Counterintuitive Indeed!

Nothing in life is so exhilarating as to be shot at without result.- Winston Churchill

JP Morgan Chase recently published an article on Supply Chain Finance titled A Counterintuitive Development: Supply Chain Finance in the New Economic Crisis I think they nailed the title. The first half of the article provides a nice review of the changing landscape in global trade. It’s down significantly due to the twin impacts of a global recession and constriction in the credit supply. It’s when the article discusses a non-traditional trade offering like Supply Chain Finance that I disagree with some of the conclusions. Some of the statements made are a little too counterintuitive! For example:

1. Buyers today care more about providing liquidity to their strategic suppliers than extending payment terms. The article also goes on to state that “ironically, when credit was plentiful and cheap in the first quadrant, major buyers were interested in Supply Chain Financing programs as a way to extend terms; but lingering concerns over the accounting treatment these programs would enjoy, as well as the ability to mobilize/ coordinate their internal functional areas (treasury, procurement/sourcing, technology) proved hurdles too high to overcome.” I’m not sure what kinds of buyers J.P. Morgan works with and the concerns they may have with the accounting associated with J.P. Morgan’s SCF programs, but the buyers we work with are still primarily looking for SCF to support supplier initiatives of some sort (e.g. pricing, payment terms, etc.) and most are concerned with improving their working capital and supporting their payment terms initiatives (which will occur with or without SCF). It is rare that a buyer feels that providing liquidity to their strategic suppliers provides enough value to pursue SCF. Further, buyers are achieving their objectives rather than finding the hurdles too high to overcome. The article is spot on though when it says that internal functional areas at the buyer need to be coordinated and this is a problem with some SCF programs. In addition, for the buyer to achieve their working capital objectives they need to implement the right technology with robust services from their SCF partners to support supplier education/enablement and Procurement’s term extension negotiations.

2. Banks are now more credit constrained and bank pricing of SCF liquidity has risen so this has hampered third party non-financial supply chain providers. The article also states that a number of banks fled the SCF market “when the going got tough” and “banks are becoming more sensitive to providing balance sheet support to “customers” who are not utilizing them for non-credit fee products as well.” One of the main characteristics of bank independent, multi-bank SCF technology providers is they allow for multiple banks to participate in the funding of an SCF program. Banks’ constrained liquidity and the potential for banks to reduce or withdraw credit has greatly increased the value of that multi-bank capability, not decreased it. At PrimeRevenue, many of our SCF programs have over $200 Million in liquidity, some over $1 Billion, and those levels of funding are very difficult to obtain in today’s credit environment unless the buyer is using an open, multi-bank SCF platform. Buyers should deploy a multi-bank platform to guard against the risks of any single bank exiting the SCF market, reducing credit or withdrawing credit. They don’t want their critical suppliers left high and dry if a bank decides to restrict or withdraw credit. I just don’t see how bank’s credit constraints make it less valuable to have a bank independent, multi-bank SCF partner that can bring in multiple banks. There’s a reason why large corporates have multiple banks in their credit agreements – they don’t want to be dependent on any single bank for liquidity. Why would they subject their critical suppliers to a risk they would not tolerate themselves?

3. They (bank independent, multi-bank providers) have been unable to provide sufficient liquidity to support recently expanded programs I don’t know where they’re getting their information but that statement is just plain false. At PrimeRevenue, we haven’t had any problems providing liquidity to our investment grade SCF programs, though it does take a greater number of banks to meet the liquidity needs of each individual program. Even for most of our non-investment grade SCF programs we have been able to source more than enough liquidity.

If I were making an argument for the benefits of an open, multi-bank SCF platform rather than a proprietary, lead bank SCF platform I would start with the points this article makes banks are credit constrained and could restrict or withdraw SCF liquidity at any time for various reasons. This increases the need to diversify sources of SCF liquidity through an open multi-bank platform rather than decreases the need.