What do Toys ‘R’ Us, Kodak and Blockbuster have in common? Besides being market leaders in their niche segments at the height of their success, all three dwindled/went out of business due to a common reason – failure to adapt to the altered ecosystems created by modern technology. Whether its giants like Amazon putting retailers out of business, or plucky upstarts like Juul making a big dent in the oligopolistic market of Big Tobacco, innovative technologies are central to challenging the incumbents. But even as CEOs and CFOs of large corporates begin to build moats against disruption around their businesses, there is one often overlooked sphere in which technology disruption promises to be a boon rather than a bane for well-established companies – supply chain finance.
Most companies already have some form of vendor financing programs in place, whether direct discounting schemes with the company itself or channel finance lines with select banks. However, these traditional routes of funding have limitations. Firstly, these financing options are reserved for the corporate’s larger and more credit-worthy vendors, leaving the others out in the cold with no cost-effective solutions to funding. Secondly, discount rates tend to be fixed, which always poses a problem at the next round of negotiation between company and vendor. And lastly, all processes are manual and time consuming.
This is where technology steps in. Third-party providers have built platforms that create win-win outcomes for all parties involved. Not only do they provide much needed working capital to vendors to enable steady operation of their businesses, but they are also optimized to the needs and requirements of the corporate clients they partner with. Banks and other financiers are also keen to partner with such platforms, giving them access to new-to-bank clients. These platforms provide a one-stop solution for all working capital requirements, and address the problems faced by traditional vendor financing programs. The platforms do not discriminate between vendors; rather than isolating smaller vendors, they offer financing based on the credit standing of the corporate anchor. The platforms feed off reams of data, analyzing parameters like credit and payment history, relationship between the corporates and their suppliers, key balance sheet items, etc, and using machine learning, offer up rates specific to each vendor and corporate, thus providing an option of dynamic discounting as opposed to fixed discount rates. Platform interfaces are user-friendly and easy to operate. The technology can be integrated with ERP systems that are already in use by the company, thereby automating the entire process and eliminating the need to have a large number of human resources working on it. These platforms are built for scale and can be easily replicated over a large number of clients and their vendors – going a long way in addressing the $400 billion funding gap across supply chains in India.
Such models have already been implemented in Western economies. It is only now that Indian companies are finally starting to benefit from the services provided by operators that run these platforms. These operators seek to partner with corporates to help unlock valuable operating cash flow that is trapped in their supply chains. While some operators possess NBFC licences, they do not seek to replace traditional financial institutions that provide channel finance to corporates. Rather, they position themselves as facilitators and technology providers, connecting corporate to vendor to financier, operating a structure that benefits all 3 parties. India Inc. should be ready to ride the opportunistic wave headed its way.