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Technology investment fuels growth in supply chain finance.

According to a September report from Allied Market Research, “The global supply chain finance market was valued at $6 billion in 2021 and is projected to reach $13.4 billion by 2031, growing at a [compound annual growth rate] of 8.8% from 2022 to 2031.”

Technological advancements in digitalization and automation have made supply chain finance (SCF) more accessible and efficient, which has led to a proliferation of platforms and solutions that streamline the processing of invoices and payments, making it easier for companies of all sizes to implement SCF programs.

The increased complexity of supply chains makes managing working capital efficiently much more challenging. SCF can bridge the gap between payment terms and the actual flow of goods—helping buyers and suppliers improve their cash flow by accelerating receivables for suppliers and extending payables for buyers.

It is also a relatively safe investment in uncertain times. And it’s not just banks that are getting in on the act. Institutional investors view it as an attractive asset class; while fintech SCF platforms, often in collaboration with banks and other alternative investors, are increasingly helping to close the trade finance gap.

Regulatory changes, including changes in trade finance regulations such as the introduction of the UK’s Electronic Trade Documents Act of 2023, can encourage the adoption of SCF by reducing legal and operational barriers. It’s worth noting that there has also been a global trend toward SCF scrutiny. In the US, the Financial Accounting Standards Board issued an Accounting Standards Update in September 2022, which came into effect in 2023, requiring disclosure of key SCF program terms and obligations on the balance sheet in quarterly and annual reports.

There is also growing demand for businesses to identify and address human rights and environmental risks along their supply chains. For example, the EU’s 2019 Green Deal requires commodities traded through the EU and products placed on the EU market to be sourced and manufactured responsibly. Meanwhile, the EU’s Corporate Sustainability Reporting Directive came into effect in January 2023.

While consumers’ attitudes have significantly influenced environmental, social and governance (ESG) goals, vulnerabilities across global supply chains are forcing businesses to rethink SCF. Increasingly, SCF is being used as both an incentive and an enabler to encourage sustainability across supply chains, and both banks and nonbanks are increasing their sustainability-linked SCF offerings.

Sustainability is an integral part of MUFG’s mission as a company and a vital part of the bank’s identity. In addition to net-zero plans for its operations, MUFG has committed to investing more than $330 billion directly into sustainable finance by 2030. It also boasts of being the largest renewable energy project finance bank in the US, and it is the leading arranger of renewable energy globally.

“Within supply chain financing, we see companies at different stages of their ESG journeys depending on alignment between their procurement and sustainability teams, often with competing priorities and separate reporting lines. So, we meet our clients at their point of need no matter where they are in that journey,” explains Maureen Sullivan, managing director and global head of SCF at MUFG.

“Some clients face financial stress in their efforts toward net-zero emissions and need financing structures that enable their transition sustainably,” Sullivan adds. “For those clients, we offer transition SCF financing, where we ring-fence select suppliers that can provide sustainable improvements as the client transitions to a greener business model.”

“For clients further down the path,” she continues, “we provide financing incentives to drive positive supplier behavior. Based on their chosen KPIs, many companies want to use SCF to encourage and promote a sustainable and socially responsible supply chain. We offer an independent third party to evaluate a supplier with an ESG score and, based on demonstrated improvements over time, offer that qualified supplier a tangible incentive such as a more attractive financing rate. ESG scoring is tiered for small to midsize suppliers, while we create bespoke KPIs for large suppliers based on publicly stated long-term measures to access preferred rates.”

Recent global events, such as the Covid-19 pandemic and other ongoing supply chain disruptions, have highlighted the importance of building resilient supply chains. SCF can build this resilience by providing access to financial resources and improving cash flow management.

Overall, the growth of SCF is driven by a confluence of factors that make it an attractive solution for businesses of all sizes. Its ability to improve working capital management, build stronger supplier relationships, and mitigate risks in complex supply chains will likely continue driving its adoption.

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Six trends changing the face of supply chain finance

Supply chain finance is revolutionising the way companies buy and sell, but its full potential has yet to be realised.

The amount of cross-border SCF conducted today is just a tenth of what could be done say European banks. One reason is the complexity of SCF. However innovations in both developed and emerging economies promise to change that modest uptake in the coming years.

Making SCF easier to use and understand is essential if it is to become the norm in financing global trade. Several trends should speed that process:

1. SCF is becoming widely accepted in cross border trade

Bankers expect the European and US crossborder markets to grow 10-20 per cent a year for the rest of this decade. Already some banks have seen annual growth of 30-40 per cent andin the UK and Germany that figure is closer to 70 per cent, according to Demica.

2. More buyers are financing their suppliers

SCF has traditionally focused more on the relationship between suppliers and their banks. This is changing. New technology is helping buyers use SCF to help their strategic suppliers at better rates than they might find elsewhere, thanks to often higher credit ratings.

3. Non-bank players are emerging as an alternative source of SCF

New entrants, including peer-to-peer lenders, dynamic discounters and early payment marketplaces help buyers and suppliers exchange purchase orders, invoices and accelerate cash transfers. Private investors, financial institutions or even buyers provide funding for these new solutions to invest in their own payables.

4. Providers unite to offer a global service

Fragmented banks are recognising the need to partner logistics companies, local banks, export credit agencies and other transaction banks to offer corporates solutions across the supply chain. That is a change from the more fragmented approach until now.

5. Technology is replacing the paperwork

Electronic documentation is playing an ever greater role in international trade business as corporates automate trade supply chains toimprove speed and efficiency. That means corporates who use a number of banks require them to deliver electronic solutions on a common platform.

6. Countries are getting involved

Governments around the globe are paying more attention to supply chain finance. The UK for instance has initiated an SCF programme with some of Britain’s leading companies and banks. In the US, the Treasury’s Invoice Processing Platform uses electronic invoicing to ensure that suppliers are paid on time or even early.