Supply Chain Finance has been the key area of focus for Fintechs and NBFCs. Transaction based working capital financing with underlying trade of products and services, the self-liquidating nature of the financing arrangement with short tenures make it a favourite product for working capital financing. The introduction of GST and e-ways bills have further acted as risk mitigates and market multiplier.

A strong anchor (typically AAA or in some cases AA) for reverse factoring or an arrangement with a strong corporate for channel / distributor / dealer financing is a case of pivot based finance pivoting on the large, well rated  corporate. This leaves out a lot of sound but unrated entities who are unable to access these platforms for funding their supply chains.

Of late, deep chain financing has been occupying a lot of mind, print and digital space. There have been efforts to go up the tier with considerable high risk (due to paucity of reliable  data) offset with usurious pricing which negates the very concept of improving liquidity at an affordable cost and leads the SME into a debt cycle trap.

Take the case of Zefo, a refurbished furniture start-up (since acquired by Quikr). In 2019, Kredx entered into a invoice discounting arrangement with Zefo and based on it’s credit model given a rating of 80-81 to the invoices being discounted by Zefo. Invoices were discounted by KredX   @ 24% pa which indicated that the customer was a high risk borrower ( The rating and the pricing were highly disconnected – possibly due to the cost of funds of the lender) . Unsurprisingly, Zefo was caught in a vicious cycle of debt and was using fresh incoming funds to pay off the earlier debt and at one time defaulted. The challenge to Kredx was it had no view of the entire supply chain – both the upstream and the downstream; nor could it sense the high risk signals emanating from Zefo’s downstream. Kredx had positioned itself as a finance facilitator for a part of the supply with limited understanding of the risks from other players in the supply chain

In conventional, rated anchor, model of supply chain finance, benefits that accrue to the corporate far outweighs the benefits to a SME vendor. For the large corporate it reduces the financing cost compared to traditional working capital arrangement. It also helps the corporate reduce their input costs through higher discount wrangled out of the SME by virtue of agreeing to finance the vendor or the distributor under such arrangement. The vendor on the other hand stands very marginally benefitted since supply risk in their upstream and the input costs do not get mitigated or improved correspondingly.

Thus, supply chain financing platforms, apart from improving liquidity on the sales side for the vendor and on the purchase side for the distributor of a large corporate does nothing of substance to ensure benefits in terms of better operational efficiency or for that matter reducing the cost and risks of the vendor’s up stream .The outcome – vendors margins get squeezed whereas the large corporate benefits in terms of lowering of costs resulting in higher profitability.  This has been borne out by the corporate results where large corporates have increased profitability whilst SMEs have had their margins squeezed. The surplus cash and the possibilities of improving treasury income have prompted corporates to deploy their surplus funds in supply chain finance programs thus garnering higher non-operating income and bringing in liquidity to attract more supply chain financing players.

Given that most of the supply chain platforms are run by pivoting around the prime corporate and addressing their immediate upstream or the downstream, the competition in this space is likely to hot up as more as more corporates take advantage of the benefits and the opportunity. To expand the market ,going deeper into the supply chain tiers makes eminent sense for less established players and Fintech.This can only succeed and scale up fast if the platforms are able to offer differentiated models, with purchase efficiency and risk management tools to improve SME profitability with lower supply chain risks. The aggregation of such data will also provide the large corporate and the financers in the chain, a dashboard view of the deep chain arrangement and the risks emanating from any portion of the chain which can have a bull whip effect. This calls for a deeper collaboration between the vendors, the large corporate and the technology platform providers.

Currently the success of SCF programs are all driven by convincing the large corporate to  be on- boarded on  the SCF platform whilst a differentiated model will create an additional push in terms of the suppliers offering different pricing models to those opting to pay through SCF platforms and those not opting to do so. This will create a demand push and a wider adoption/opportunities in deep chain financing

Treds, RXIL, M1exchange and the rest are all positioned as a pure invoice discounting platform with some embedding other financial products for SMEs in association with banks and/or NBFCs. There is a compelling case to reposition SCF platforms as SCS (Supply Chain Solutions) platforms with embedded finance across the chain as a strong value add.

Deep tier financing will rapidly expand if the approach is changed from a pure financing model to a supply chain solutions model by collaboration and co-opting other players in the area. Simple cost effective tools and plugins to benefit SMEs in improving their supply chain resilience and providing a complete view of the supply chain to the large corporate will deliver a strong value proposition and be the key driver of faster adoption. It will also be able to deliver strong risk management tools for proactive management of supply chain risks across the chain – upstream and downstream.

#scf #fintechs #nbfcs #banks #supplychainfinance  #tradefinance

Sharing is caring!