Banks are increasingly focusing on the growth potential of supply chain finance, but a new breed of non-bank provider is beginning to gain ground.

Over the past four years, supply chain finance (SCF) has emerged as a significant growth area for global banks. As corporations became more concerned about maximising working capital and ensuring the survival of their suppliers during the financial crisis, interest in this area has steadily increased, with some banks reporting that the number of transactions has doubled in the past year.

Indeed, a 2011 research report by working capital solutions provider Demica found that more than 80% of European banks are putting “very significant“ efforts into promoting their SCF offerings. Rob Stigall, director for global trade and supply chain solutions at Bank of America Merrill Lynch, confirms that this remains a key area of focus: “Most definitely, supply chain finance is rapidly becoming a primary growth engine. The opportunity for growth is tremendous.”

Beyond the direct benefits of establishing individual SCF programmes, banks are finding that SCF can open other doors. The Demica report notes that the implementation of such programmes can enable banks to provide “a raft of other financial products" to their clients. By its nature, an SCF programme initiates a relationship between the bank providing the programme and the suppliers of the bank’s client. There is a clear opportunity for banks to build on that relationship and offer other types of product to those suppliers directly. In some cases, suppliers who are participating in SCF programmes are in turn opting to set up similar programmes for their own suppliers.

"Supply chain finance is not offered by every bank – medium-sized and smaller banks don’t have the critical mass,” says Mr Stigall. “Consequently, suppliers that are using supply chain finance programmes could very well realise the benefit of such a solution and possibly make the decision to move their banking relationship from their existing financial institution to one that offers supply chain finance.”

Internal hurdles

However, in some cases, banks have had to overcome significant internal hurdles in order to bring these types of solution to market. “Different businesses within the bank fall under the supply chain finance hat, and as a result banks may have difficulties when it comes to breaking down internal silos,” says  Enrico Camerinelli, senior analyst at research and advisory firm Aite Group. “They are trying to do this through something that is not really supply chain finance – global transaction banking or global transaction services, which is allowing banks to bring cash management and trade finance together.”

For some banks, however, the convergence of cash and trade services predates the current focus on SCF. “We did this some time ago,” says Nicholas Blake, managing director, European corporates for treasury services in Europe, the Middle East and Africa (EMEA) at JPMorgan. “The JPMorgan treasury services business brought the cash, trade, cards and liquidity management businesses together. The reason why these were aligned, and the reason why our relationship people are multi-product faceted, is that we do see these areas coming closer together for treasurers and it is important to reflect their needs in our solutions.”

As well as prompting some banks to undertake internal reorganisation in order to break down the silos, Mr Camerinelli believes that SCF can pose a threat to existing product lines: “The sense I am getting is that banks are still concerned that SCF in its real extension risks cannibalising many businesses of the bank – letters of credit, trade finance, asset-based lending.”

Bankers argue that the demise of letters of credit has little to do with the rise of SCF – indeed, many see SCF as a means by which banks can reclaim their role in trade relationships, which has been gradually eroded as open account trading has replaced letters of credit. Nevertheless, in other cases it is clear that SCF could displace existing product offerings.

Lex Greensill, EMEA head of SCF, global transaction services at Citi, says: “It’s not really an issue for us but Citibank is different to other commercial banks in that we don’t have a factoring business, so for us we are not cannibalising our own revenues. If you did have a factoring business, then yes you would have issues because clearly SCF business is a lower-margin business than invoice discounting, factoring and so on.”

The non-bank alternative

While banks have been working to overcome these obstacles, a new breed of non-bank SCF provider has begun to gain ground. In some cases, these providers offer platforms which enable cash-rich corporates to run an SCF programme without bank funding, by offering their suppliers early payment in exchange for a discount. Could these new providers squeeze banks out of what has become a very lucrative business?

Mr Camerinelli warns that banks should not be complacent in light of this new source of competition. “The role of the banks in supply chain finance is not indispensible. It is up to banks to move from wondering whether it’s a business for them and how much they should charge clients, to instead look at the bigger picture. Otherwise big corporates will increasingly run these programmes on their own.”

Markus Ament, co-founder of SCF company Taulia, says that banks are certainly monitoring the situation. “Banks are increasingly aware of solution providers such as Taulia and trying to identify if we are a partner or a threat. There have been other technology companies such as Xign, a Californian company, which was acquired by JPMorgan Chase in 2007. And there have been other examples where banks have made similar acquisitions. But we don’t see it as a hostile situation – both types of solution providers can co-exist.”

“There’s space for everyone to work,” agrees Mr Blake. “There are a few different business models. In some instances clients will be looking for the funding and system provision to come from one entity; in others they will be focusing more on interoperability across a number of providers. It’s a growing market – it’s not as if all the competitors in the market are competing for a standstill market.”

In reality, the lines between the different types of SCF provider are becoming increasingly blurred. Non-bank providers might focus on corporates looking to fund their own programme, but they also tend to work in partnership with one or more banks to enable corporates to access bank finance via their platforms. “My experience is that the majority of companies prefer to use their own cash and I think most companies will move towards a hybrid mode where they use their own cash as long as they have it and then look for external financing,” says Mr Ament.

Shape of the future

Blurring the lines further, some banks are beginning to look at offering the types of functionality that the non-bank providers currently claim as their unique selling point. Citi, for example, now offers corporate clients the ability to operate an SCF programme via the bank’s platform on a self-funded basis.

“Clearly, allowing the client to use their own cash is a less profitable form of the business,” says Mr Greensill. “The point is though that our clients are now sitting on much larger cash balances than ever before. Our clients want to put that cash to work today – but that may change in the future. What we can do is put in place the infrastructure and framework so that they have all the benefits of an SCF programme with the ability to fund it themselves. Then, in the future, when the client wants to use that cash for something else, the bank is positioned to step in and become the capital provider."

Meanwhile, just as the non-bank providers claim to save their clients money by cutting out the middleman, Mr Greensill argues that a bank SCF platform can offer similar benefits: “Clients want a multi-bank solution and the non-bank providers do provide that to a certain extent. But you can get a multi-bank solution from a bank such as Citi and benefit from the balance sheet and capital that comes with the technology, and you also have one fewer mouth to feed, as it were – whereas if you go with a technology company, you have to pay for the use of that technology.”

The SCF landscape is continuing to evolve, and the emergence of self-funded programmes comes at a time when many corporations are looking at how best to use cash buffers built up during the financial crisis. Time will tell whether this model continues to have the same appeal for corporate clients once market conditions change, but the work done by Citi to incorporate this structure into its own programme is a clear indication that some global banks are beginning to take it seriously.

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