- August 9, 2022
- Supply Chain Finance (SCF) is the use of financing and risk mitigation practices and techniques to optimize the management of the working capital and liquidity invested in supply chain processes and transactions. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.
- We aim to ensure a much clearer communication in this rather complex ecosystem of providers, clients, accounting and legal professionals, regulatory authorities and others involved in international supply chains.
- The novelty of the subject matter of Supply Chain Finance led to the usage of a range of expressions, terms and terminology that were – and remain today – often inconsistent, opaque and even contradictory. There is an agreement on the clear benefits of the development and dissemination of standard definitions and terminology.
- Definitions featured in the publication will be useful to finance providers, corporates, commercial and SME clients, investors, regulators, legal practitioners, information technology and infrastructure providers, as well as other trade finance related communities.
CONTINUOUS GROWTH OF PAYABLES FINANCE
The 2022 ICC Trade Register reports a total 113% growth of financed volume over the past 5 years. Clearly, there were negative effects to the transaction volume related to Covid-19, however, at the same time, the quantity of obligors (representing the buyers that have chosen to enhance their working capital toolbox with Payables Finance) has continuously increased.
EXPECTED DEVELOPMENT DOCUMENTARY VS: OPEN ACCOUNT TRADE
World trade volumes have seen a startling increase in open account transactions over the recent years. Although the pandemic had severe effects on Trade Finance in general, it may also stimulate the digitization of the business, i.e. drive the shift from documentary business to open account.
The figures outline three possible scenarios describing how Trade Finance could further develop over the next years.
Bank Payment Undertaking
As the last of three newly introduced technique descriptions, the BPU (following the definitions for the Corporate Payment Undertaking and Dynamic Discounting) describes an irrevocable and independent payment undertaking that makes the buyer’s bank the primary obligor of the payment to the seller.
ICC Rules for Supply Chain Finance
Over the past four years, the GSCFF and ICC representatives pursued an intensive debate on the need and feasibility of ICC Rules for Supply Chain Finance. As a result, it was concluded to not create ICC Rules for Supply Chain Finance at the present point in time. The reasoning for this decision is explained in a position paper that was published in January by the ICC and is available here or on the ICC website.
Sizing the SCF Market
With the rise of Supply Chain Finance, there is a similar rise of interest in understanding the actual size of the market. While other businesses of the financial industry like e.g. payment clearing can be well measured through clearing systems, SCF to a large extent is processed in a decentral manner. This creates a range of challenges for anyone trying to analyse the market wanting to provide a fair view on the actual market and its potential growth in terms of financing volume or even revenue:
- Despite the industry definitions being available since 2016, varying interpretations and definitions exist in the market. Reasons may be of competitive or technical nature. One must also keep in mind that SCF as defined by the GSCFF comprises of 11 financing techniques. However, often ‘SCF’ is understood as ‘Payer-driven financing’, which could be Payables Finance or a Corporate Payment Undertaking – depending on the provider’s or the analyst’s view. A similar challenge evolves around the distinction between ‘Receivables Discounting’ and ‘Factoring’, as both techniques are legally the same, but bear differences in commercial and operational details.
- When it comes to data sources, not only banks, but also non-banks, including the Fintech world need to be taken into consideration.
- A comprehensive view on the market would require a reliable, structured and consistent data feed from a representative array of SCF service providers across the globe and would also need to provide clear guidance on how data should be classified and delivered.
- Another challenge is data privacy and risk participation – generally, service providers are hesitant to share data for competitive or operational reasons. Data collection on a broader scale also requires respective legal documentation in the form of an NDA. Risk participation may deflate or inflate the reported volumes depending on how they are reported by who.
All these considerations lead to the conclusion that a comprehensive statistical analysis of SCF business on a global and ongoing basis is a very complex and challenging undertaking.
Still, the GSCFF has taken the effort to take a comprehensive view on existing market studies to understand the current state of the market. It should be considered as a determination of where the industry is as well as an inspiration for the future.
SCF FEASIBILITY STUDY ON YEMEN
With a view on the evolution of SCF into emerging markets the GSCFF has taken the opportunity to analyse the feasibility of practising SCF in Yemen. The result is a compelling analysis of challenges the industry is facing when introducing SCF in Yemen.
While Yemen is not fully representative for other countries, the analysis very well illustrates a whole array of aspects that need to be taken into consideration for markets where SCF is not yet common for e.g. regulatory, political or cultural reasons.
Dynamic Discounting is a buyer led solution that allows sellers to receive early payment on a buyer’s outstanding invoices at a discount to the invoice value. The discount applied is ‘dynamically’ calculated based on the number of days settlement occurs prior to the original invoice due date. That is, the earlier an invoice is paid the larger the early payment discount that is applied. A technology platform may be engaged to facilitate both the early payment requests from suppliers and the discount calculations. Upon early payment to the supplier, the buyer extinguishes the payables on its balance sheet.
The buyer funds the early payment to the sellers using their own funds, potentially generating higher yields on excess cash. This is unlike Payables Finance or Corporate Payment Undertaking, where sellers in the buyer’s supply chain are able to access liquidity provided by Banks, Funds, or other alternative financiers by means of Receivables Purchase or other arrangements that cover the finance provider’s right to receive the buyer payment. In these solutions, the payable continues to be due by the buyer until its due date.
Corporate Payment Undertaking
Corporate Payment Undertaking is provided as a buyer-led programme within which sellers in the buyer’s supply chain can, at their option, access liquidity by means of receiving discounted early payment. Such payment to a seller covers seller’s invoices (or buyer approved amounts relating to such invoices). The technique provides a seller of goods or services (seller) with the option of receiving the discounted value as early payment of outstanding invoices (that have an unconditional approval by the buyer to pay on the due date) prior to their actual due date and typically at a discount with cost of early payment more aligned to the credit risk of the buyer.
Whereas in Payables Finance the finance provider enters into receivables purchase arrangements with a seller, under a Corporate Payment Undertaking programme the early payment does not require receivables purchase but may require the seller to confirm the finance provider’s right to receive buyer payment and/or pass-through arrangements and/or acceptance as full payment of the approved invoice amount.
This SCF technique is subject to several naming conventions (consistency should be encouraged), which can overlap with Payables Finance. The Forum decided that the term Corporate Payment Undertaking is an appropriate name that captures the essence of the technique.
Enhancement of the standard definitions for Techniques of Supply Chain Finance
This document elaborates on an enhancement of the existing GSCFF Standard Definitions for Supply Chain Finance that have been released in 2016. Due to the global applicability of the SCF Definitions, it needs to be ensured that any changes to the existing SCF Definitions are carefully considered and aligned with all relevant stakeholders.
The update described in this document has been discussed and approved by the GSCFF Steering Board in October 2019.
This document describes the reasons, benefits and expected outcome of the proposed change and shall serve as a basis for actions that are required to accomplish the agreed change of the GSCFF Standard Definitions.
MARKET PRACTICES IN SCF – PAYABLES FINANCING
In 2016, the Global Supply Chain Finance Forum (GSCFF) published the Standard Definitions for Techniques of Supply Chain Finance (SDTSCF) in order to outline and establish common market practice guidelines.
This guide is the second in the series and is meant to complement the aforementioned publications.
This guidance is intended to benefit Finance Providers, Corporate/Commercial/SME clients, Investors, Regulators, Legal Practitioners, Accountants and Standards Bodies and other communities by clarifying common, accepted and emerging market practices in the risk management, documentation, and operational handling for Payables Finance transactions as defined in the SDTSCF. The scope of this guide is limited to the mechanics of the technique rather than how it is administered or executed.
ENSURING PAYABLES FINANCE REMAINS A FORCE FOR GOOD
Over the past decade, payables finance programmes have become a popular means of financing supply chains—bringing in new pools of investment liquidity from financiers to generate win-win benefits throughout the supply chain. For the buyer, this means improved payment terms and working capital optimisation, for the seller this means alternative sources of funding and at lower rates than most small and medium-sized enterprises (SMEs) can normally access. For both, it means more secure and stable supply chains and more sustainable business.
Such an arrangement should create benefits on both sides of the transaction. However, it is concerning to observe certain practices in the market and to read reports that this may not be the case in some instances, with criticisms emerging regarding these programmes: both their objectives and their outcomes.
Supply chain finance is one of the fastest growing trade products, however, financial institutions often don’t use similar terminology or accounting techniques. The Forum, comprised of BAFT (Bankers Association for Finance & Trade), Euro Banking Association (EBA), Factors Chain International (FCI), International Chamber of Commerce (ICC), and International Trade and Forfaiting Association (ITFA), is issuing a series of guidance documents based on its 2016 Standard Definitions for Techniques of Supply Chain Finance to get all industry stakeholders on the same page.
The paper released today focuses on receivables discounting – a technique and form of receivables purchase, flexibly applied, in which sellers of goods and services sell individual or multiple receivables (represented by outstanding invoices) to a finance provider at a discount.
The terminology will greatly enhance the ability of clients to understand, compare and select optimal solutions to their supply chain finance needs and consider the offerings as an attractive alternative to other financing models. Clients will be able to weigh alternatives, their advantages and disadvantages, and engage in a clearer and more relevant dialogue with finance providers and other supporting communities.
Download a PDF version of the terminology in English or Chinese language.
- Supply Chain Finance is defined as the use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.
- SCF is a portfolio of financing and risk mitigation techniques and practices that support the trade and financial flows along end-to-end business supply and distribution chains, domestically as well as internationally. This is emphatically a ‘holistic’ concept that includes a broad range of established and evolving techniques for the provision of finance and the management of risk.
- SCF is usually, but not exclusively, applied to open account trade. Open account trade refers to trade transactions between a seller and a buyer where transactions are not supported by any banking or documentary trade instrument issued on behalf of the buyer or seller. The buyer is directly responsible for meeting the payment obligation in relation to the underlying transaction. Where trading parties supply and buy goods and services on the basis of open account terms an invoice is usually raised and the buyer pays within an agreed time frame. Open account terms can be contrasted with trading on the basis of cash in advance, or trading utilising instruments such as Documentary Credits, as a means of securing payment.
- Parties to SCF transactions consist of buyers and sellers, which are trading and collaborating with each other along the supply chain. As required, these parties work with finance providers to raise finance using various SCF techniques and other forms of finance. The parties, and especially ‘anchor’ parties on account of their commercial and financial strength, often have objectives to improve supply chain stability, liquidity, financial performance, risk management, and balance sheet efficiency.
- Finance providers offer their services in the context of the financial requirements triggered by purchase orders, invoices, receivables, other claims, and related pre-shipment and post-shipment processes along the supply chain. Consequently, SCF is largely ‘event-driven’. Each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event or ‘trigger’ in the physical supply chain. The development of advanced technologies and procedures to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions in the related financial supply chain.
- SCF is not a static concept but is an evolving set of practices using or combining a variety of techniques; some of these are mature and others are new or ‘leading edge’ techniques or variants of established techniques, and may also include the use of traditional trade finance. The techniques are often used in combination with each other and with other financial and physical supply chain services.
Supply Chain Finance is defined as the use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions.
SCF is typically applied to open account trade and is triggered by supply chain events.
Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.
SCF terminology in the news
MEDIA COVERAGE AND LATEST NEWS
In this section you will find the latest updates on and access news articles on Supply Chain Finance Terminology
- October 25, 2021