An overview of how innovation in the fintech sector has led to more efficient supply chain financing.
What do successful mega corporations have in common? In addition to being market leaders in their respective niches during the peaks of their success, they all have a constant risk of losing out on their positions due to a failure in adapting to the new age business ecosystems that are being driven by technology.
What we will cover in this blog:
- The need for Technological Readiness
- The problem with the current Supply Chain Finance
- New Age Supply Chain Finance
- Features of Tech Supply Chain Finance Platforms
- Penetration of Supply Chain API platforms
- What’s the latest in Supply Chain Finance?
- Bottom line
The need for Technological Readiness
We have seen this happen time and again, with seemingly impervious organizations such as Blockbuster, Kodak and Toys R’ Us. Whether it’s state-of-the-art organizations like Amazon putting retailers out of business, or disruptive startups like Juul penetrating the oligopolistic market of the Big Tobacco firms, innovation in technology has been central to challenging the status quo. But even as CEOs and CFOs of large corporations begin to build firewalls against such disruption around their businesses, there is one often overlooked aspect of their business in which technological innovations become an opportunity for success rather than a problem to overcome. That aspect is supply chain finance.
The problem with the current Supply Chain Finance
Many organizations have already opted for some form of vendor financing program or another, whether direct discounting schemes with the company itself or channel finance lines with select financial institutions. However, these traditional modes of funding come with severe limitations.
– Firstly, these financing routes are usually reserved for a large enterprise’s larger and more credit-worthy suppliers, leaving the smaller suppliers deeper in the supply chain out to dry with no foreseeable solutions to their working capital needs.
– Secondly, discount rates in most funding programs tend to be fixed, which always poses a problem for a manufacturer’s 2nd tier vendor onwards. – And lastly, all processes are conducted manually taking away precious time that could be devoted to other aspects of the business.
New Age Supply Chain Finance
This is where innovations in financial technology steps in. Third-party providers like CredAble have built API-based platforms that create lucrative outcomes for all parties involved in a supply chain. Not only do they provide much-needed liquidity to vendors which would facilitate the steady operation of their businesses, but they are also customizable to the needs and requirements of the corporate clients they partner with. Banks and other financiers are keen to partner with such third-party fintech platforms, as this gives them access to a whole new market of clients.
These API-based platforms provide:
– A one-stop solution for all of an enterprise’s working capital requirements, and address the problems faced by traditional vendor financing programs that corporates have used until now.
– No room to discriminate between vendors. Rather than being out of reach for smaller vendors deeper in the supply chain, they offer financing to these vendors based on the credit standing of the corporate anchor.
Features of Tech Supply Chain Finance Platforms
– The platform makes use of the abundance of data, analyzing parameters like credit and payment history, relationships between the corporates and their suppliers, key balance sheet items, and other key credit assessments.
– They make use of machine learning to offer rates specific to each vendor and corporation, thus providing an option of dynamic (variable) discounting as opposed to rigidly fixed discount rates.
– The platform interfaces are extremely user-friendly and easy to operate for all the parties involved.
– The technology can be integrated with nearly any ERP systems that are already in use by the company, thereby automating the entire process used by the anchor and eliminating the need to have a large number of human resources working on it.
– The platforms are built for scaled growth and can be easily replicated for a large number of clients and their vendors. This is undoubtedly going to go a long way in addressing India’s $400 billion funding gap across supply chains.
Penetration of Supply Chain API platforms
Supply chain finance models such as these have already been widely implemented in economies of Western countries. It is only now, with technological upgrades rapidly happening in every company, that Indian companies are finally starting to tap into the benefits these services provide by operators that run these platforms. The platform vendors seek to partner with corporations to help unlock valuable operating cash flow that is trapped in their supply chains. While some operators possess NBFC licenses, they do not seek to replace traditional financial institutions that provide channel finance to corporates. Rather, they position themselves as facilitators and technology providers, connecting a corporation to a vendor to a financier, operating a structure that benefits all 3 parties. India Inc. should be ready to ride the opportunistic wave headed its way.
What’s the latest in Supply Chain Finance?
The forerunners in Supply Chain Finance are rapidly innovating in a field called multi-tier financing, or deep tier supply chain financing. As mentioned earlier, most of the vendor funding programs that exist today are only capable of taking care of the working capital needs of the first layer of suppliers of enterprises. However the bigger the supply chain, the more the levels of suppliers, which in turn leads to an exponential rise in the number of payment cycles, terms, etc. This sharp rise in the number of moving parts by increasing each additional layer of supplier causes a funding program to be that much more intricate, in order to create stability down the entire supply chain.
The Bottom Line
There are various technologies and techniques that make such deep-tier supply chain financing possible, and are being widely implemented by anchor corporations in India.
The bottom line is that with a rise in the robustness of supply chain finance in the country, there should be a clear rise in the business performance of India in the coming years. Exciting times lie ahead for Indian businesses, that is for sure.