Why is Supply Chain Finance so Slow to Grow?

There is no question that the principles of supply chain finance (SCF) are strong and its corresponding benefits are considerable. The ability to get finance on the basis of the client’s creditworthiness should line up multitudes of companies, eagerly demanding such an attractive, and apparently low-cost, facility. Yet, the reality is that SCF programmes are evolving only very slowly and achieving far from widespread adoption. Financial institutions (FIs) have invested significant resources in money, time, and staff to develop and market SCF programmes, but have so far obtained relatively small returns compared against initial expectations. Non-financial companies represent a growing SCF alternative to banks, but their firepower is only a small fraction of what FIs can put in place.

An initial overview of the market and of its players suggests various likely valid reasons for such a slow uptake:

  • The level of information among companies about SCF is still low.
  • Banks are reluctant to change old-fashioned credit-checking, risk and collateral management processes and adapt them to the new offerings.
  • Companies already have financing lines in place and do not want to change.
  • Some large multinational companies (MNCs) are already running their own self-made SCF programmes.
  • Companies do not line up finance specialists in SCF programme teams.
  • Accounting and auditing issues may advise against the introduction of SCF programmes.
  • Company internal disconnects between treasury and procurement functions represent a serious concern.

These facts are, however, too general to detect what justifies the lack of SCF growth, suggesting to me that there was a need for deeper investigation and analysis. To simplify the work, while still achieving significantly still valid results, I decided to focus my observations on reverse factoring – also known as approved payables finance.

This instrument represents one of the most significant SCF solutions offered today. It would not be too far removed from reality to consider reverse factoring the pre-eminent SCF instrument. The fact that some banks call SCF their reverse factoring product shows how much this financial instrument has grabbed the attention of the market and, indeed, represents the epitome of SCF.

From this, one can conclude that a sequence of facts might explain why reverse factoring, and hence SCF programmes, have grown so slowly:

  • A large buyer approaches their bank asking to set up a reverse factoring programme for a number of suppliers. The foundation of reverse factoring is that suppliers get financed by the bank on the basis of the buyer’s creditworthiness.
  • The bank receives a mandate to approach the suppliers.
  • Normally these suppliers are based in fast-growing or emerging foreign countries (see later the comment regarding domestic suppliers).
  • The bank is supposed to finance these companies, so needs to properly review them under the lens of a full know your customer (KYC) procedure.
  • Current regulatory pressures demand very strict KYC controls and thorough assessments of each company profile.
  • Since the companies to control are based abroad, the bank must have a physical presence in each of the suppliers’ countries to execute the KYC mandate. Even with a physical presence onsite it will not always be feasible to conduct a compliant KYC control, due to lack of primary information from the company. Not all countries have the same levels of control and not all companies are provided with the proper systems to collect and store KYC- required data.
  • The bank may have a correspondent bank partner in the country, in which case the profiling of the supplier company can be somehow facilitated.
  • It is, however, highly unlikely that the KYC norms allow for a ‘on-behalf-of’ KYC check.
  • The bank of the buyer company may, at this stage, decide to opt out from the reverse factoring programme because the lack of KYC information risks compromising its compliance with regulatory requirements.
  • The practical impossibility of performing supplier on-boarding compliant with stringent KYC regulations prevents banks from running SCF programmes.
  • The cause of slow SCF programme take-up resides in the lack of adequate information that enables an FI to comply with regulatory mandates.
  • In the case of domestic supplier companies the KYC issue is resolved. However, in such cases there are already established SCF offerings that go under the name of ‘factoring’. Factoring is offered by specialised companies and by banks; both enjoy highly profitable results from these business lines.
  • Banks are therefore unwilling to touch their factoring business units.
  • Domestic companies are also normally familiar with factoring as a source of receivables finance. In fact factoring business is growing at an incredibly fast rate globally. Although companies lament the high costs of the factoring service, they are hardly aware of alternative solutions. On their side, banks have no real interest to distract companies’ attention away from traditional factoring in favour of nascent reverse factoring. Why merge the bank’s lucrative factoring business, and in the process lose revenue, into a (almost still unknown) SCF line of business?


The slow adoption of SCF programmes does not reflect a lack of demand from companies. Inevitably, the steering wheel is squarely in the hands of banks that are either unable to comply with KYC controls or unwilling to cannibalise the very profitable income of their factoring business units.

If banks are genuinely interested in solving at least the KYC conundrum, they should work to a solution similar to the European Economic Area’s (EEA) ‘passporting’. With passporting, a document, having been approved by one EEA competent authority – the home authority – can be used as a passport for offers or listings in all other EEA countries, without further review or the imposition of further disclosure requirements by the relevant authority of that EEA country, or host authority. Similarly, banks could work on developing a ‘KYC passporting’ model.

As per the factoring business, nothing is preventing banks from putting their factoring business under the wider SCF ‘umbrella’. If they choose not to, then banks will remain in the eyes of their corporate clients as product-centric dinosaurs despite all the efforts and attempts from their marketing departments to declare their dedication to a client- and solution-centric cause.


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