Supply chain finance is under the biggest transformation in years, pushed by changing customer demand and the rise of fintech. The Paypers interviews Tom Cross, GM of Trade Finance at Hitachi Capital to understand where the industry is going next.
What are the 3 main areas where fintech could positively transform supply chain finance?
- Unconfirmed Transactions: While some buyers absorb performance and timing risk by confirming payables, the vast majority do not. For some this is merely a matter of inability to confirm, e.g. situations where title has not shifted to the buyer, whereas others may be unwilling to assume the risk and burden of confirmation. This leaves sellers of goods unable to accelerate payment for about 90% of their transactions. Fintech companies can use analytics and automation to mitigate performance and timing risk, enabling financial institutions to safely accelerate payment for unconfirmed transactions. - Multi-tier SCF: The largest pain point within a supply chain is not between the OEM and its large tier-1 suppliers, which is where SCF has traditionally focused, but rather between large commodity companies and their smaller customers. Credit and supply risk in this space bubbles up a supply chain, adding considerable cost and risk for the OEM. Fintech companies can leverage new payment methodologies to directly pay supply chain constituents, eliminating credit risk and processing cost. - Flow Disruption: Financing trade within supply chains is easy, assuming, of course, the music does not stop. However, financial institutions and manufacturers are both harmed when trade flows are disrupted. Fintech companies can monitor trade flows, leverage distributed ledgers and employ analytics to predict flow disruptions and the resulting ripple outward through the supply chain.What types of partnerships is Hitachi Capital pursuing with fintech companies? - Servicing: Changing the way a large financial institution services business is difficult and slow. We prefer to work with fintech companies able to automate and build out back office servicing to enable our new solutions. Partners are better able to service our business because of their intimate knowledge of their technology. - Technology: Our new solutions rely on analytics, distributed ledgers and efficient payment processing, all of which is not our core competency. We look to partner with fintech companies where this is their core competency. Could you outline the constraints in the existing bank offerings that make agreements with fintechs even more appealing? - Bank offerings are oftentimes constrained to an individual buyer, whereas the supplier seeks a solution across all its buyers. Fintechs can provide a kind of middleware that aggregates disparate programs and presents a holistic solution to the supplier. - Banks also have a difficult time entering markets or rolling out new products until they are somewhat proven. Fintechs are more nimble and less constrained in what they can finance, enabling them to prove out markets and solutions the banks can then adopt. How can supply chain finance unlock the middle-market? Also, what is on the company’s agenda to providing working capital to the mid-market? SCF can lower cost and risk relating to originating and serving the SME sector. Large companies that buy from or sell to SMEs represent channels and fintech companies the delivery mechanism. Hitachi Capital is focused on what we call Hitachi Inventory Procurement, wherein we finance on both sides of our client’s balance sheet. We pay our client’s suppliers early and are later repaid from their customers. TradeRocket and Flowcast provide the data and analytics to enable the program. The ultimate goal is to leverage Hitachi’s strength in procurement, logistics and finance to offer procurement as a service. The following illustrates how Hitachi Capital delivers one of its SCF solutions.
- Hitachi leverages its purchasing, logistics and finance strength to lower procurement cost & risk. - Clients can increase CCC by increasing DPO and lowering both DIO and DPO. - Hitachi Capital partners with several companies to deliver these solutions. Are there any particular US / Canada sectors where supply chain finance is now taking off? There is great potential in the auto industry for multi-tier solutions and in the retail for programs that enable pay-on-scan, i.e. reduce DIO. How does the supply chain finance landscape look from your position and experience? Could you pinpoint the biggest challenges and briefly describe how they can be overcome? SCF is still in the early days of a broader movement from financing at the enterprise level to financing at the transaction level, much like we saw in the consumer finance world. Commercial is more complex, but like we saw in consumer, the potential to greatly improve liquidity, price, flexibility and speed creates very large benefits for all of us. Hitachi believes that any large endeavour should be broken into manageable pieces that can be delivered over reasonable timeframes. We also believe that solutions are best done in partnership and look to form long-term relationships with those that will help Inspire the Next Breakthrough.About Tom Cross:
Tom Cross is GM of Trade Finance for Hitachi Capital. He was founder and president of Crestmark Bank, Hennessey Capital Solutions and Triad Financial. Tom received his MBA from the University of Michigan and BS in Economics from Oakland University.
About Hitachi Capital America:
Hitachi America Corp is a specialty finance company that serves commercial businesses and other Hitachi companies in the United States. We offer senior secured financing solutions with a focus on truck, trailer, and floorplan financing; trade financing; medium/small ticket financing; structured financing; vendor financing; and asset-based lending. You can read the story and other related stories in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017.
Read this story and other related stories in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017
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