Trade financing has entered a new era of digitalisation. Gone are the days when supply chain financing was dependent on instruments like letters of credit, invoices or purchase orders.
Until recent years, banks had been providing either pre-shipment financing or post-shipping financing to suppliers — meaning the supplier either gets funding from banks once it receives the purchase order for supplying goods, or receives funding once the goods have been shipped. But now, thanks to more information available digitally, banks can even provide a part of the funding to the supplier or any other intermediary in the client’s ecosystem at an earlier stage. This has cut the supply chain financing time cycle from as much as 60 to 90 days to just around 24 hours.
“The market is shifting in terms of what can be done,” says Amit Agarwal, DBS’s head of open account trade products, Global Transaction Services. “Everybody in the ecosystem, including corporates, banks and fintech firms, are understanding that this is a win-win situation for everyone. Suppliers get cheaper funding; corporates are able to build tighter relationships with their suppliers; and banks are able to make money by lending.”
That has allowed buyers and bankers to boost their focus on sustainability within the supply chain, says Agarwal. Again, digitalization has brought about immense changes to the system as the availability of data on a single platform is allowing buyers to have full visibility on the supply chain.
Agarwal cites the example of textile companies, which are increasingly emphasizing sustainable practices following a spate of negative headlines around workers’ conditions in manufacturing factories.
“If we get all the partners into a single platform, and everyone is sharing data which is available in real time, then you can not only achieve full traceability, but also allow for the whole supply chain to be financed and paid at any time,” he adds. “That’s where the physical and financial supply chains are now merging, where we create an ecosystem through which everyone has the same information — whether enabled by blockchain or not — helping all partners to leverage the supply chain.”
The push for sustainability comes from both large buyers and banks, which are keen to adhere to their corporate and social responsibility goals. It’s not always easy, however. Sometimes suppliers, especially smaller suppliers, need an additional nudge to go down the sustainability route.
How are they motivated? Agarwal says two factors play a role here. The first is pricing incentives, where banks offer the suppliers lower interest rates if they comply with sustainable practices. The second is by boosting a bank’s credit limit on a certain supplier, providing more working capital capacity.
There is a stark difference in the way supply chain financing has evolved in the West and the East, says Agarwal. According to him, large Western multinationals have been leveraging on open account trade or supply chain financing solutions for nearly four decades.
“They are very well educated on the kinds of solutions available in the market, and they can leverage not only on proprietary solutions from one bank, but are also able to tie up with fintech firms through which they are able to get a wide array of banks bidding for the same business. Therefore, corporates are becoming more independent rather than depending on just one or two banks for their needs.”
It’s a different story in Asia, where corporates are still behind on the use of open account solutions, and where many treasurers are still catching up with their counterparts in the West to understand fully the benefits of the process.
“There is still apprehension from Asian corporates to move into these solutions, given there are only a few banks that provide these solutions, DBS being one of them,” reckons Agarwal. “Corporates would rather take a clean loan or a long-term facility to finance working capital. Clean loans could be a one-time discussion, but moving to trade finance would mean regular interactions with a bank, which some may consider quite painful.”
The tide is changing, though, with more corporations in Asia realising the many advantages of transactional lending. With fintech firms too looking to carve out a share of the market, banks are being forced to step up their game, provide better and faster turnaround times to corporates, and better technological capabilities to service their needs, says Agarwal.
“I think there is huge opportunity in Asia for a more digital approach towards engaging transaction services,” he adds. “Western MNCs are already there, but there is immense potential among Asian corporates.”
Banks vs fintechs
So how are Asian companies deciding between banks or fintech firms when it comes to finding the best name to cater to their supply chain requirements?
If the Asian arm of a Western MNC is seeking transaction services, guidance comes from the company’s headquarters. In other cases, it comes down to the corporation’s needs, says Agarwal.
“Fintechs can change, adapt and deliver very fast. If I’m a treasurer, I would want a partner that could provide services according to situations. But they are also aware that not all tech partners may have the balance sheet to provide financing. They would ultimately rely on banks and other investors.
“And a significant challenge for a fintech is also establishing trust with the corporates for handling their finances. There are many new fintechs that are only recently established, which may struggle to meet expectations of these large corporates, so companies may not completely rely on fintechs for solutions.”
That’s where banks like DBS have a clear advantage, thanks to the emphasis it has given to advance in technology and digital transformation over the past few years under the leadership of chief executive Piyush Gupta. The World’s Best Digital Bank 2018 award given to DBS by Euromoney is testament to this.
Needless to say, this has already given the bank an edge over what it considers its rivals in supply chain finance — the likes of Alibaba Group Holdings and Tencent, rather than the traditional banks.
“One of the strengths DBS has is trust and how we customise our solutions,” says Agarwal. “That’s how we differentiate ourselves from others. When we approach a customer, we explore and co-create with the customer. This is enabled through customer journey workshops, where we listen and understand their challenges. We then build solutions together, which are usually heavily customised, taking into consideration the nuances of the company and its operations. Banking products are then integrated into those solutions.
“That’s the approach we use — working holistically with customers with the mutual objective of growing their business.”
Can DBS trump its competitors? The numbers tell the story. DBS’s global transaction services division accounts for 35% of the bank’s institutional banking business income and grew 17% year-on-year in 2017.
It is also winning clients. Last year, it gained hundreds of new client mandates in open account trade, leading to double-digit revenue growth in that business, and almost doubling growth in supply chain financing revenue.
Agarwal points to the fact that the development of supply chain finance in Asia is still at a nascent stage, with DBS being one of the early players to experiment with a range of solution offerings in collaboration with its clients.
“This co-creation approach is helping us to move in the right direction with services that are benefitting the industry, corporations and clients,” he says.