Myth to Reality

Whenever an individual or a business decides that success has been attained, progress stops- Thomas J. Watson

A recent report from McKinsey titled Supply Chain Finance: From Myth to Reality does a nice job reviewing the evolution of Supply Chain Finance as well as discussing issues for the future of SCF, primarily from a banker’s perspective. Like many, McKinsey highlights the need for banks to participate in open, multi-funder SCF programs. Any bank, regardless of size and ambition must recognize current market expectations for openness. The report goes on to say that an open multi-funder SCF network has the highest likelihood of attracting critical mass and Participating companies want to access trade finance from various providers, not only the bank that serves as their primary treasury services gateway. In discussing the evolution of SCF, McKinsey mentions some of the inhibitors to adoption resulting from the first model of SCF which utilized proprietary bank technology platforms. These included inconsistent global legal standards, the low cost of capital in the mid 2000s and the fact that linking suppliers with banks’ proprietary platforms proved to be cumbersome and expensive. McKinsey then describes the second model or multi-funder model, “The second model of SCF emerged as many large companies began sourcing their raw materials from SMEs around the world. The key enabler here was the development of technology platforms with two innovative features. First, these platforms connected all counterparties around the world, and second, they made it possible for multiple credit providers to connect and compete on financing, with the expectation that lower cost receivables financing would attract more suppliers and further More recently, however, technological improvements and the economic environment have rekindled interest among suppliers, suggesting that the second model has the potential to gain traction going forward. The third and next stop on the SCF evolutionary trail according to McKinsey will extend financing beyond an approved payable to all components of the purchase to pay cycle starting with a purchase order. “This new level of integration will support event-triggered financial services along the physical supply chain”. Supply Chain Finance has had a significant and positive impact on corporate supply chains and it will continue to evolve to meet the needs of corporate clients.