Winning Supply Chain Finance business in Asia

A technician stands on a crane at the Tanjung Priok port in Jakarta, Indonesia, August 3, 2022. Reuters

Some of the local banks in markets across Asia are either planning or are in the process of launching a Supply Chain Finance (SCF) business. Banks are attracted to SCF as this has high returns and offers an annuity flow of revenue. To recover the cost of launching this business and to make this business profitable, banks will have to win their client’s business for SCF. This article visits some of the strategies that banks in Asia can engage in to win new mandates from their target SCF clients.

If a bank is exploring launching Supply Chain Finance, it has a green field and can socialise the concept with its clients who have strong credit standing. Usually, an analysis of the Days Payable Outstanding (DPO) of the peers in the industry will help the client to see where they are in terms of DPO compared to their peers.

Often clients will float a Request for Proposal (RFP) and ask banks and fintech companies to participate in the RFP. Banks participating in the RFPs should read the client document carefully as every client is different and their requirements could also vary.

If there are questions from the bank’s side related to the RFP document, it’s better to have either a session with the client or send them the questions in writing. Clients will usually share the responses with all the participating banks.

Sometimes clients may have unique requirements in their Supply Chain Finance RFPs. Some of the key topics that could come up in an RFP are covered here:

• Rebate:

Sometimes a client will ask the bank to share their discounting income as a rebate with them. This may have an accounting impact on the client and may be classified as debt especially if the client is an SEC registrant. Even if the client is not an SEC registrant, they should still discuss with their accounting consultant in terms of local accounting policy compliance. Rebates have many negative impacts on the program other than accounting treatment. If the supplier finds out that the buyer is earning an incentive from the bank, this can impact the buyer-supplier relationship. The rebate also inflates the pricing of the program and many suppliers will not join such programs where the pricing could be higher than the financing cost from their own banks. It is the responsibility of the bank to educate and inform the client about these potential impacts of rebates during the sales process.

• Pricing:

Usually, banks will price their program based on the Buyer’s credit rating. Pricing may be quoted with a benchmark rate like SOFR plus credit spread plus a platform fee. In Asia, some markets have all-inclusive rates which are usually the bank’s cost of funds plus the spread. In markets like China and India, rates used to be quoted as all-inclusive but nowadays pricing could also be quoted with Loan Prime Rate (LPR) as the benchmark in China and with T-bill rate as the benchmark in India. Pricing in a supply chain finance program should not be static and should be reviewed periodically to adjust to market conditions. In an increasing rate environment, pricing must be increased to ensure that the bank is not losing money. Similarly, if the rates are decreasing, suppliers should benefit from lower pricing. The mechanism of communicating pricing change to suppliers will be based on the local market’s regulatory requirements and should be documented in the agreement that the bank executes with the suppliers.

Pricing is a key determinant but not necessarily the only factor in winning a supply chain finance mandate. A Buyer will like to negotiate a good overall pricing or pricing range for their suppliers without getting into individual pricing negotiations for each supplier to avoid accounting issues. Having said that pricing alone cannot win a mandate. This has to be a comprehensive package solution comprising a robust platform, strong project management, supplier onboarding and risk distribution support from the bank. It is important to build a product team who understands the local requirements and a sales team that can confidently sell the solution to the target clients. Otherwise, investment in SCF will not deliver the desired outcome in terms of revenue and assets.

• Reconciliation:

Many banks face an issue when reconciling the payments from the Buyer against discounted invoices. Ideally, if the Buyer maintains an account with a bank, the bank can debit the buyer’s account at maturity. Then it is the Buyer’s responsibility to reconcile their accounts. Often clients will mention in the RFP that they will not open a new bank account for SCF and may want to fund the account on the due date from another bank. If this funding is not accompanied by a reconciliation file, the bank will not know how to apply these funds. They may even have excess funds not knowing which invoices to knock off. This reconciliation mechanism should be discussed during the RFP process and the bank should understand how the account will be funded and funds will be applied based on the file provided by the Buyer.

• Stand Alone Credit Notes (SACN):

During RFP, it’s good to have a discussion between the Buyer and the Bank on how SACNs will be handled. Suppliers issue SACNs to buyers for multiple reasons often to offer credit for defects in the products that they have supplied. As the name mentions, this is “stand-alone” and banks will not know how to apply SACNs on their own. Hence, the best is to ask the buyer to net off the SACN from future payments and upload a net positive payment file for the supplier.

• Service Level Agreements (SLA):

Service Level Agreements are not common in Supply Chain Finance. A buyer does not pay for the service of Supply Chain Finance to the bank as they appoint the bank as its paying agent. It is the bank which takes the risk based on the Buyer’s credit by discounting funds to the suppliers and thus earning its income from the suppliers. If a client asks for an SLA in an RFP, this should be discussed with the client especially on what will be covered in the SLA and how will this SLA be monitored and measured and what will be the penalty for the bank if the SLA criteria are not fulfilled.

• Presentation:

The climax of most SCF RFPs is the client presentation where the bank gets a chance to present its solutions to the client. Usually, a PowerPoint presentation will be made by the leading salesperson which summarises the solution presented. This should be customised to address the client’s requirements and concerns. Sometimes a common template is maintained for responding to client proposals and then copy-paste is done to respond to the client RFP document and for client presentations. A custom-made client-specific response for RFP and presentation material is recommended to demonstrate to the client that the bank has done its homework.

Prior to the client presentation, it is important to spend some time determining who should attend the session from the bank. While seniority and matching the client’s profile are important, it is also important to have in the room or in a video call the people who will be doing the actual work-these are the technical resource, the supplier onboarding manager, the overall project manager etc. This not only puts the faces to the names in the submitted proposal earlier but the client also gets to see who they are, and what are their credentials and this helps the clients to determine if they are comfortable working with the proposed team from the bank.

• Demonstration:

Sometimes clients will ask for a live demonstration of the bank’s platform and its functionalities. This requires some homework on the bank’s part to make sure that the demonstration version of the platform works on the actual presentation time, not to mention ensuring that there is good internet connectivity in the room. Clients may ask questions about cyber security and how often the platform has been “ethically hacked”. There could also be questions on how the bank will protect the client’s data and comply with stringent data regulations like GDPR of the EU or PDPA of Singapore.

• Referral:

It gives a client confidence when an existing client of the bank is ready to vouch for the bank and express their satisfaction with the solutions and services provided by the bank. It is important to seek prior approval from the client who will be referred before sharing their names and contact details with prospective clients. At the same time, the bank should have a diversified source of referrals not to overburden the same client every time there is an RFP.

• Liquidity:

There was tremendous demand for liquidity from the clients during the beginning of the pandemic. It is important to highlight how a bank can support the liquidity requirements of the client during RFP.

• ESG:

Nowadays Environmental, Social & Governance (ESG) solution for SCF has become an essential offering in an RFP. This should also be customized addressing the specific ESG goals of the client and how this will be measured by independent ESG rating companies. Focus today is more on the “E” or environment and how the bank could support the environmental sustainability goals of the client and help their suppliers to attain these goals gradually through a reward-based incentive framework.

• Disclosure Requirements:

The IFRS proposal calls for the disclosure of information about supplier finance arrangements that enables users of financial statements to assess the effects of these arrangements on the entities' (buyers’) liabilities and cash flow. The bank should inform the Buyer about these new requirements during the RFP process and the Buyer should discuss the details of such disclosure with their accounting firm on the qualitative and quantitative nature of these requirements.

• Unique Requirements:

Every client is different and their supply chain finance requirements could also be unique. There could be questions in the RFP related to Dynamic Discounting. Clients may ask banks for cost reimbursements related to the ERP integration work on their side with the bank. There is no all-inclusive list of RFP requirements. Experience and expertise in SCF will help the bank to address and customize the solutions for each client tailored to their needs and help to win new client mandates.

Supply Chain Finance provides the banks with the opportunity to not only earn sustainable revenue flow but also support thousands of micros, small & medium enterprises (MSMEs) who will most likely not qualify to be the bank’s clients due to their small size. SMEs and MMEs are the drivers of the economic growth engine in most markets in Asia. There have been some negative media reports on excessive terms extension and misuse of Supply Chain Finance. It is the responsibility of the Bank and their clients, the Buyer to ensure that SCF is used in a responsible manner and to ensure that suppliers receive the best benefits from these programs. Otherwise, this could have a very negative impact on the entire industry.

Global banks have been successfully delivering SCF for many years mostly targeting global clients and their suppliers across the world, especially in emerging markets in Asia. Now it’s time for local banks in Asia to rise up to seize this opportunity to reach out to their clients and help their clients and their suppliers and in the process help the country’s economy toattain benefits from SCF solutions.

This decade could well be defined for Covid-19, the Russia-Ukraine conflict, inflation and supply chain disruptions. SCF has the potential to address the negative impact of all of these if applied as a smart working capital solution tool by the bank and their clients benefiting the suppliers. As the popular saying states, “Rising tide lifts all boats”.

[Parvez Murshed headed the Trade Documentary Services, Trade Supply Chain Finance Business & Implementation function for Citigroup’s Treasury & Trade Solutions business for 15 markets in the Asia Pacific region and also led the Global Transaction Services business of Citibank Bangladesh. Views expressed here are of the author’s own and do not represent the views of any organisation.]