In order to assess supply chain finance (SCF) activity in France, Corporate Linx’s methodology was to access information gathered from large corporates located in-country, as well as information gathered from specialised media publications and financial organisations.
The research included:
- All initiatives initiated and managed by the buyer, granting suppliers with an early payment option.
- All programmes managed by French or foreign financial organisations in France.
- All programmes called reverse factoring, SCF and dynamic discounting.
The research did not include:
- Other financial products such as forward factoring and invoice discounting.
- Practices of ad hoc early payments that most corporates have to forego when a situation with a supplier demands urgent and early payment.
In 2010, €14.5bn worth of programmes have been financed with SCF or similar initiatives. The figure is expressed in yearly procurement volume or, in other words, yearly invoice amount. This makes it easier to compare with other short-term credit products.
By comparison, in the same year, domestic forward factoring products will account for €109bn. Although SCF may appear to be small, it is worth noting that this represents an increase of around 30% compared to last year, while forward factoring will slightly exceed 2008’s volume in 2010 after an historic drop in 2009.
Why Have SCF Programmes Increased?
There are many different SCF offerings in the market providing corporates with alternatives to what their own banks can offer. Most corporates are looking for multi-banks programmes, as a single source of funding often proves insufficient, uncompetitive and riddled with heavy constraints imposed by the unique funder. In addition, factoring/banking offerings often have little automation, and corporates are faced with operational challenges to operate these new programmes. Furthermore, technical solutions from financial institutions usually consider the transaction only when it has become a ‘validated debt’.
A SCF programme is often seen as a new way of managing supplier relationships. The automation and dematerialisation of ordering, invoicing, collaborative dispute management, credit note management, and remittance advices can be found with a service provider’s modern and dedicated technical solutions. This becomes a more palatable proposition for corporates because it can kill two birds with one stone: it can save on operational costs, as well as generate financial gains when managing early payment. All in all, it is a win-win situation as both suppliers and buyers are financially benefiting from this new and improved relationship.
Durable SCF Solutions
SCF initiatives can provide other benefits than just creating cost savings for corporates. A mere self-financing SCF programme can be an objective. Large corporates can gain facilities such as a lifeline to their suppliers. Ensuring that suppliers are granted access to the lowest short-term credit terms in the marketplace works to ensure that the corporate’s client revenue is not at risk with incidents and interruption in their supply chains. In summary, a SCF solution can become a corporate tool to financially ‘protect’ suppliers in the supply chain so that revenue is not jeopardised by parts/goods/services not being delivered on time by distressed suppliers.
Service Providers Develop New Business Model for SCF
As the number of SCF programmes is growing, new offerings from service providers or software vendors are emerging. This translates into a different business model where, instead of providing a technical solution and participating in the profit sharing, service providers can bill for a service subscription. However, in France both corporates and banks are beginning to question why intermediaries in these huge transaction volumes are skimming off some of the profits.
French Corporates Take the Lead in SCF
In France, numerous SCF programmes have seen corporates take the lead in constructing the programmes, outlining what technical solution needs to be used and grouping together several banking partners. This provides:
- A programme built around the corporate’s objectives and constraints.
- An agreement with banking partners that they can no longer ‘dictate’ their own and unique terms and conditions.
- An assurance that the programme’s terms remain as an operational debt.
- Better control over the programme’s distribution.
- Adherence to programme’s terms by all participants.
- Enhanced profits for corporates.
When taking all these elements into consideration, SCF programmes is predicted to grow steadily in the future. The sheer procurement volume from any of the top 50 French corporates can boost figures by a few billion euros per annum whenever a new programme is launched.
For 2011, based on steady deployments of existing programmes and new programmes scheduled for next year, SCF programmes should exceed €20bn in France. Corporate Linx will endeavour to keep gtnews readers updated during the course of next year of the continued development of SCF in France.
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