Data: The next supply chain finance frontier
Data will be critical in the future of supply chain finance – particularly for SMEs.
Traditional methods of supplier analysis have typically restricted SMEs’ access to financing. And more worryingly, this SME financing gap has only widened in recent years – particularly in the APAC region. To help bridge the gap, supply chain financiers are increasingly looking to data – with hopes of creating healthier and more sustainable supply chains.
In the immediate wake of COVID-19, headline trade news focused on physical supply chain weaknesses. While these will continue to be of concern even during a global economic recovery, the pandemic has also highlighted significant weaknesses in financial supply chains.
“With consumer demand essentially turned off overnight, the impact on corporate cash flows has been extremely destabilising,” said Michael Sugirin, Global Head of Open Account Trade at Standard Chartered – at Infor’s recent APAC Supply Chain Virtual Summit.
The situation caused a spike in demand for bank-funded supply chain financing. This trend had already been building steadily; Standard Chartered has seen 40 per cent year-on-year growth since June 2019, particularly in the early stages of the supply chain cycle. “COVID-19 has driven a need for financing at even earlier stages, for second and third-tier suppliers – what we call ‘deep-tier’ financing,” added Sugirin.
Supporting these smaller suppliers’ financing needs has long been an issue, particularly in the APAC region, where the small and medium-enterprise (SME) financing gap has been growing. “In attempting to bridge this gap – especially in these challenging economic times – the application of data in supply chain financing will be critical,” Sugirin urged.
Bridging the gap
Of the estimated global SME financing gap of USD5.2 trillion per annum, approximately 46 per cent is in the APAC region1. “This is a particular issue in the typically-developing markets we operate in,” said Ashish Kohli, Director of Trade Products, at the same virtual summit.
The benefits of bridging this gap in developing markets – job creation, economic growth – are obvious. And from a supply chain perspective, supporting the smallest suppliers in a supply chain makes increasing sense as supply chains decentralise – something that we expect to see accelerate post-COVID-19, added Sugirin.
“Multiple organisations like The World Bank, International Finance Corporation (IFC) and central governments have focused on the development of financial infrastructure, digital financing and payment-systems streamlining to address the funding gap,” said Kohli. For Standard Chartered, a crucial element of such technological advancements will be data.
Data: Supply chain finance’s greenfield
Over the last five to seven decades, supply chain funding has been largely based on traditional credit risk models. For smaller suppliers, the reliance on such methods of evaluation generally mean insufficient, delayed or even no financing for SMEs. “The increased emphasis on regulatory processes here, such as KYC and AML, have not helped the case for these smaller enterprises,” Kohli explained.
Yet advancements in data are changing SMEs’ fortunes. With now more detailed and easier access to their transactional information, supply chain funders like banks can use data to extend financing based on a more thorough understanding of supplier performance. This also enables financing to be extended to the deep-tier suppliers, who typically struggled to receive formal financing before.
For supply chain financers, there are several ways data is now being applied to boost such financing. “Banks are typically using data in three main ways for supply chain financing: SME support, credit underwriting and risk evaluation,” said Kohli.
Standard Chartered is currently employing such practices, applying a two-pronged approach to the data journey. “First, we are using data to help our clients better understand their ecosystems and identify new insights,” explained Kohli. With data enabling greater ecosystem visibility, solutions are then developed based on the buying and payment patterns of a corporate client and their buyers and sellers. This enables financing to be targeted at the point where it is really required – often at the deep-tier financing level.
Second, data is increasingly supporting supplier assessments. “We are using external and internal data, applied to machine learning, to predict supplier-performance goals,” said Kohli. Compared to previous manual analysis, this provides more detailed information that is – crucially – available much sooner. Essentially, this means at-risk suppliers can be funded before it’s too late, promoting healthier and more sustainable supply chains.
One recent application for the Bank was an Asia-based supplier, which had seen expansive growth but struggled to achieve financing based on traditional credit analysis models that limited them due to exposure caps. “Detailed data analysis of the suppliers’ buyers meant we could finance our client based on the strength of its buyers – ultimately bridging their funding gap,” said Kohli.
The Data Decade?
We are at a turning point for data. Indeed, a recent CRN survey2 of top technology company CEOs dubbed 2020 as the launch of the ‘Data Decade’. “We are clearly seeing the turning point for the use of data, particularly in the APAC region,” said Kohli. With this brings hopes of bridging the region’s wide SME financing gap, he added.
“In the next decade, we expect supply chain finance will be broadly originated and driven by data and strong supplier-buyer relationships as the norm,” concluded Sugirin. If used with the right intent and appropriate governance, data will be gold.
1 https://www.ifc.org/wps/wcm/connect/03522e90-a13d-4a02-87cd-9ee9a297b311/121264-WP-PUBLIC-MSMEReportFINAL.pdf?MOD=AJPERES&CVID=m5SwAQA
2 https://www.crn.com/news/running-your-business/ceo-outlook-why-2020-will-be-the-launch-of-the-data-decade-