Looking back on the last 10 years in supply chain finance - Trade Treasury Payments

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Looking back on the last 10 years in supply chain finance

Looking back on the last 10 years in supply chain finance

Sean Edwards Apr 15, 2025

“You are old, Father William,” the young man said,
“And your hair has become very white;
And yet you incessantly stand on your head—
Do you think, at your age, it is right?”
Lewis Carroll
From: “Alice in Wonderland”

Those of us engaged in supply chain finance (SCF) over the last decade may well have grown old but standing on your head is a phenomenon of an altogether better pedigree. Arguably, this dynamic area, where the physical and financial supply chains collide, has led to great innovation and benefitted large corporates and SMEs while playing an important role in reducing climate changes and achieving some of the UN sustainable development goals (SDGs). The same period has also seen new pressures and threats, as well as some largely underserved, negative publicity.

The old stuff works…and in new markets

CCC = DIO + DSO – DPO

This magic formula (where CCC is the ‘Cash Conversion Cycle’, DIO is ‘Days in Inventory’, DSO is ‘Days Sales Outstanding’, and DPO is ‘Days Payables Outstanding’) still reflects the basic purpose of all payable finance or reverse factoring. Optimising working capital involves reducing DIO and DSO and increasing DPO. In other words, try to get paid as early as possible and pay as late as possible while making sure you don’t keep your goods too long in an unproductive environment such as a warehouse or ship.

Dear readers, nothing has changed on this basic value proposition. Everyone wants to reduce DSO (get paid early) and increase DPO (pay later) and payables finance / reverse factoring / supply chain finance squares the circle.

The delivery channels have changed (see below) and technology has enabled greater efficiency and market penetration than ever before, democratising and driving down the cost of this instrument of working capital. Through the work of MDBs and others, payables finance has begun to be employed in emerging markets and by ever smaller anchor buyers.

This writer’s own experiences in Central Asia and further-flung markets have confirmed that there is a wide understanding of the benefits this technique brings, at least amongst banks. There is not the rub, but rather, it is about making the right choice of platform and confidence in local market take-up. This is often a matter of finding the right scale for all the parties concerned, including the banks.

At an ITFA conference in Budapest, a bank from a small Balkan economy demonstrated a viable business model for using SCF based on its central role in, and knowledge of, cash flows, imports etc., in that country. The amounts were not large, but the approach and thinking were very impressive.

Delivery channels have improved…and have needed to

Aiding emerging market take-up but also responding to cost pressures in developed ones, new technology has allowed SCF to be offered to more users by more and more financial institutions, including non-banks.

Blockchain has seemed a spent buzzword but underlies, in public or private form, many of the platforms, tokenised instruments (alright, I’m looking to the future a bit) and tools available to the market. The decade saw the rise and fall of some boil-the-ocean platforms, but it would be wrong to pin the failure on the technology: it was commercial adoption, or the lack of it, that pulled the plug.

Most large IT systems providers have overhauled their offerings to provide flexible, multi-modal tech suites capable of carrying out various forms of SCF. These are leveraging cloud cost savings and, increasingly, artificial intelligence (AI). The latter offers real potential in analysing past financial behaviour and predicting it for the future.

If this seems like the infamous “future receivables” programmes of the discredited Greensill Capital, one of the decade’s brightest falling stars, the new technology offers both a safer and more economical way to achieve an important goal of SCF: financing the pre-export leg of the physical supply chain. With prudent policies, however, there is no reason this can’t succeed, and the tech can make this happen.

But what do we mean by supply chain finance?

I have used the term “supply chain finance” liberally, but for many, the term is confusing or, conversely, too limiting. How do we make our way through this Tower of Babel? The decade saw the publication of a major innovation in terminology, the “Standard Definitions for Techniques of Supply Chain Finance”, produced by the Global Supply Chain Finance Forum, an umbrella for the world’s major trade finance associations, including ITFA. The Standard Definitions may not win a prize for the snappiest title or sell well in airports, but they have helped to settle the meaning of things in our world, thereby fostering understanding and adoption as well as being a major educational tool.

By its nature, SCF is dynamic, and the Definitions have kept pace with evolution.

SCF has become as a major weapon in fighting climate change and advancing net zero. Some of this has been forced by legislation, but it is also because of public opinion. At the time of writing, this has become a subject of controversy for well-known reasons beyond the scope of this article, but it seems unlikely that it will reverse to any great extent.

SCF programmes providing improved pricing to compliant suppliers have been a major force in helping buyers meet their legal obligations and encouraging suppliers to adopt better practices. Some of these have not been monitored or defined as well as they could have been, and they may have been seen as superficial, but practices get more robust every year.

Threats and challenges

The ubiquity of SCF has drawn the attention of both rating agencies and regulators.

The first have been concerned about the lack of transparency and have spied “debt-like features” in the practice as well as an over-reliance, and therefore a threat to liquidity, in its use by corporates. A few corporate failures appeared to justify this interpretation, with the majority of finance coming through such programmes and/or an excessive (as compared to the market) extension in DPOs.

The consequence was a move by the two principal accounting standards boards to introduce new accounting rules for payables finance (note: not for other forms of SCF). These did not, as was feared, cause an immediate reclassification of payables finance from trade debt into bank debt. Rather, they have mandated increased transparency to allow the rating agencies to make that determination.

It is too early to tell if the rules will have a chilling effect on the use of payables finance as we are only just coming to the end of the first accounting period, but anecdotally, major corporates are reconsidering the scale of use.

Alongside a perceived abuse of investors was a feeling that suppliers were being exploited by their buyers and forced to agree to unfair term extensions, which could only be financed using expensive bank finance. Late payment rules exist around the world, but concerns were brought to the boil in Europe with an attempt to revise the Late Payment Directive by, principally, making it illegal to agree to payment terms beyond 30 days. Arguments by ITFA and others that this would remove a major source of liquidity underpinning supply chains have had some effect, but the issue is still on the table and will need further advocacy.

So will we ever achieve perfection?

In short, no, but then where would the fun be? SCF has proved to be valuable not just to industry and trade but also to be a source of creativity and innovation. What’s not to like?