The impact of COVID-19 on our inter-connected economies and businesses has been significant, putting supply chains around the world under unprecedented pressure and severely disrupting global trade.
Urgent support is being introduced around the world, and with banks and other lenders looking for ways to help, the importance of their trade finance offerings and supply chain finance (SCF) in particular is coming to the fore. These services have historically
been cumbersome and accessible mostly to large businesses, but digitalisation is making SCF more transparent and efficient and therefore available to the millions of SMEs who act as the backbone of the global economy.
If we are to help businesses survive COVID-19, lenders have to embrace these technological innovations in SCF in the long term.
COVID-19: a global crisis for businesses and supply chains
The scale of the economic disruption prompted by the rapid spread of COVID-19 has led to some commentators claiming that the 2008 global financial crisis looks in retrospect to be little more than a “dry run” for the current emergency. The Bank of England,
for example, has already said that the UK may be facing the biggest economic shock it has experienced in centuries.
The mounting pressure on businesses across the globe has led to significant strain on supply chains, with the World Trade Organization estimating that world trade could fall by anywhere between 13% to 32% over the course of 2020. This is a sobering prediction
when compared with its 12% fall during the banking crisis in 2008-9.
As lockdowns force closures and disruptions to business, difficulties from procuring technological goods in China and South Korea to automotive parts in Europe have dramatically interrupted business-as-usual. The manufacturing sector has been one of the
hardest hit globally, resulting in 44% invoking ‘force majeure’ clauses and many simply ceasing production altogether.
Getting help is not straightforward
While there have been extensive efforts to support businesses, with governments, central banks and fiscal authorities introducing far-reaching measures to protect economies, the longer-term impact on businesses is likely unavoidable.
Actually procuring the immediate support pledged by many national authorities has also been problematic. In the UK, for example, growth businesses have not found it straightforward to access funding from the business-interruption loan scheme during COVID-19.
At the same time, many SMEs, especially in emerging markets, where obtaining trade finance was already an uphill struggle, find that they lack the credit rating required to access bank finance.
Digitally-enhanced SCF presents a solution
The demand for supply chain finance has, as a result come to the fore, with SCF volumes already on the rise internationally in recent years. However, traditional SCF offerings have often been limited to larger companies, with SMEs typically struggling to
access these services. Indeed, a survey of US manufacturing SMEs found that 32% found obtaining finance for cross border trade to be ‘burdensome’, compared to only 10% of larger firms.
Compounding this is the fact that SCF has traditionally been a fairly slow and cumbersome process. Document-heavy, manual systems have been slowed further by intense Know Your Customer (KYC) checks – a process that often isn’t feasible for time-poor and
low-manpower SMEs. Furthermore, such inefficient systems make SCF a less attractive and less profitable option for lenders.
However, innovation and increasing digitalisation of SCF is making the service more efficient and more transparent, with integrated platforms simplifying information sharing and KYC. In the midst of COVID-19 lockdowns, when dealing with and transferring
physical documents is less possible, the role of technology becomes even more important. For banks in the long term, a more efficient and less resource heavy solution also makes SCF more profitable.
The solution for lenders looking to deliver SCF services more efficiently and more profitably lies in technology. These digital capabilities are already provided by a plethora of companies offering digital SCF platforms. Now is the time to push for their
integration into the system rather than let the current measures hamstring a reeling global economy.