After a volatile 2023, the global banking sector has continued to face a challenging operating environment this year due to multiple headwinds. These include a divergent global economy, high funding costs due to prolonged elevated interest rates, tight liquidity, a decline in global trade volume from the post-pandemic rebound and sluggish capital market activity.
As banks seek more predictable and consistent revenue streams, areas such trade and supply chain financing are coming into focus. According to the International Chamber of Commerce 1, global nominal trade and supply chain finance revenues surged 28% year-on-year in 2021 before gaining a further 6.3% y/y to USD 63 billion in 2022. While it expects a decline of 7.4% in 2023 due to slower trade flows and higher-priced financing products, the ICC forecasts trade and supply chain finance revenues to return to growth in 2024, rising 3.8% annually to reach USD 91 billion in 2032.
Supply chain finance is a particularly attractive revenue stream for banks as the credit risk is inherently mitigated by the dynamics of the value chain and transactional credit history. As suppliers can gain access to relatively cheaper, collateral-free finance, this goes a long way to fulfilling the working capital needs of these primarily medium-to-small-and-medium-sized businesses.
But while supply chain financing might seem like a low-hanging fruit, banks face many challenges in expanding this area of their business.
For a start, the process is typically manual, consuming much time and resources. The lack of a fully automated process means an inefficient workflow between the anchor and the bank. Then, there is operational risk arising from manual processes including critical ones like limits management, overdues management, etc. To add to this, banks also have to contend with low visibility due to the absence of real-time risk monitoring dashboards at a program level.
Digital platforms could resolve these pain points. Indeed, the sentiment was echoed in a 2023 survey2 conducted by the Asian Development Bank, which covered 137 banks across 54 countries and 184 corporations in 43 countries.
The survey found that 71% of the banks agreed that widespread adoption of fintech and digitalisation can facilitate easier, cheaper and quicker know-your-client processes, anti-money laundering checks as well as compliance checks of small-and-medium-sized-enterprises. Around 68% of the banks also agreed that digitalisation can deepen the data mapping of SMEs to help with better client profiling and risk assessments.
However, there’s one obvious hurdle – cost.
The capital outlay required in digitalising banking technology is often one of the main hurdles for banks when it comes to digital integration and enhancements. The ADB survey also cited cost as the main barrier (25%) to digitalising banks’ business and trade portfolios, followed by a complex legal environment (21%) and lack of interoperability of existing platforms or systems (20%).
It’s not uncommon for a medium to large international bank to spend USD 300 million to USD 400 million on technology for its back-end operations and at least USD 20 million to USD 30 million for the front-end. Even a standalone supply chain financing platform/system may cost USD 5 million to USD 10 million.
But it does not have to be all-or-nothing. Targeted SaaS solutions often cost far less than proprietary systems, can be deployed faster and more efficiently, and can sit alongside other banking platforms or systems.
At TASConnect (TASC), we offer a full-suite, end-to-end, SCF platform as a SaaS solution, providing an efficient and cost-effective way for banks to arrive at their destination model without needing to invest hefty sums and invaluable time.
TASC platforms are bank agnostic and can complement a bank’s digital channel for bespoke deal structure, client work-flow automation and straight-through processing. We can help banks deepen and scale up their existing SCF models as we possess the integration tools to connect front and back-end processes, resulting in an overall solution that is even cheaper than a standalone platform.
We can help banks which are new to SCF to digitise their programme in phases, from putting their prospectus into place to pitching, organising, onboarding, disbursement and loan extensions. We have product knowledge and a deep understanding of how relations work in a bank.
When it comes to cost, TASC adopts a flexible/hybrid revenue sharing model based on a combination of subscription-based charges and actual transactions that flow through the platform. Moreover, the revenue model allows for charges to be borne either by the bank and/or the enterprise client.
Features on the TASC platform can also help banks acquire new clients in addition to boosting the asset base and revenues from existing clients with new products and services like dynamic discounting, pre-shipment finance, deep-tier finance, distributor financing and digital FX and payment solutions. We also provide value-added solutions through our partnership model, such as ESG-based financing.
Thus, through digitalisation, supply chain finance can be an alternative revenue stream for banks as the daunting task of integration and adoption can be simplified and demystified through TASC solutions.
