Benefits & risks for banks in Supply Chain Finance
I have a Labrador dog, Andy whose breed originated in Greenland. I buy its food online in a store located in Germany whose product of Canadian origin is delivered directly to my house in Madrid, Spain thanks to TNT, a transport company of Australian foundation whose majority shareholder is the Dutch KPN; now that’s globalization!!
- Hold the different accounts necessary for a fast and efficient flow of payments;
- Benefits from the use of funds deposited in such accounts and obtain fees for the payments between the participants;
- Fees received for the use of the IT platform helps the bank to compensate the loss of revenues coming from traditional trade instruments (e.g. letter of credit) which the clients have substituted by an Open Account scheme;
- The bank may charge fees to the participants as a provider of the IT platform;
- Once the IT platform is available, the Bank can offer this service to different customers, making such an investment into a clear competitive advantage;
- Has a complete knowledge of the full operation of its clients, what implies a better understanding of their business;
- If necessary, the bank can grant funding to buyer or seller, depending on the case, enjoying the most accurate information about the operation he is funding and with the possibility of controlling the flow of funds;
- The bank has an excellent opportunity to attract the sellers as new customers and to make a cross-selling of its services; and,
- Through participation in a structure of SCF, the Bank demonstrates to markets its determined commitment by international trade, its capacity to adapt to new technologies and becomes a major player in this kind of activity within the reach of a small number of entities.
- In any SCF structure, the bank usually concentrates its risk on the buyer (who approves the invoices); therefore, it should be a creditable corporation enjoying a sound financial position;
- bullet SCF structures are suitable for high volume transactions held by trustworthy companies in developed countries;
- bullet Usually, the discount of approved invoices to the seller is on a non-recourse basis;
- bulletCompanies are willing to participate in a SCF structure when the payment terms are medium and/or long term;
- bullet Cost of providing the IT platform can be high and, unless a wide-scope agreement is previously reached with one or more highly reliable companies willing to participate in a SCF structure, it could be an unproductive investment;
- bullet Access of the companies‟ staff to the IT platform implies to design an appropriated authorization process in order to guarantee the safety of the whole operation;
- SCF involves not only financial transactions (discount of invoices, cash advances, loans, etc.) but commercial transactions as well (input of purchase orders, invoices approval, logistic documents, etc) which are not always well-known for the bank‟s staff;
- Credit Line: IFC offers a short-term loan to a bank, which will in turn use the funds to lend to farmers, agriculture commodity producers, or traders against warehouse receipts or equivalent as collateral.
- Risk-Sharing Facilities: IFC guarantees up to 50 percent of short-term loans extended to agriculture commodity producers or traders against warehouse receipts or equivalent as collateral. Banks can transfer credit risk to IFC from their own portfolio or from a new portfolio they originate. The assets typically remain on the banks‟ balance sheet, and the risk transfer comes from a partial credit guarantee provided by IFC.