To discuss the paper and better understand how DTSCF can promote financial stability, risk management, and sustainability, Trade Finance Global (TFG) spoke with Tod Burwell, President and CEO of BAFT.
Via Trade Finance Global by Tod Burwell and Deepesh Patel
Deep-tier supply chain finance (DTSCF) is an innovative financial solution with the potential to unlock financing for smaller suppliers deep into a supply chain by leveraging the credit risk of the anchor buyer.
The latest whitepaper from BAFT (Bankers Association for Finance and Trade) and the Asian Development Bank (ADB), “Deep-Tier Supply Chain Finance: Unlocking the Potential”, explores some of the more opaque aspects of deep-tier supply chains.
To discuss the paper and better understand how DTSCF can promote financial stability, risk management, and sustainability, Trade Finance Global (TFG) spoke with Tod Burwell, President and CEO of BAFT.
BAFT is a member of the Global Supply Chain Finance Forum (GSCFF), an organisation established in 2014 to develop, publish, and champion a set of commonly agreed standard market definitions for supply chain finance (SCF).
DTSCF and its differences from traditional supply chain finance
DTSCF, a variation of the traditional forms of SCF, has the potential to reach micro, small, and medium-sized enterprises (MSMEs) deep within supply chains by allowing them to finance their payables based on the credit risk profile of the anchor buyer.
According to the BAFT and ADB whitepaper, a program must have several core elements to be considered DTSCF. For example, it must be related to trade finance, driven by the anchor buyer’s supply chain, occur post-shipment, and be predicated on an irrevocable payment obligation.
Burwell said, “DTSCF allows an original receivable to be discounted in parts at multiple levels, with the benefits transferring down the chain.”
It is a distinct form of payables finance as tier 1 suppliers are typically the main beneficiaries of a payables finance structure.
Benefits for anchor buyers, suppliers, and financiers
From a buyer standpoint, DTSCF creates greater resilience and transparency in the supply chain by creating value for lower-level suppliers through reduced costs and fraud risks.
Burwell said, “In a deep tier structure, your tier 2 supplier who has presented an invoice to your tier 1 supplier also gets the ability to discount that invoice, and the tier 3 supplier that has presented an invoice to the tier 2 supplier, and so forth down the line.”
From the seller’s perspective, DTSCF provides better access to financing at lower rates driven by the anchor buyer’s credit rating. As this is extended down the chain, sellers at each level can access more favourable financing rates.
From a financier’s perspective, with many currently not financing MSMEs, this presents a way to grow natural client bases due to the increased visibility of deeper-tier suppliers.
There is also an opportunity to link ESG reporting once deeper levels of the supply chain are connected.
Burwell said, “DTSCF creates more efficient operations, which can help lower costs. As we see more ESG creeping into the structure of supply chains, it enables these lower-tier suppliers to achieve compliance and reporting requirements in the context of that supply chain.”
Core implementation challenges
DTSCF builds on several of the core elements of traditional SCF. Unfortunately, inadequate secured financing infrastructure has prevented the widespread adoption of SCF in many markets. Without that foundation, many markets are not prepared for a deep-tier alternative.
Currency impediments are also factors. While tier 1 suppliers often deal in major tradable currencies, suppliers further downstream are likely to work with local currencies that can be subject to tight FX control regimes.
Burwell said, “One big challenge is having willing participants. You are dependent on everyone in the supply chain to be open to being transparent with everyone else. You start
with the anchor buyer, but if you are the tier 1 supplier, you need to be willing to open up about your own supply chain to your buyer.”
According to the whitepaper, complex and onerous onboarding procedures also hinder the scalability of supplier-led financing offerings. The cost and effort required to onboard suppliers, particularly MSMEs, can be prohibitive for lenders, making it difficult to extend financing to the deeper tiers of the supply chain.
Despite the challenges, there are case studies of successfully implemented DTSCF programs.
Successful implementation case studies
One operation in China had reached 9 levels down the supply chain, reaching $70 billion over several years, with the average invoice totalling $77,000.
Burwell said, “The smallest invoice we came across in this program was $15. Traditionally, this would be unthinkable because many financiers are not interested in a deal if the ticket sizes are that small. But the point of this is to provide value at the MSME level, where you will have smaller and smaller ticket sizes. If it can work for a $15 invoice, it can work for anything.”
Another example is a bank with about 1000 suppliers on a blockchain-based platform that reduced onboarding time by 75%. Given that many consider the supplier onboarding process alone responsible for holding back SCF scaling, this is critical.
Burwell said, “Having the right technology and the structure where each of the tiers are onboarding their own supplier networks; if you can reduce onboarding time by 75%, you have something.”
Next steps to scale and fully realise opportunities
To continue advancing DTSCF, the two most important next steps are education and developing consistent legal frameworks.
On the education side, the industry must continue to engage with and communicate DTSCF structures and benefits. The more organisations know about a utility, the more they use it, and the more innovation will be added to existing structures.
On the legal side, it will be important to create consistent legal frameworks to enable DTSCF on a cross-border basis. While some structures are based on contract rights with irrevocable payment undertakings, others are based on negotiable instruments.
Burwell said, “The heavy lifting for us is going to be looking at the legal frameworks and how we can better enable cross-border legal frameworks to standardise the client agreements and onboarding processes to achieve scale.”