Overview
A new service has quietly been shifting the environment of supply chain finance: financial tech companies that act as brokers between suppliers and buyers. Believe it or not, these companies have created a system that is beneficial to both sides. This is possible due to their capability to improve working capital, decrease contract processing costs and offer more favorable payments terms to both sides. Their strategy is found in practice from heavy equipment financing to healthcare supply chains and is gaining more momentum from small-to-medium entities (SMEs).
“Fintech” is a term that everyone knows. The industry has received more than $31B in investments in the last 3 years. But there is one application that’s changing the global landscape of procurement for companies of all sizes. Fintech companies in the supply chain environment can be thought of as a digital procurement broker. Whether it’s for a buyer or supplier, they use a network of banks to offer the most favorable trade financing terms. There are many structures fintech companies choose to use, but the process begins with a purchase request from a buyer and ends once the supplier has been paid. When acting as an intermediary they can allow a supplier to be paid in 10 days and a buyer to pay in 120 days all under the same agreement. The fintech company will pay the supplier upfront, sometimes within 2 days. This payment schedule allows the fintech intermediary to get higher discounts from supplier. The buyer can extend out their accounts payable, which is due to the fintech company. The options are usually between 30 and 120 days. On top of that, the payment processing costs on both sides are reduced due to an automated processing system provided by fintech platforms.
In summary, fintech solutions in Supply Chain Finance (SCF) offer buyers:
Suppliers gain all the benefits of the streamlined process as well as a much shorter payments terms (paid shortly after contract origination through the fintech provider) lightening the pressure on accounts receivable.
Corporate Funding Incentive
After seeing the benefits of utilizing these platforms, it’s no surprise that currently more than 1 out of 4 corporations are using a fintech solution to their supply chain finance strategy. In the past, supply chain finance was always led by large banks and companies were limited in their banking options. Now they can connect through the fintech platforms to an entire network of banks and financing options. Corporations often engage with suppliers internationally and fintech solutions offer an added degree of flexibility when automating currency exchange. Between their improved working capital and efficient procurement process, corporations are able to devote more working capital into new markets.
SME Global Impact
Large corporations aren’t the only ones that benefit from these platforms. The core growth of fintech in supply chain comes from SMEs. It’s easy to understand why, as financing has always been a pain point for SMEs. In fact, it’s estimated by the International Financial Company that there is a global funding gap of $2 trillion for SMEs in emerging markets. These are the companies that need to get every penny out of their working capital and can’t devote a large amount of resources to pouring over trade contracts. With fintech SCF, they can automate the process and engage with banks (via the platform) that traditionally wouldn’t be interested in creating a trade finance contract. Large banks, historically, aren’t interested in taking the time to create finance terms for these smaller companies. With the online platform, the banks have no reason not to engage with SMEs.
While it offers more opportunity to SMEs, fintech also develops a deeper knowledge of the financing environment for these companies. When buyers request a source of funding they aren’t just given one option, they are able to see the terms for multiple bids from different sources. That structure allows them to understand what terms are most crucial for their business. Whether that is payment term, loan size or interest rate they can determine the best approach for their business in current operating conditions.
Healthcare Opportunity
Procurement through a fintech platform is ideal for manufacturing-centered companies, but the applications aren’t limited to this space. One of the industries that overlooks advanced supply chain management the most is the healthcare industry. Most hospitals still use the most basic strategies to optimize their supply chain. While in a recent survey from Syft, 98% of hospital executives said that supply chain management (SCM) was of medium-high priority, there is still a lack of investment into improving the SCM capability. It’s even estimated that the average hospital has an opportunity to save $11 million annually, when comparing supply chains costs to the efficiency of top-performing hospitals.
The reason hospitals have such an opportunity to reduce these costs is their lack of adoption of technology related to SCM. Using a fintech platform is a great opportunity for hospitals to automate many of the costs they incur from managing their supply chain. There are many areas that hospitals could begin investing to reduce costs associated to their supply chain, but a fintech platform for procurement is a great start. As mentioned, the lack of investment into technology increases costs, but SCM staff would save a great deal of cost by automating the procurement process. With limited staff, every minute saved on a process has a large impact on the hospital’s costs. The benefits of automating procurements costs in this industry would be relatively higher, but they would also experience the benefits of improved cash flow and ideal financing terms experienced in any industry utilizing fintech in SCF.
There is also a large push to connect patients to hospitals via fintech platforms to lighten the burden of medical payments. If this strategy is a potential reality for many hospitals in the future, there is even more reason to commit to the technology now.
Future Issues/Concerns
As it is with all newly developing financial tools, there is concern about regulatory issues in fintech financing. The uncertainty around it is keeping some companies away from investing too much into fintech SCF. Each country must develop their own set of rules regarding the overall structure as well as more complex details such as derivatives originating from a fintech loan (e.g. credit default swaps similar to the ones that caused the ’08-’09 recession.) These regulations will have the potential to impact the global market, whether that’s a surge of SME funding or the undermining of national market stability.
Summary
Businesses should always be looking forward to implement new cost-saving technology, but only after acknowledging the potential risks and costs associated with it. Using fintech platforms offers companies a chance to streamline their procurement with financing terms that suit them best. Connecting to a network of lenders can benefit the largest corporations as well as the smallest start-ups. In either situation, companies can utilize the technology to maximize their working capital at the lowest cost. While regulation around these platforms is still developing differently in each country, the opportunity it gives to smaller businesses should encourage policy makers to let it develop to its full potential.
Sources:
https://hbr.org/2016/06/the-rise-of-fintech-in-supply-chains
https://www.pymnts.com/news/b2b-payments/2019/supply-chain-trade-finance-fintech-innovation/
https://www.prnewswire.com/news-releases/fintech-providers-are-disrupting-the-bank-led-supply-chain-finance-industry-new-survey-shows-300825608.html
https://www.pymnts.com/news/b2b-payments/2019/hospital-supply-chain-financial-health/
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