When it comes to supply chain finance, there are a few sacred fundamentals. First, it’s a tried and true way to unlock substantial working capital trapped in the supply chain. Second, it’s a win-win for all involved – it benefits both large companies and their suppliers. And, third, it works best when multiple funding sources are involved.
The first two fundamentals are pretty irrefutable. The third one, however, has driven a lot of debate. We have written at length about the advantages of a multi-funder approach to supply chain finance and the risks of a single-funder strategy on this blog before. Here are the highlights: (a) no one bank can cover all of the currencies and jurisdictions required to support a global supply chain, (b) companies have no recourse if their funder exits a market or supply chain finance altogether and (c) a single funder typically requires the use of a proprietary trading platform, which locks companies into its technology requirements and limitations. A multi-funder strategy backed by a bank-agnostic supply chain finance platform eliminates these concerns.
One argument put forth by single-funder program proponents is that a sole funder can overcome these challenges by syndicating liquidity requirements to other banks. In effect, the funder can replicate the benefits of a multi-funder approach.
The problem is the claim simply isn’t true. While bank syndication does involve multiple banks, they must participate through the lead bank. That means these banks adhere to a single set of rules and processes, and face the same limitations faced by the lead bank – whether technology, procedural or market-related.
Take what’s happening with the Italian financial crisis. According to the IMF, one-fifth of all loans ($400 billion) in the Italian banking system are classified as troubled. Meanwhile, one of the world’s oldest banks and largest in Italy, Banca Monte Dei Paschi Di Siena, is on the verge of collapse. Regardless if the bank had syndicated liquidity requirements to cover any of it’s outstanding loans, its collapse, bailout or takeover will most likely have an adverse effect on programs it may fund.
Bank syndication also negates one of the primary benefits of a multi-funder supply chain finance program – pricing competition. In a multi-funder approach, if one bank can’t offer a supplier competitive pricing and discounts, another bank can. With bank syndication, pricing is established by the lead bank – and that prevents syndicates from offering better pricing or discounts. Furthermore, funding spreads are typically higher in syndication scenarios as the lead bank extracts extra fees from the syndicates. For suppliers and companies, the overall cost of funding can be higher.
One other thing to keep in mind when it comes to bank syndication is that it’s a tactic advocated by proponents of single-funder supply chain finance. These proponents are often the same large financial institutions that claim to be able to fund these programs on a sole-source basis – venerable institutions like Citibank, Deutsche Bank and Royal Bank of Scotland that have, ironically, left some supply chain finance programs in a pinch as they’ve exited markets since the global financial crisis.
There is no replacement for a true multi-funder approach to supply chain finance. The inclusion of multiple banks in a program, and the use of a bank-independent platform to facilitate invoice trading, allows the supply chain finance program to take advantage of the best of each bank’s capabilities and ensure coverage and liquidity requirements are met. Most importantly, it does this on the company’s terms – not the bank’s.
