The market for trade and supply chain finance is growing by leaps and bounds. One of the most profitable ways for funders to participate in this growth is by joining one of the specialist platforms serving this market.
Platforms come in all shapes and sizes. These range from providing a pick and mix of do-it-yourself transactions to the more sophisticated and integrated ones such as Finverity’s. Finverity’s platform offers an end-to-end service, including origination of pre-vetted deals, processing, risk management and reporting. Banks joining a fintech platform as a funder will gain instant access to a larger range of deals without the need to invest heavily upfront in technology or suffer a big jump in customer origination/acquisition costs.
As with so many financial services sectors, fintech is reshaping the way that trade and supply chain finance are carried out. By boosting transparency, reducing unit costs and enabling real-time data, fintech is making access to this growing asset class more widely available to a larger number of bank and non-bank funders. As funding volumes increase, a wider range of corporates are in turn benefiting from greater access to financing. These include the often-overlooked SME corporates.
Growth of digital platforms
The global revenue pool for buyer-led supply chain finance, also known as reverse factoring, is expected to grow at a 3.2% CAGR through to 2030. Other open account products — which include invoice finance, receivables finance and inventory finance not covered by the former category — are forecast to increase at a 3.9% CAGR in the period, according to Boston Consulting Group (BCG).
Trade volume growth, as well as increased penetration of trade finance products over time, are predicted to drive revenue growth. “Increasing the access to trade and supply chain finance, particularly digital propositions to the mid-market and lower end-markets, that’s a big area that we expect to grow,” Ravi Hanspal, principal at BCG, recently said in an interview with S&P Global Market Intelligence.
By 2025, BCG estimates that 10%-15% of trade finance and 20%-25% of small and medium-sized enterprise trade finance will be conducted through digital platforms. Banks will need to innovate their product design and execution in order to capture this growth, Hanspal predicts.
Given the many benefits that the best trade finance platforms offer, it is increasingly common for banks to partner with a platform. A recent EY report names strategic partnerships with external firms as one of five key action points that banks can follow. These actions would allow them to unlock value and remain competitive, whilst nevertheless predicting a 10.5% fall over the next five years in supply chain assets being financed by banks. Given that such platforms are relatively new, there may be a perception that joining such a platform could be complicated.
But is that really the case? Let’s take a look.
Three key factors for a smooth onboarding process
Three key factors will ensure a smooth and productive onboarding experience. These three factors draw on Finverity’s best practice experience of onboarding many banks across different geographies.
First is to align the onboarding process so it meets the needs of a bank’s approval protocol and fits into its decision-making routines. Although this will naturally take some time, once completed, a bank will benefit from a synchronised and highly scalable operational and approvals process to deploy capital via the platform.
Secondly, making the process intuitive will work wonders. People learn by doing. That is why Finverity’s onboarding process draws on the feedback of hundreds of users and is designed to be as intuitive as possible. Time and time again, research shows that user experience is key to successful client acquisition and onboarding. McKinsey’s research indicates that only about a tenth of the SCF market potential – U$2 billion of the potential US$20 billion in SCF revenues – is captured globally, with poor user experience being a primary factor.
Thirdly, we provide an experienced human team at every step of the way to help and support onboarding. There are few worse things in a digital experience than being unable to solve a tech problem without recourse to a human being.
The Onboarding Process
Below we outline the steps in our onboarding process, which we hope will act as a guideline to other players in the trade finance ecosystem.
Finverity has an established onboarding process for funders joining the platform, which can be split largely into three areas: credit approval, product approval (operations, IT and legal) and KYC/AML onboarding.
In our experience, a bank’s credit approval process for supply chain finance transactions originated by Finverity (payables & receivables) does not differ from that for bilateral
facilities. Credit approval is normally handled by the Relationship Management/Coverage team working together with a bank’s credit team to obtain approval on a specific transaction originated by Finverity.
Finverity’s deals are pre-qualified, with complete analysis provided of all underlying data. This significantly streamlines a bank’s due diligence process and the origination to execution cycle. All deals presented by Finverity to clients go through a stringent internal qualification process as depicted below.
Finverity provides an investment memorandum for every transaction that matches the bank’s credit appetite or a mandate. Upon indication of interest in a deal/s, Finverity’s distribution team shares the full client data pack. This includes underlying client financials and KYC data for further due diligence by the bank. The pricing and structure of the deal will also be suggested by Finverity based on client requirements and the conclusions of Finverity’s internal risk analysis. In addition, Finverity shares a step-by-step transaction process and flowchart of the trade to ensure a complete understanding of the deal.
Based on the above information, the bank and Finverity will work together to reach a final structure that meets the requirements of all parties, including the bank’s credit underwriting criteria.
Product approval: Operations
New banks joining the platform can start with a ‘plug-and-play’ model whereby Finverity uses a bank’s internal payment gateways for disbursement and collection. This minimises disruption to existing operational processes. As collaboration scales up, full integration into core banking systems, payment gateways and other third party software can be implemented to boost automation.
Operational processes for deals funded via the Finverity platform can differ from the bank’s existing processes for bilateral transactions. The bank’s internal operations team will therefore need to obtain a clear grasp of the operational model and potentially provide operational risk approval. To facilitate this, Finverity provides a presentation with an overview of the platform’s operational model and internal workflows to be followed. This details the steps each party has to undertake for deal completion.
Operational risk approval can be split into the following subsections:
● Disbursement & collection process
● Internal workflow for approval of disbursement
● How are the financing terms applied to invoices (Calculations Sign Off)
● Format of payment instructions for disbursement and reconciliation
● Roles and Permissions setup for internal bank team
Product approval: IT
Finverity’s platform is one of the very few solutions on the market that does not require any up-front integration into internal banking systems to start funding deals. This ‘plug-and-play’ model significantly reduces the technology and information security work required for approval from a bank’s IT team.
Once commercial viability has been proven, Finverity supports full end-to-end integration into core banking systems, payments gateways, client ERPs and accounting systems and third-party software solutions via a number of gateways.
Finverity’s solutions are being used by banks and NBFIs across the world and have undergone a rigorous screening process from industry-leading entities. We have leveraged this experience to prepare an onboarding pack that will make this process seamless for the bank’s IT team.
Product approval: Legal
Finverity’s platform is supported by a legal structure based on direct participation through a Trust/Agency structure. This is a structure whereby the assets (such as rights to receivable proceeds and irrevocable payment undertakings) are held by Finverity on behalf of the funder, who is taking a principal role in a particular transaction. It is commonly used across the world for platform-originated supply chain finance deal execution.
Its purpose is to ensure that the funder remains the unique beneficiary owner of the assets with a full enforceable title to these, while Finverity can operate the facilities through its platform. The benefit of such a structure is that by using the same set of documents, the funder can fund multiple deals by simply signing new term sheets acting as addendums that Finverity can then further syndicate.
While most banks active in supply chain finance have used legal documents for the assignment of receivables rights and irrevocable payment undertakings, the alternative structures such as Trust/Agency used by fintechs may be new to some. By providing legal opinions, clear explanations of legal structure and supporting documents, we aim to simplify the process for legal approval.
KYC/ AML approval
Given the fact that a bank is not taking any credit risk on the platform, the onboarding of Finverity’s platform from a KYC and AML perspective is a relatively straightforward process.
A bank’s compliance team will need to follow its normal processes for identifying UBOs and Directors of the company, undertaking KYC and AML checks and ensuring that the correct authorities within Finverity have been given internally to engage with the bank.
Finverity’s risk team will provide a full KYC pack along with all the relevant data used to get the Finverity platform approved by other banks. This will help expedite the process.
Often a new product approval is required by a bank in order to get started. In such cases, the outcome of the above-mentioned onboarding steps will be a product paper for final internal approval. The Finverity team is available to assist the bank throughout the process.
It is especially important to ensure that funders correctly understand how payables and receivables deals will be funded through the platform. This ensures that the operating model, platform usage and legal structure is accurately reflected in the paper and approved by the relevant committees.
Beware the digital gap
Most integration challenges emerge when two organisations or systems seek to connect. We have spent considerable time and resources at Finverity in addressing integration (both technical and non-technical) to ensure an efficient process with minimum friction. Once the onboarding is completed and later on the integration into the platform is up and running, the scalability benefits become very significant. Gone are the days of repetitive, manual and paper-driven tasks as these are replaced by automated processes where most appropriate. This releases valuable human resources to where they add most value: credit selection and accompanying clients.
The benefits of digital platforms are becoming increasingly recognized, with adoption rates increasing as the SCF industry evolves into an ecosystem. We expect to see a widening digital gap between the early adopter banks that work closely with fintechs and platforms to ride the growth wave and the laggard banks that are slow to adapt and evolve. Platforms offer banks a highly scalable way to participate in trade finance growth at negligible cost. Ultimately, platforms are democratising SCF by making the market larger and more liquid, reducing barriers to entry for smaller institutions and increasing access to finance for all. That can only be a good thing.