Taking supply chain financing into the 21st century


Supply chain financing is a notoriously complex undertaking synonymous with widespread intermediation and inefficiencies. The existing framework has created an ecosystem where manual interventions reign supreme and unnecessary costs are saddled onto businesses, adversely impacting their working capital and liquidity optimisation. Efforts are being initiated by industry leaders such as Societe Generale to augment supply chain financing thereby speeding up payments and reducing risk for stakeholders in the transaction process.

The complexities of KYC in supply chain finance

Effective KYC (know-your-customer) and AML (anti-money laundering) checks are critical requirements to fulfil in supply chain financing activities. A failure to adequately spot malpractice at a client’s supplier could result in punitive financial penalties being levied on banks in the event of sanctions or regulations being breached. In addition, the reputational damage of being found to be in violation of strict regulations – such as the US Patriot Act – would also be equally devastating potentially leading to a loss of business elsewhere.  

Obtaining the necessary KYC information on corporate clients is usually fairly straightforward, but it is much less so when validating the legitimacy of customers’ own underlying suppliers, many of whom may operate in exotic markets where disclosure requirements are not as rigorous as they are in more mature economies. This regulatory divergence in market-wide standards makes it difficult for providers to have a consolidated KYC approach across multiple jurisdictions, thereby adding inefficiencies and risks.  

In extremis, the lack of homogenised KYC disclosures and reporting may act as a deterrent to banks offering reverse factoring programmes to suppliers in certain jurisdictions. Obtaining credible KYC data on suppliers is not the only challenge banks need to confront. KYC also continues to be a highly manual exercise heavily reliant on paper-based processes and human intervention, a problem which adds to the overall cost and risk of conducting business. It is an issue many firms are looking to mitigate.

Managing the problem

Financial institutions are exploring ways by which to expedite KYC checks so as to not only trim costs, but to deliver a more comprehensive and rounded service offering to corporate clients. Many of the impediments that hinder KYC verifications – such as manual intervention and the difficulties involved with obtaining the prerequisite documentation - could be resolved if providers clubbed together and created a registry for corporates.

Such a utility could be modelled on SWIFT’s existing KYC Registry, which is available to any supervised financial institution irrespective of whether they are SWIFT members. The establishment of a corporate KYC registry is being advocated by market participants including Societe Generale, who point out that a streamlining of existing KYC practices would dramatically reduce administrative costs in supply chain financing.

Inefficiencies in Payments

estimated lost man-hours

Along with KYC checks, payments remain a pain-point for participants in supply chains, the frictional costs of which eat into corporate revenues. Studies have shown these inefficiencies cost the average UK company £88,725 per year, a result of 6,500 in estimated lost man-hours.1 Factors contributing to these added overlays include the continued high proportion of paper-based invoices, non-Purchase-Order based invoices, and a general lack of automation in the entire transactional cycle, according to one study.2

Cross-border payments frequently face delays because of local market dynamics too. For example, some jurisdictions insist that payments be declared in a certain way or disclosed in a specific reporting format while other exotic markets may implement currency controls.  Hold-ups can also be a consequence of antiquated payment processing systems at domestic providers, or because there happen to be multiple intermediaries in a particular market, weaknesses which collectively undermine automation and Straight-Through Processing.

Delivering efficiencies in payments

Correspondent banks such as Societe Generale are trying to remedy some of these chronic shortcomings in order to improve the experiences of both suppliers and corporates. Adoption of the SWIFT GPI (global payments innovation) is one strategy firms can pursue to enhance the payment process in the international supply chain. GPI, which went live in early 2017, is a cloud-based solution designed to transform cross-border payments.

GPI, which has already been adopted by 150 banks globally, enables beneficiaries to be credited in minutes and potentially seconds, while allowing users to monitor payments end-to-end.3 GPI will also provide total transparency on the fees being levied throughout the payment chain by various counterparties, charges which historically have been fairly opaque and difficult to understand. A broader implementation of GPI, a wider availability to Corporates supported by API as advocated by Societe Generale  will help supply chains become more efficient, bringing widespread benefits to market participants.  

The future of supply chain finance

The roll-out of GPI and industry-wide discussions to accelerate the development of a corporate KYC registry will augment the supply chain operating model. Looking further ahead, some believe Blockchain or distributed ledger technology (DLT) is ideally placed to support KYC checks and deliver on instant payments. Blockchain is endowed with a number of advantages, but it is constrained by the lack of standardisation and consensus around its applicability, putting it at a disadvantage to SWIFT for the time-being.

1 Tungsten Network (September 13, 2017) Supply chain friction costs businesses 6,500 hours a year
2 Tungsten Network (September 13, 2017) Supply chain friction costs businesses 6,500 hours a year
3 SWIFT (March 2018) GPI brochure (PDF)

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