Supply Chain Finance Trend:
Fintech at the center of the sector’s growth
Blockchain and AI open up new scenarios in the finance market
The potential market
for supply chain credit is worth 530 billion Euros, but only 28% is already served.
Supply Chain Finance includes different variations of Fintech and is certainly one of the most interesting areas of digital transformation in Financial Services. The research published in March 2019 by the Observatory of the Polytechnic University of Milan, which Lutech is participating in for the second year in a row, sees Italy as the second biggest Supply Chain Finance market in Europe.
These data enclose all the potential of the Supply Chain Finance market, above all in terms of invoicing and loans. The slow and inexorable change of banks from being the main providers of credit over the last ten years or so, giving up on their primary role, has led to considerable changes in the landscape, hanks above all to the role taken on by technology.
The problem is therefore clear: how to allow companies to avoid being dependent on the payment times of their customers, on waiting times for finance, on the risk of having to shut down production and of not being able to innovate? Through a new form of active intermediation, a new market sector, to which banks themselves give the nod and which is based on two main pillars: technology and new business models.
The average time
to collect of trade receivables in Italy is 77 days, while the payment of debts requires 91 days.
Fintech is an opportunity for all: IT suppliers, companies, SMEs and Italian start-ups
Fintech is technology applied to finance, the cornerstone which allows management of supply-chain credit with limited costs, controlled risks, and, therefore, attractive margins. As previously mentioned, for the Supply Chain Finance market, as studied by Polimi (Polytechnic University of Milan), we see an opportunity of 530 billion Euros with a 25% year-on-year increase, of which 480 billion (81% of the total, up by 3.3%) is to customers and the remainder to associated companies. A market second in Europe only to France – which started earlier but is only one point ahead of Italy – and in front of Germany.
Looking at the individual sectors, we find that the most common solutions are still the most traditional ones, such as the Invoice Advance – finance for unpaid invoices – which increased from 75 billion in 2016 to 79 billion in 2017 (15% of the market, +5.3%) and Factoring – assignment of trade receivables due to a company by its debtors – stable at 58 billion.
Over the past year, Reverse Factoring has grown – the chance for suppliers to leverage the creditworthiness of a customer company to get lower prices – and it is worth 4 billion (0.8% of the market, +33%). This was also the case of the use of Credit Cards, which generates a value of 2.6 billion (0.5% of the market, +6.7%), and new solutions such as Invoice Auction, a marketplace for invoice advances based on a technology platform that allows third parties with available capital to invest in invoices issued by companies. The latter is only worth 0.04 billion (0.01% of the market), but has grown by 500% in a year, thus showing a huge potential for the future. Finally, securitization of trade receivables – well-established but still important – is worth 2.5 billion, or 0.5% of the market.
Supply Chain Finance solutions are mainly based on the technological component, which is expressed through certain specific trends. The first one is undoubtedly the blockchain.
By its very nature, every business transaction and supply chain is in fact clearly certified. Management is (relatively) easy, transparency of transactions and participants is guaranteed, and the speed of supply means better efficiency along the supply chain.
Another technological trend with a natural place in Supply Chain Finance is Artificial Intelligence, more specifically automation algorithms (RPA, Robotic Process Automation), mass data processing and predictive analysis (machine learning). For example, data analysis is widely used in credit scoring to determine a company’s risk of insolvency. The possibility to cross reference internal company data with data received from information providers specialized in scoring and, above all, external data on the sentiment of the company itself, which can be retrieved from sources that can be grouped together in the “Alternative Data” cluster, makes it possible to provide predictive assessments, not only regarding insolvency but even in the areas of financial assessment of assets, strategies and visions, right through to the investment and equity securities area. Ultimately, more data, more analysis, more precision, and more security, benefiting the entire supply chain.
Companies, both large corporations and SMEs, as well as start-ups, therefore have effective enablers to obtain faster and more secure financing for their working capital, generated by their operations or current investments, leveraging the role they play in the Supply Chain in which they operate and relations with other players in the supply chain. The benefits are clear:
- Increased availability of credit
- Improved conditions for accessing credit
- Reduced total working capital requirements
- Improved relations with the other players involved
The solutions based on the technologies described involve Financial Institutions, B2B Service Providers, Logistics Operators, Insurance Companies, and Fintech Platforms, and are based on pervasive use of the digitization of the order-payment cycle, promoting collaborations and partnerships which, according to the Observatory’s report, reach values in Italy that are higher than twice the world average.
Blockchain e AI
are amongst the main technological trends enabling Supply Chain Finance
The characteristics of the reference solutions for Supply Chain Finance
In short, which operational environments for technological solutions apply to this market? We can summarize them as follows:
- Digitization of the entire end-to-end cycle through a combination of Blockchain, RPA (Robotic Process Automation) and Smart Contracts.
- Regulatory developments in Blockchain and Smart Contracts (validity/security/legality of data)
- Reliability of Big Data Analytics tools and models
- Impact of technology on creditworthiness through new rating models (including operational data)
- Use of technology for supplier onboarding
- Impact of mandatory electronic invoicing in Italy and the potential opportunities created by this (risk of fraud, data extraction, seizure of credit by the state)
- Improved relationship between financial institutions/factors and Fintech/digital platforms
- Integration of supply chain solutions with existing management systems/platforms.
In addition, a new order-to-payment journey comes about, through:
- Standardization methods for qualitative/quantitative financial information
- Accurate management of specifics (for example in relationships with small but highly specialized suppliers)
- Enabling more complete pre-order and post-payment scenarios.
Lutech is an active part of this revolution in the finance sector through its role as enabler of high-level technological projects.
The in-depth knowledge of the credit market gained through 20 years of creating vertical platforms in the market makes Lutech the ideal partner both from a technological standpoint, and as an innovator in terms of new Supply Chain Finance business models.
The latest digital evolutions in Lutech’s platforms include: Digital Onboarding and the entire digital platform allowing transactions to be carried out through automated processes to manage significant volumes and to perform simulations on the financing required, the Vendor Portal, the Invoice Trading marketplace and platforms (both with and without the assistance of Blockchain), etc.
All of this is supplemented with that required to ensure regulatory compliance and that the supervisory requirements imposed by the latest regulations are met.
In addition to identifying and offering the most innovative solutions in the field of artificial intelligence and the blockchain, Lutech acts as a consulting and integration partner in order to facilitate communication between the existing application platforms of the players in the supply chain and new technological tools.