Technology is opening up better financing opportunities for small and mid-sized companies all the way out to the end of the supply chain.
Suppliers several steps removed from the name-brand companies are usually invisible until their ability to produce is disrupted, as during Covid-19. Many small to medium enterprises (SMEs) do not have access to the same financing programs as tier-one suppliers to enable them to survive disruptions. But the tier-one suppliers and their original equipment manufacturer customers are dependent on these smaller companies that have been priced out of traditional trade financing.
The lack of financing for deep-tier suppliers hinders economic growth and stability for SMEs. It also presents a new market opportunity for banks to engage smaller customers with less risk and encourage local GDP growth.
Supply chain financing, essentially reverse factoring, allows SMEs to leverage the higher credit standing of the larger corporate buyers for favorable financing terms. In addition, technology such as blockchain, Internet of Things sensors and application programming interfaces allow lenders to finance these deep-tier suppliers with greater confidence, to keep their supply chains connected.
Deep-tier financing means banks and fintechs can fund not just one company but a whole supply chain, said Burak Yahsi, M&A and strategy manager at advisory firm Goetzpartners. “The bank increases its reach and becomes strategic partner of a supply chain with thousands of possible companies,” he says.
Enabled by blockchain, buyers and sellers can create smart contracts that track and trace goods and settle payments, with an 80% reduction in transaction costs. Working with SMEs is a new market segment for banks—one that brings new fee income and also supports national GDP growth due to lower risk, noted Parm Sangha, head of Trade Finance Networks, IBM Global Business Services.
The response to Covid-19 accelerated digitalization of trade finance by three to five years, according to Sriram Muthukrishnan, Singapore-based group head of product management, global transaction services at DBS Bank.
DBS was among the banks that rolled out deep-tier or multitier financing to support SMEs.
The holistic push to digitalize the entire supply chain finance journey helped DBS grow its supply chain revenues by 34%, reflecting the rapid adoption pace.
The digitalized onboarding journey reduced turnaround time by 75%, which increased supplier acquisition by more than sixfold; while the volume of traditional customers migrating to DBS’ digital banking channels tripled year-on-year, according to Muthukrishnan. Overall, DBS approved about 9,000 loans, worth approximately $3 billion, to the SME trade sector since establishing its program in the first quarter of 2020.
In China, DBS launched platforms to track transactions and subtransactions, making it possible to provide financing on a pre-shipment and a post-shipment basis.
“We are able to make financing available at a fast pace to the smallest of SMEs,” Muthukrishnan says. “We look at businesses as an ecosystem and have improved the way we make liquidity available to the smaller end of that whole chain.”
Digital transformation, backed by artificial intelligence and data sharing via cloud systems, helps banks reduce costs and risk in engaging clients. Technologies such as distributed ledger and cloud computing allow banks to reduce their onboarding steps by up to 80%. In addition, increased transparency in transactions, due to tracking goods throughout the supply chain, reduces the likelihood of fraud or nonperformance.
“That visibility means banks can price in less risk, and less risk makes the products more affordable,” Sangha says.
More-affordable products allow banks to engage with smaller businesses and enable the bank’s anchor clients to grow because the supply chain is more self-sufficient from a cash flow perspective.
Small fintechs are niche providers that may not have sufficient capital and liquidity to serve the market at scale, according to Muthukrishnan. Larger banks like DBS, with robust balance sheets and ratings, can price products more attractively than smaller competitors.
“The takeup rate is good because suppliers can see the pricing is not predicated on their lack of bargaining power,” he says.
Blockchain allows participants to have confidence in transactions that are verifiable, auditable and immutable. The blockchain anonymizes data so that participants can contribute sensitive information without fear of a breach. With the confidence of information in the blockchain, SMEs can receive payments faster; so the same amount of operating capital supports more-frequent trading. The anonymity of blockchain helps address companies’ reluctance to share competitive information due to fear of information leakage.
Asia-Pacific (APAC) and Africa are leading regions in adopting digitalized processes that support deep-tier financing.
Samsung has established a fund to enable tier-one suppliers to finance tier-two suppliers in Korea. Foxconn Technology Group established a similar fund to supply working capital to small upstream suppliers. Blockchain enables visibility into the financial status of deep-tier suppliers, enabling manufacturers to reduce supply chain risk via capital investment.
SBI-Banco, a subsidiary of SBI Group, launched a blockchain-oriented, end-to-end deep-tier supply chain finance platform in APAC to let SMEs access financing across targeted industries. SBI-Banco is a strategic partnership between the platform operator Byfin and the Singapore-based fintech company RootAnt Global, a digital banking platform technology provider.
“We see a tremendous opportunity in an end-to-end digital banking platform offering like Banco, where key players such as banks, enterprises and SMEs collaborate on a single platform to facilitate cross-border trade, close the financing gap for SMEs and support enterprises to strengthen their supply chain and cash positions at scale,” said Lincoln Yin, CEO of RootAnt Global, in a prepared statement for the platform’s launch in March 2021.
DBS was the first Asian bank on AntChain’s blockchain trade platform, Trusple. Trusple generates a smart contract when a buyer and a seller upload a trading order onto the platform. The smart contract automatically updates crucial information, such as order placements, logistics and tax refund options when executing an order. Then, using AntChain, the buyer’s and seller’s banks automatically process the payment settlements via the smart contract.
The bank has also used platforms to track and trace product origin to certify sustainable rubber and cotton production practices. “With greater visibility, we can give farmers timely working capital support while enabling provenance tracking and verifiable use of sustainable production methods,” Muthukrishnan says.
Absa Corporate Investment Bank adopted digital platforms to keep trade flowing during lockdowns. Its Trade Management Online offering gives clients tools to monitor and manage online transactions.
The increased transparency from digitalization and blockchain adoption enables a matrix supply chain—rather than the traditional linear supply chain—in which any participant in the matrix can interact with any other, creating new business models.
“That gives you a tremendous reduction in risk,” says IBM’s Sangha. It also strengthens the business and trade ecosystem for all participants.