The spread of digital tools, the increased availability of data on both business and financial interactions, and the improvments in data processing capacities are all critical to the expansion of supply chain and distributor finance. Digital integration of traditional retailers/suppliers and distributors/manufacturers is a pathway for addressing working capital challenges and driving financial inclusion, as well as a driver in employment and economic growth to ever smaller businesses. Linkages to mobile money services and agent banking are expanding outreach to informal retailers while helping nascent mobile money operations become sustainable.
Small- and medium-sized enterprises (SMEs) are hindered by a persistent gap in financing estimated at $8.1 trillion in emerging markets alone ($5.2 trillion among formal SMEs1; $2.9 trillion among informal SMEs). Survey results of SMEs testify to a common problem: more than 40% of working capital is dedicated to paying suppliers.2 Conversely, small suppliers face delays in receiving payments from buyers, which results in slower capital flows for funding and growing production. IFC estimates at least 20% of the overall SME financing gap is due to supply chain payment delays.
Supply chain finance (SCF) is a broad set of products that seek to leverage information and relationships from the interactions of buyers and sellers within a supply chain in order to improve the efficiency and lower the cost of providing finance to supply chain participants. Supply chain finance products can, for example, categorize the risk level of a counterparty in order to tailor financing, and determine key factors in trading parties (revenue, sector, working capital ratios, and geographic location) to establish accurate financing thresholds.
Digital integration of traditional retailers/suppliers and distributors/manufacturers in supply chains is a pathway for addressing working capital challenges and driving financial inclusion. The rapid penetration of digital technology (mobile networks, cloud-based systems, tablet computers, etc.) and massmarket consumer adoption of digital payment accounts and services means there is now a growing opportunity to connect ‘traditional’ retailers, including those previously underserved SMEs and households in emerging markets, to the benefits of digital management, electronic payments, and banking services.
Digital integration can help facilitate SME growth and employment, increase access to finance along the supply chains, reduce distribution costs, and improve the purchasing power of end consumers. At the same time, these retailers and distributors generate a large volume and value of payments in their economies. Such transactions can improve the economics for financial institutions: they can bring the scale needed for nascent mobile money and agent banking ventures to become sustainable.
The spread of digital tools for business and finance, and the increasing availability of data on both business and financial interaction, is a boon to the development and deployment of supply chain finance. Digitized supply chain interactions are providing useful and valuable information to design new products and manage financial risk more effectively. Growing digital connectivity between even the smallest businesses allows SCF providers to offer services to businesses that previously lacked access to financial resources that would better enable them to run their businesses. Data analytics and platform services enable the processing of data and delivery of funds to be highly automated, thereby increasing productivity and efficiency for both financial institutions and their clients, while reducing costs to onboard. Such gains lend credence to the belief that providing supply chain finance to smaller businesses is both viable and no longer reliant on a single corporate as off-taker to provide finance to their respective suppliers or distributors.
Source: International Finance Corporation