3000BC – 1980: Emergence of the bill of exchange
To fully understand the evolution of supply chain finance, we must first understand the origins of trade finance.
It is on record that trade finance dates back to five thousand years ago in Mesopotamia.
This early civilization did not have many natural resources, so it was forced to trade with neighbouring countries in order to acquire what it needed to survive.
As early as 3000 BC, instruments such as bills of exchange could be found on Babylonian clay tablets, but it was not until the Roman era (27BC-476 AD) that trade finance became widely used for the importation and exportation of goods with neighbouring countries.
This shift helped Roman merchants expand their operations, thus leading to the expansion of the Roman Empire.
There is a wealth of evidence that the Ancient Romans used a form of invoice financing by selling promissory notes on a secondary market at a discount.
In addition, during the same era, we can also find evidence of the first debt collection agents, who received a commission on the money they collected from each debtor.
The 17th, 18th, and 19th century witnessed further evolution of some form of invoice financing in the American colonies, as this form of financing was used to facilitate long-distance trade between the American colonies and their British and European trading partners.
After World War II, it became apparent that new trade finance could be applied to other areas across a range of industries.
As the global economy began to recover from the aftermath of the war, interest rates began to grow, this made the financing of trade more necessary and more widespread.
1980 – 2007: Supply chain finance is born
Contemporary supply chain finance can be traced to Spain in the 1980s. This period was also renowned for high interest rates and inflation, coupled with the high cost of funding and difficulty of accessing finance.
Taken together, this resulted in the creation of ‘confirming’, also known as confirming bancario, payables finance, or reverse factoring.
The concept of reverse factoring started with the automobile industry. In the 1980s, automakers such as Fiat used this kind of financing process for its suppliers in order to realise a higher margin.
This principle then spread to the retail industry due to the interest it represents for a sector where payment delays are at the heart of every negotiation.
In 1982, British logistician Keith Oliver defined the concept of supply chain as follows: “Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible.
“Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.”
This definition has evolved over the years, with different meanings to different practitioners, which has led to non-standardisation of SCF terminology.
In the 1990s, supply chain management further evolved with the introduction of enterprise resource planning (ERP) systems.
The ERP is a back–office business process management software that is used for the processing of a company’s operations, commerce, reporting, manufacturing, and supply chain activities.
This period witnessed the birth of the World Wide Web (www), which has revolutionised trade and supply chain finance.
2007 – 2017: Evolution of SCF disruptors
The rise of the internet catalysed a shift towards mobile banking driven by smartphones and mobile payments.
This period also saw the rise of financial technology companies (fintechs) that provide digital innovations to bank services, including supply chain finance.
Fintech disruption in banking started during the last financial crisis in 2007-08.
Fintechs have generally been regarded as disruptors in the SCF equilibrium, as they have introduced innovative front-end digital solutions that are perceived as encroaching on some financial services previously managed by the traditional banks.
The emergence of this front-end digital portal provided an opportunity for invoice data to be processed and managed electronically between the buyer, the supplier, and the funder in a seamless and efficient way.
This was a huge move from the previous way in which invoice data was sent via email to the funders for processing and payment.
In 2016, the Global Supply Chain Finance Forum (GSCFF) published the Standard Definitions for Techniques of Supply Chain Finance, which is more widely used across various practitioners.
This document defined supply chain finance as the use of financing and risk mitigation practices and techniques to optimise the management of working capital and liquidity invested in supply chain processes and transactions.
Supply chain finance today covers a range of financing techniques, including factoring, but unlike traditional factoring, it is not led by a supplier, who would submit their invoices to a factor to be paid early.
Rather, it is a buyer-led financing solution whereby the buyer uses their financial position to request the funder to pay their suppliers early on selected invoices.
2017 onwards: Digitisation of SCF
Digitising supply chains has been the key enabler of supply chain finance.
Digitising the supply chain process is key for the overall strategy of mitigating risk and providing an efficient technique aimed at optimising the management of working capital and liquidity.
It can have a material impact on overall costs by reducing supplier spend and the operational cost of finance, while maximising cash flow, cementing buyer-supplier relations, and improving liquidity for suppliers by virtue of early repayment.
Despite the best efforts of the International Chamber of Commerce (ICC) to digitise the SCF process, this has been met by varied macro and complex challenges.
These include, but are not limited to:
- Non-standardisation of supply chain processes
- Lack of legal framework to support the scalability of the supply chain finance across multiple countries
- The siloed and disjointed nature of our digital islands platforms, which have not been built to optimise the entire value chain
- The non-interoperability of these platforms, which do not have the rights that APIs have to speak with each other
With all these issues, it was no surprise that, based on data from the Digital Container Shipping Association (DCSA), only 0.1% of bills of lading were issued electronically in 2020.
In other words, there has never been a better time for corporates, funders, fintechs, and regulators to collaborate and future-proof their trade processes.
At the Bank of China, one area in which we have seen significant growth potential is the emergence of multi-bank platforms led by independent third-party supply chain finance providers.
Large corporates are driving the need for banks to sign to these multi-bank platforms, instead of signing up to individual bank platforms, which has been challenging for them to manage from an operational stand-point.
In 2022, we expect to see the emergence of new network-to-network initiatives that will connect individual trade platforms.
Interoperability is arguably one of the biggest threats to digitisation, so it will be great to see this new network offer the digital ecosystem a way of enhancing process efficiency and providing visibility of the end-to-end supply chain in a way that has never been possible before.
We also expect to see the emergence of new artificial intelligence (AI) built into these front-end digital platforms, to drive predictive analysis on supplier invoice authenticity and future repayment.
