
The COVID-19 pandemic indeed highlighted the critical role of supply chain finance in addressing supply chain challenges, according to McKinsey & Company. Companies have prioritised increasing resilience by diversifying supply bases and implementing regionalisation strategies. However, a significant shift towards boosting inventories was noted, possibly due to the structural and operational complexities of industries like chemicals and metals. Furthermore, the pandemic underscored the importance of risk management, with a majority of companies now having formal supply-chain risk management processes. The transition to remote working and the surge in digitalisation efforts, particularly in advanced analytics, have also been key strategies for companies aiming for smoother operations and faster recovery.
Navigating Market Volatility
2023 was characterised by significant market volatility, driven by geopolitical tensions, trade policy changes, and ongoing supply chain disruptions. Supply chain finance played a critical role in enabling businesses to navigate this uncertainty. By leveraging SCF solutions, companies could offer flexible payment terms to their suppliers, ensuring continuity of supply even in fluctuating market conditions. This flexibility not only helped maintain operational stability but also strengthened relationships with key suppliers, which is crucial in volatile markets.
Supply chain finance programs can help businesses manage their cash flow more effectively, offer flexible payment terms to suppliers, and mitigate risks associated with supply chain disruptions. This financial flexibility is crucial for maintaining operational stability and ensuring the continuity of supply, particularly in industries that are highly sensitive to such disruptions, such as manufacturing, retail, and automotive sectors.
Responding to Inflation
The surge in inflation across major economies presented a significant challenge in 2023, affecting the cost of goods and the availability of financing. SCF became an essential strategy for managing these inflationary pressures. By optimising working capital through SCF, companies could better manage their cash flow and maintain liquidity, which was vital for coping with increased costs. Moreover, SCF allowed for more strategic inventory management, enabling companies to make more nuanced decisions about stock levels in response to fluctuating prices and demand.
Regulatory Changes and Their Impact
The regulatory landscape for supply chain finance is indeed undergoing significant changes across various jurisdictions, emphasising the importance of transparency, risk management, and operational standards. These regulatory developments are geared towards protecting stakeholders and ensuring the integrity of SCF practices.
One of the focal points of regulatory attention is the transparency of SCF arrangements. The lack of mandatory disclosure standards in some jurisdictions has led to increased scrutiny from regulatory bodies, according to Thomson Reuters article. For instance, the article mentions the collapse of Greensill Capital and highlights the potential for SCF arrangements to obscure true financial health, prompting calls for clearer disclosure standards. The result, according to the article, is the start of regulatory bodies, such as the SEC in the US, in paying closer attention to how companies disclose their SCF arrangements, emphasising the need for detailed disclosure to provide investors and analysts with the necessary information to make informed decisions.
Moreover, the International Accounting Standards Board (IASB) has responded to the call for greater transparency by publishing amendments to IAS 7 and IFRS 7, which introduce new disclosure requirements for supplier finance arrangements. These amendments aim to provide qualitative and quantitative information about such arrangements, allowing users of financial statements to better assess their impact on an entity’s liabilities, cash flows, and exposure to liquidity risk.
In addition to international regulatory developments, specific regions, such as China, have seen shifts in the regulatory oversight of commercial factoring companies, moving from the Ministry of Commerce to the China Banking and Insurance Regulatory Commission, the China Business Law Journal writes. According to the article, this transition marks a shift from a previously loose regulatory approach to a more moderate one, with a focus on cleaning up the sector, including addressing the use of shell companies. It concludes that the regulatory environment now requires that all equity changes in factoring companies undergo substantive examination and approval by local financial regulators, reflecting a more cautious approach to the M&A of factors.
These regulatory changes underscore the need for companies engaged in supply chain finance to stay informed and adapt their strategies to remain compliant while effectively leveraging SCF opportunities. The evolving regulatory environment aims not only to enhance transparency and protect stakeholders but also to ensure the sustainable development of supply chain finance as a vital financial tool for managing supply chains.
The Role of Fintech and Startups
Fintech companies and startups are reshaping the landscape of supply chain finance, making it more accessible and efficient for small and medium-sized enterprises (SMEs). These innovations are crucial for SMEs, which form the backbone of many economies but often face significant barriers to accessing traditional forms of financing.
Fintechs have introduced a range of digital solutions that streamline the SCF process. These digital platforms not only improve the efficiency of transactions but also enhance transparency, enabling SMEs to better manage their cash flows and maintain liquidity. Such is the Liquiditas Supply Chain Finance solution that offers a great support for your cash flow. Moreover, fintech companies have been crucial in leveraging data analytics and app-based services to provide seamless financing solutions, targeting large e-commerce platforms and their associated SMEs to offer tailored financial services.
The global volume of supply chain finance funds has seen a significant increase, highlighting the growing importance and adoption of fintech solutions in this space. Fintech platforms offer a range of services that support SCF operations, tapping into previously inaccessible capital and financing growth in new and emerging markets. This democratisation of supply chain finance helps not only in financing growth but also in developing and supporting new products, strengthening financial positions, and increasing the capital available to the entire supplier ecosystem.
Innovations by fintech companies in the SCF space are not limited to financial transactions. They also encompass partnerships with procurement software providers to offer integrated financing solutions on a single platform, connecting buyers, suppliers, and financial institutions more efficiently. These innovations are pivotal in addressing the credit gap faced by MSMEs, thereby enhancing their competitiveness and integration into global supply chains.
2024 Outlook and Predictions
Looking ahead to 2024, the integration of advanced technologies such as AI and blockchain in supply chain finance is expected to significantly enhance the efficiency, transparency, and sustainability of supply chains. KPMG highlights the digital shake-up in supply chains, emphasising the role of data management and low-code platforms in improving predictability and margins. The integration of technology facilitates better decision-making and transparency beyond Tier 1 and 2 suppliers, which is essential for achieving Environmental, Social, and Governance (ESG) goals and enhancing overall supply chain resilience.
AI and blockchain are set to revolutionise SCF by improving fraud detection, enhancing traceability to combat counterfeiting, and facilitating tokenisation for digital asset management. These technologies enable more secure and efficient operations across various sectors, driving sustainability and compliance in supply chains. Blockchain, in particular, is praised for its role in ESG compliance, offering unmatched transparency and accuracy in tracking and reporting, thus helping companies meet increasingly stringent regulatory and sustainability requirements.
Moreover, McKinsey underscores AI’s potential in transforming supply chain management by providing end-to-end transparency and faster decision-making. AI-driven solutions enable companies to analyse vast data volumes, optimise operations, and dynamically manage trade-offs across the supply chain, leading to significant improvements in logistics costs, inventory levels, and service levels.
As regulatory changes continue to evolve, companies are encouraged to adopt more transparent and risk-aware financing practices. This adaptation not only complies with emerging legal frameworks but also strategically positions companies to capitalise on the opportunities presented by these technologies. The focus on sustainability is set to deepen, with SCF playing a crucial role in promoting ethical and environmentally friendly supply chain practices.
In conclusion, the future of supply chain finance is poised for transformative change, driven by technological advancements and a growing emphasis on sustainability and regulatory compliance. Companies that stay in line with these trends and proactively integrate AI, blockchain, and other digital solutions into their SCF strategies will be well-placed to navigate the complexities of the modern supply chain landscape.
