By Dale Rogers for HBR
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 asOrbian, 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.
First appeared at HBR