A new type of service company could transform global supply chains: financial technology companies that act as intermediaries to facilitate transactions between a company and its suppliers. They enable the buyer and supplier to improve their working capital by allowing the former to roll over its accounts payable and, at the same time, accelerate payment to the latter. This provides both parties with benefits, including greater liquidity and less variability in the timing of payments. Jason Simon, an expert who has worked closely with all things FinTech and eCommerce, provides a detailed explanation of the boom in supply chains.
Multinational corporations, such as Apple, Colgate, Dell, P&G, Kellogg and Siemens, are using these FinTech companies to leverage previously inaccessible capital in their supply chains to help fund growth in new and emerging markets, develop and support new products, strengthen their financial positions, and increase the capital available to the entire supplier ecosystem. The use of FinTechs enables suppliers to access financing at the lower cost of capital from the multinational enterprise.
FinTechs are Internet companies that streamline financial systems and make supply chain finance more efficient. They include startups such as Orbiano, Prime Income, C2FO, Taulia and Ariba, as well as new operations started by traditional financial services companies such as Citi Group, HSBC, BNP Paribas and Deutsche Bank.
“Many FinTechs operate as cloud-based software platforms and can enable “purchase-to-pay” systems that incorporate both purchase and accounts payable management functionality,” explains Simon. “They provide an integrated solution that supports a process that begins with a purchase requisition and ends with payment to suppliers. These integrated systems enable buying companies to significantly reduce the burden of managing these functions by closing the loop between procurement and accounts payable and providing a structure that streamlines these processes.”
For suppliers, joining the platforms can be almost as simple as adding an app to a smartphone. Once the supplier is on board, the buying company approves the invoice, and a cascade of processes takes place on the FinTech platform. The advantage for the supplier is that it can get paid at the time of its choice, a big advantage in a period when large manufacturers are extending payment terms. In some cases, payment can be sent to the supplier in as little as two days versus 60, 90, or even 120 days that the buying company often prefers.
The supplier offers the buying company a discount on the invoice amount at the buyer’s lower cost of capital. For example, when a supplier chooses to receive payment on a $10,000 invoice in 15 days through FinTech and the buyer sends payment to FinTech 90 days after approving the supplier’s invoice and the buyer’s cost of capital is 2%, the discount the supplier gives FinTech is only $41. In other words, the supplier gets $9,959 of the $10,000,
The buying company benefits through longer accounts payable, which positively impacts its working capital. In many cases, companies such as Procter & Gamble and Kellogg have extended their accounts payable through such supply chain finance relationships up to 120 days. This enhanced working capital can be used to finance growth in new markets.
FinTechs often act as intermediaries. Their relationships with a whole network of different banks or financial institutions enable them to obtain the best financing solutions for their customers. This is comparable to the way third-party logistics firms (3PLs) direct transportation. It used to be that a company would have all of its transportation contracted with one transportation company. But a 3PL is able to pick and choose a transportation company in the same way as a brokerage.
Simon states, “It is important to note that multi-bank FinTech platforms, which receive only a small fee for their services, have increased competition in supply chain finance to the point where the profits of the institutions providing the finance have been significantly reduced.”
FinTech companies are likely to continue to evolve and add additional services. Some companies already provide supply chain services, such as procurement and inventory management. In the future, some FinTech companies are likely to expand their scope beyond financing to supply chain services such as sourcing and supplier management.
Traditionally, supply chain management has focused on sourcing, manufacturing, and delivery. Now., it’s about “financing,”