The
Rise of FinTech in Supply Chains
A new type of services company could transform
global supply chains: Financial technology companies that act as intermediaries
in facilitating transactions between a company and its suppliers. They enable
both the buyer and supplier to improve their working capital by making it
possible for the former to extend its payables and at the same time accelerate
payment to the latter. This provides both sides with benefits, including
greater liquidity and less variability in the timing of payments.
Multinational corporations such as Apple,
Colgate, Dell, P&G, Kellogg’s, and Siemens are using these “FinTech”
companies to tap previously inaccessible capital in their supply chains to help
finance growth in new and emerging markets, develop and support new products,
strengthen their financial positions, and increase the capital available to the
whole supplier ecosystem. (The use of FinTechs allows suppliers to access
funding at the multinationals firm’s lower cost of capital.)
FinTechs are internet companies that
streamline financial systems and make funding the supply chain more efficient.
They include new enterprises such as Orbian, Prime Revenue, C2FO, Taulia,
and Ariba as
well as new operations launched by traditional financial service firms such as
Citi Group, HSBC, BNP Paribas, and Deutsche Bank.
Many FinTechs function as cloud-based software
platforms and can enable “procure-to-pay” systems that incorporate both
purchasing management and accounts payable functionality. They provide an
integrated solution that supports a process that begins with a purchase
requisition and terminates with payment to suppliers. These integrated systems
enable buying firms to greatly reduce the burden of administering these
functions because they close the loop between procurement and accounts payable
and provide a structure that streamlines these processes. For suppliers,
joining the platforms can be nearly as simple as adding an app to a smartphone.
Once the supplier is onboard, the buying firm
approves the invoice, and a cascade of processes takes place on the FinTech’s
platform. The advantage for the supplier is it is able to obtain payment at a
time of its choosing — a big benefit in a period when big manufacturers
are extending payment terms. In some cases, the payment can be sent to the
supplier in as early as two days versus 60, 90, or even 120 days that the
buying firm often prefers.
The supplier gives the buying firm a discount
on the invoice amount at the buyer’s lower cost of capital. For example, when a
supplier elects to receive payment for a $10,000 invoice in 15 days through the
FinTech and the buyer submits payment to the FinTech 90 days after it approves
the supplier invoice and buyer’s cost of capital is 2%, the discount that the
supplier gives to the FinTech is only $41 (i.e., the supplier gets $9,959
of the $10,000).
The buying firm benefits through longer
payables, which positively impact its working capital. In many cases, companies
such as Procter & Gamble and Kellogg’s have extended their accounts payable
through such supply-chain financing relationships out to 120 days. This
improved working capital can be used to fund growth in new markets.
FinTechs typically act like brokers. Their
relationships with an entire network of different banks or financial
institutions allow them to obtain the best funding solutions for their
customers. This is similar to the way third-party logistics companies (3PLs)
arrange transportation. It used to be that a firm would have all of its
transportation contracted with one trucking company. But a 3PL is able to pick
and choose a transport company in much the same way as a brokerage.
It is important to note that multi-bank
FinTech platforms, which receive only a small fee for their services, have
increased the competition in supply-chain financing to the point that profits
for the institutions providing the financing have been reduced significantly.
It is likely that FinTech firms will continue
to evolve and add additional services. Some firms are already providing
supply-chain services such as procurement and inventory management. In the
future, some FinTech firms are likely to extend their reach beyond financing
into supply-chain services such as procurement and supplier management.
Traditionally, supply chain management has
been about sourcing, making, and delivering. Now, it’s about “funding” — using the
supply chain as a source of inexpensive capital. FinTech companies are helping
to make this possible, and as they expand into new areas, their importance in
supply-chain management is certain to grow.
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