The Growth of Supply Chain Finance
PETER JACOBSTEIN, Chief Strategic Partnership Officer, The Interface Financial Group
May 5, 2022
Once a sleepy corner of the specialty finance world, Supply Chain Finance is now firmly in the mainstream — and projected to continue its rapid growth.
Global volume of Supply Chain Finance reached $1.8 trillion in 2021, up 40% from 2020, according to BCR Publishing’s World Supply Chain Finance Report 2021. Since 2015, the industry has expanded at a 33% compound annual growth rate.
In this report, we’ll examine the outlook for Supply Chain Finance, the factors that are driving its growth, and innovations that will carry it forward.
What’s Driving SCF Growth?
A combination of factors is pushing the rapid growth of Supply Chain Finance:
1. Growth in Demand
The global pandemic – and subsequent economic recovery – drove huge demand for SCF as buyers and suppliers alike scrambled for new sources of working capital.
But supplier demand for early payment has been driven by a number of factors:
Increases in buyer payment terms: beginning with the 2008 financial crisis, buyers began a decade-long quest to improve working capital by extending their terms, leaving suppliers in need of their own sources of affordable working capital.
Growth of buyer Dynamic Discounting: with longer terms, buyers introduced Dynamic Discounting — early payment for suppliers in exchange for a discount, funded by the buyers’ own capital. Demand proved strong, but overall, buyers were able to fund just 8%-10% of their supplier demand, opening the door for third-party SCF funding.
Increased media profile: Expansion of SCF use, coupled with new funding providers, often from the fintech world, drove media interest in SCF — pushing awareness and interest into the mainstream.
2. Growth in Supply
The need for additional Supply Chain Finance drove innovations in the marketplace, transforming SCF from a product for a select few large buyers and suppliers to a widely available source of easy, inexpensive working capital.
Key drivers of Supply Chain Finance supply include:
The post-pandemic supplier crunch: The economy has roared back to life with shortages of nearly everything. Savvy buyers have added early payment programs as a way of demonstrating goodwill to their suppliers, and to ensure that they maintain continued access to the goods and services they need.
The rise of fintech providers: For most of its history, SCF was provided by money center banks to near/investment grade buyers and suppliers. The banks now face a crop of well-funded fintech challengers who have applied technology to SCF, delivering faster, easier, and less-expensive-to-implement solutions for buyers…and for suppliers of all sizes.
The growth of Procure-to-Pay networks: Procurement has moved online, and with it the links between buyers and suppliers. This provides a strong nexus for SCF providers — who can seamlessly integrate early payments into the invoicing and payments process.
The Bottom Line
Over the past decade, Supply Chain Finance has grown from a bank-led specialty product to a mainstream working capital tool.
Smart suppliers now expect opportunities for early payment, and savvy buyers are offering ramping up programs to meet the demand.
Here’s what we expect to see in 2022:
Flattening of terms for buyers: the expansion of payment terms appears to have slowed, as suppliers gain leverage in negotiations during a time of scarcity
Continued strong demand for Supply Chain Finance: suppliers are increasingly expecting an early payment option, but buyers are being cautious with their own cash, curtailing Dynamic Discounting programs. Supply Chain Finance will continue to fill this gap.
Increased attention from accounting bodies: with the growth of SCF has come a desire for additional transparency. Both IFRS and FASB are proposing new disclosure rules for SCF programs. The full scope of new disclosures is not currently known, but what has been discussed publicly to date is not expected to dent enthusiasm for early payments.
If you’re interested in learning more about Supply Chain Finance, IFG can help.