Supply Chain Finance in for major changes

Reported by: |Updated: December 31, 2020

In the second part of the 3-part report based on The 2020 McKinsey Global Payments Report, we discuss the status of supply chain finance – though passing through difficult times, how innovative players have opportunities:

Source: McKinsey Global Payments Practice

Significant value in the global supply chain finance (SCF) market remains untapped and nearly 80% of eligible assets do not benefit from better working capital financing, and the remaining one-fifth of assets are often inefficiently financed, says the 2020 McKinsey Global Payments Report.

Says the report: “We now see change accelerating in the market in response to a convergence of factors: an increased focus on working capital, structural changes in financing for small and medium-sized enterprises (SMEs), a step-change in digital adoption, and the potential geographic relocation of $2.9 trillion to $4.6 trillion in spending on cross-border supply chains (for 16 to 26% of global goods exports) over the next 5 years. Could these events spur the long-anticipated transformation of the landscape? The answer may be yes.”

Stating that SCF is often focused on larger, well-financed multinational corporations and their supply chains, smaller and less well-financed enterprises face barriers to access. It says many catalysts – including digital delivery, fintech innovation, industry utilities, blockchain, and API technologies – could stimulate cheaper and more accessible SCF, but change has been slow. “Now in 2020, the impact of covid has contributed to accelerating digital adoption and reconfiguration of trade and supply chains,” it adds.


The report cites 4 major axes while measuring the complexities in SCF: fragmentation of delivery, fragmentation of the underlying assets, limited credit and expertise, and geopolitical turmoil.

As regards fragmentation of delivery, seamless experience is held back by several barriers like manual and fragmented process flows, but there are technology solutions that can streamline the financing process.

Fragmentation of underlying assets as payables and receivables vary widely in terms, duration, and underlying creditworthiness.

With a limited secondary market, the provision of supply chain financing is restricted by the number of individual banks and nonbank providers with sufficient risk appetite and know-how.

Global trade volume grew by 6% (CAGR) between 1990 and 2007. From 2011 to 2018, it at a 3% CAGR, pushing the absolute trade volume to new heights. In 2017, total global trade stood at $22 trillion, with trade in goods at $17 trillion. Trade-in services, though smaller at $5 trillion, has outpaced growth in goods trade by more than 60% over the past decade (CAGR of 3.9%).

The report says while many of the drivers of SCF growth are longstanding, ongoing changes might signal a structural shift in the ecosystem. “Corporates, both small and large, have structurally increased their use of supply chain finance, systematically considering how to support smaller suppliers’ working capital needs. In a May 2020 McKinsey survey, 93% of global supply chain leaders expressed plans to increase supply-chain resilience, with 44% willing to do so at the expense of short-term savings. This could double historically low SCF eligibility and uptake levels from below 40% to as much as 80%. Unsurprisingly then, the recent supply shock from covid led to the increased use of supply chain financing,” says the report.

The report says digitization resolves issues arising from fragmentation of delivery as corporates are actively focusing on their supply chains. It points out to the 2020 survey by McKinsey, which has across industries identified 79% of respondents planning investments in digital supply chains. Similarly, banks are forced to develop truly end-to-end digital capabilities, from onboarding and application through approval and execution to improve servicing, capacity, and ability to automate underwriting and risk management.

The report maintains that a once-in-a-generation supply chain diversification creates a catalyst for modern, holistic SCF solutions. It talks about the estimates made by the McKinsey Global Institute that up to $4.6 trillion of global exports (26% of the total and up to 60% in industries such as pharmaceuticals) could be in scope for relocation over the next 5 years. “This will structurally shift the ecosystem, likely in favor of players with holistic offerings across receiving corridors, whether in intra-domestic trade, in regional trade, and/or across a more diverse set of global corridors. This may result in additional support for solutions catering to the needs of domestic bank customers,” it explains further.


The report points out that many non-traditional players are aggressively targeting attractive niches in SCF business, threatening banks’ revenue streams, like fintechs developing value propositions centered on digital platforms to provide non-financial services, directly connecting corporates. Similarly, several consortia have emerged in trade finance leveraging technology such as blockchain to make processes faster, simpler, and more transparent.

Besides, bank and non-bank providers are innovating in credit decision making, especially through rapid improvement in the application of advanced analytics and machine learning to financing decisions and pricing. SCF platforms and banks are increasingly augmenting payables information with historic information, as well as additional private and public data to drive innovation in financing decisions. This leads to better risk pricing, but also improves speed and certainty of credit provision, two key drivers for corporate customer satisfaction and retention, says the report.


McKinsey believes that given the persistent fragmentation of the SCF ecosystem, the current converging trends will trigger a structural change as corporates accelerate their digitization of supply-chain finance and constantly assess their financing setup to fully benefit from the shifts outlined. Winning them over will likely require a heavy focus on their digital interfaces. This could take the form of industry libraries of APIs and data exchanges, or it could involve open standards to make ERP, invoice, and supplier data portable across platforms.

The report predicts 4 possible future models:

  1. Bank-led with banks improving end-to-end delivery by reimagining client journeys, renovating technology, and delivering AI-enabled financing.
  2. Bank-led partnerships helping in developing solutions (ERP integration, third-party data) but retain control of the customer interface. Banks then move beyond numerous (but often superficial) partnerships with fintech or technology platforms to create truly seamless and digital SCF journeys spanning procurement, invoice creation, and financing.
  3. Non-bank platforms scaling to provide SCF across the full industry value chain of suppliers and buyers, linking into banks and non-bank financing providers.
  4. Diverse supply-chain finance ecosystem where a broad range of providers coexist, each catering to different needs.

The report forecasts that most banks will need to trigger a shift into the bank-led partnerships of the second model listed. In this scenario, banks would no longer need to be the end-to-end provider of SCF products. For customers in given verticals or for selected steps of the value chain, banks may elect to enter partnerships with other providers to achieve scale and reach. This is likely the default mode for many banks and is particularly suitable for regional and smaller players.

In conclusion, the report says: “It’s worth noting that the past decade has been a period of persistent economic growth and relatively stable supply chains. Volatility will cause much greater market turbulence. This pressure may be felt most strongly among banks that did not focus their sizable SCF franchises in recent years. Time will tell whether their stand-alone status proves to be a sustainable or model or – more likely – drives corporate customers to other SCF providers. In the end, a multi-trillion-dollar financing opportunity is at stake.”

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