Excerpts of article:

 

In recent years, supply chains have come under tremendous scrutiny: in the information era, it is all too easy for consumers to find out whether their favourite clothing brands use sustainably sourced cotton, or whether the diamonds they buy are conflict stones. In turn, these commitments have led to the emergence of a plethora of traceability tools.

​

In financial supply chains too, a transformation has taken place. Financial institutions have been under pressure from consumers and regulators to know exactly which customers and trades they are supporting. In the UK, the Modern Slavery Act of 2015 forced companies above a turnover threshold of £36million — including financial services companies — to report on the checks they put in place to ensure their supply chains do not use slavery. Meanwhile, constantly evolving trade sanctions place companies involved in international trade at risk of inadvertently doing business with sanctioned entities. Because of this, transparency has been brought to the forefront of banks and insurers’ concerns, who want to know about not only their own customer (KYC), but also their customer’s customers (KYCC).

​

​

Leveraging technology

In the fintech space, more and more companies are facilitating this due diligence. Some scan sanctions lists and integrate them with maritime and vessel tracking data, to better assess the various counterparty risks associated with a trade transaction. Others collect data automatically from customers’ ERP systems and present a picture of a firm’s financial health to help financiers make investment decisions, or monitor the deals they are supporting.

​

​

New data for enhanced risk mitigation

New digital avenues represent an opportunity for financial institutions and insurers to consider adjusting their underwriting models so as to adapt to ever-changing supply chains. For SMEs, lenders are finding ways to mitigate risks, through data gathered directly from small businesses’ accounting software. Quickbooks, a popular accounting software, is already partnering with fintech lending platforms such as Ondeck and Funding Circle, to meet SMEs’ liquidity needs. To date, over US$1billion has been provided in financing to Quickbooks customers. The digital arm of Euler Hermes, EHDA, has taken this one step further. Its invoice insurance product for SMEs – Tradelock – works not only with over 10 accounting software services, but is also directly integrated with Xero, creating a simplified user experience for Xero’s customers.

​

Complex supply chains in huge domestic markets involving thousands of SME suppliers, however, require different solution sets. Indonesia? Beijing-headquartered Q&X Credit  has developed a digital underwriting and monitoring system by using transaction data to analyse SMEs’ credit needs/risks and monitor their business operations and financial capabilities on a real-time basis. The model does not rely on financials but focuses on trade-related data, and makes SME risks transparent and foreseeable for insurers, financiers and trading partners, so insurers are able to provide coverage against SMEs’ payment risks while the banks or non-bank financiers are willing to provide funding to SMEs with the risks covered by insurers.

​

​

Stumbling blocks

Opening the door to the financing of the tail end of supply chains is key to making them more transparent and sustainable, and finding ways to fund SME trade is essential in order to reach that tail end. Other technology platforms have tried in the past, with mixed results. In July 2018, URICA decided to suspend its operations in France following a significant fraud perpetrated by one of its clients. “Technology can sometimes give a false sense of security. Who’s inputting the data? Bad data in is bad data out, it doesn’t matter what technology you use,” points out Blattner-Hoyle.

​

Indeed, fraud in the world of trade is a recurrent beast that's hard to tame, despite the most advanced technological tools and seemingly sophisticated digital environment. Still, innovation is constant, and financial institutions and fintechs shall continue to learn from their own and predecessors’ mistakes.

​

​

Sustainability in financial supply chains
While there are no regulations governing sustainability standards in financial supply chains yet, public pressure has led to voluntary commitments: many financial institutions have stopped funding coal projects, and others have put in place financial products incentivising green practices. Shue-Heng Yip, the bank’s head of digital for Asia and Oceania, explains how MUFG uses technology to ensure its green financing
goes to sustainable trade. “We have found that traceability, while it helps, does not equate to sustainability. The main driver of success in sustainable financing is dependent on addressing the participants’ pain points across the value chains on priority, with minimal new steps. In this regard, an example of a traceability tool is a well-designed closed looped e-payments and e-loans platform to direct and control funds to the value chain participants for business-related purchases like agricultural inputs,” he says, adding that the development of green credit scoring is also key to the bank’s efforts.

​

In this area, the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFDs) should help. The more companies join the scheme, the more data will be available, and the easier it will be to develop green credit scoring for all.

​

​

A perfect supply chain?

Broadly, it looks like everything is converging in the direction of fully transparent, traceable and sustainable supply chains, but the reality is much more complex.

 

For one, international trade has to deal with hundreds of different jurisdictions, each with its own set of regulations. And even within the same jurisdiction, regulations
sometimes contradict each other. Secondly, the fintech sector needs to reach a higher level of maturity. Pilot schemes need to result in real commercial use-cases, which, as mentioned earlier, isn’t always easy. Lastly, addressing fraud and sustainability
in supply chains goes well beyond technological solutions. It requires education and financial incentives for small producers. Ensuring financial flows trickle down to the smallest end of supply chains is a first step, but how do you achieve that when suppliers don’t even have a bank account? The smart way to go is to take an industry-specific approach.