Supply Chain Finance: Delivering a digital future for MSME summarize

Introduction:

While digital technology has altered many parts of life today, the fact is that most MSMEs, particularly in emerging nations, are still far behind on the path to digital transformation and continue to conduct their business primarily in cash. Digital transformation offers enormous potential to help Micro-, Small-, and Medium-Sized Enterprises (MSMEs) decrease costs, standardize and automate company operations, raise productivity, boost competitiveness, and better understand customer behavior.

Due to the importance of finance in MSMEs' operations and relationships with customers and suppliers, financial services play a vital role in their digital transformation. Digitalization is transforming the finance industry as well. Mobile phones have been transformed into financial instruments, and new venues for peer-to-peer lending, crowdfunding, and online markets have emerged as a result of technological advancements. Banks are investing in new technology development, integration, and acquisition, while technology companies are exploiting digital platforms to deliver financial services.

What is supply chain finance?

Supply chain finance is also known as supplier financing or reverse factoring. It is a financing solution that allows suppliers to get early payment on their bills. Supply chain finance reduces the risk of supply chain disruption while also helping consumers and suppliers to better manage their working cash.

Supply chain finance, unlike other receivables financing methods such as factoring, is initiated by the consumer rather than the supplier. Another important contrast is that suppliers can access supply chain finance at a funding cost determined by the buyer's credit rating rather than their own. As a result, suppliers may typically acquire supply chain financing at a lower cost than traditional financing methods.

However, technology is transforming SCF approaches today, extending the potential market. Improved connection, more readily available consumer data, and new technology reduce costs and enable the extension of digital SCF solutions to small merchants at the tail end of global supply chains. Digitally empowered SCF can successfully assist small merchants in buying better, selling better, and running their businesses better.

The Role of SCF “Platforms” in MSMEs’ Digital Transformation:

Taking the initial step in changing their operations from analog to digital is one of the most crucial difficulties that MSMEs confront today. The increased customer desire for convenience and speed, including access to more and faster payment and delivery choices via digital technology, has been a primary driving force behind enterprise digital transformation. The COVID-19 epidemic has increased the need for contactless commerce significantly. However, more than half of all small retailer transactions worldwide are still conducted in cash, with Pacific Asia accounting for more than two-thirds of the total.

This is a significant concern since data is still widely underused and many MSMEs are still intimidated by security threats and unable to properly comprehend the potential benefits for their operations. While this is a significant challenge, it also represents an opportunity for the financial sector to play a key role in catalyzing and accelerating MSMEs' digital transformation by encouraging and facilitating their migration from cash to digital payments and leveraging digital invoicing and bookkeeping as a core around which enterprises' digital infrastructure can be expanded.

1. The availability of financing and near-instant decisions for credit: Supply chain finance makes use of a merchant's supply chain transaction data supplied by FMCG inventory management systems. Using this information, financial institutions can save time and money when evaluating the creditworthiness of small businesses. When inventory is low and suppliers are present, small shops will obtain the credit they require. This will help the merchant develop a compelling value offer and expand.
2. Improved business operations and cash flow management: Supply chain and finance connects loan provision to the movement of products. This benefits retailers by resulting in more stable inventory levels and more efficient cash flow. In reality, all supply chain participants, including FMCGs, suppliers, and merchants, benefit from enhanced company operations and cash flow management. This leads to more sales, faster turnover, and, eventually, better profitability and growth for all actors.
3. Aggregation of Data for improved Decision making: A platform-based model that uses digital technologies to meet the interdependent demands of various stakeholders at the same time is ideally suited to providing SCF solutions. Platform models aggregate digital data generated by logistics and money movements throughout the supply chain, fostering trust and supporting coordinated decision-making. As a result, better insights about merchant and consumer behavior are provided.

The digitization of supply chain financing:

In today's unstable economic climate, economic instability and corporate social responsibility may disrupt company. As supply chain finance (SCF) becomes a more effective approach for improving supply chain financial performance, there is a growing need for sustainable products and Environmental, Social, and Governance (ESG) measures.

Sustainable SCF is a practice that takes ESG into account while providing finance services to stakeholders. It employs SCF mechanisms to incentivize sustainable behavior by offering actual rewards to suppliers and purchasers. Banks and corporations can meet their ESG targets while giving consumers what they want by offering suppliers cheaper working capital in exchange for their investment in better environmental practices.

Despite the rising relevance and monetary rewards of sustainable SCF, its implementation is fraught with difficulties and roadblocks, such as data gathering, sharing, and analysis. With the advancement of new technology and the digitization of SCF, sustainable SCF is becoming less difficult and time-consuming. These technologies can get access to previously untapped data in the supply chain, offering global buyers, financial providers, and suppliers with more visibility and sustainability advantages.

Building a large financing pool:

A big shift will be witnessed towards a multiple choice quotient scenario enabling a mix of different types of lending players from Banks to NBFC’s and other private players in the space. Suppliers can have access to more financing options with expanded reach and multiple players providing higher values, improved financing, and better working capital.

Digitize supply chains and create digital footprints for MSMEs:

Generally, the percent of payments and collections between merchants and distributors have been made in cash. To replace offline transactions, Customer credit management produces a digital collection of receivables inside the supply chain. Digital collections are more efficient and allow small shops to establish a credit history and create a digital data trail. MSMSEs can have access to services supplied by conventional financial institutions at a lesser cost with this digital footprint. Access to supply chain finance, we think, is critical to the growth and sustainability of small companies in India and throughout the world.

Leverage data to make financial services more accessible

In several businesses in India, trade and supply chain have historically functioned offline, depending on paper invoices and cash to complete transactions. When MSMEs need to check invoices and access data to confirm prior trade connections with their corporate partners, the lack of digital records presents a barrier. Leveraging numerous channels to connect clients organically when and when it is convenient for them, establishing a real customer experience and offering a smooth, relevant experience at all touchpoints.

Financial institutions may develop tailored experiences that take into consideration a client's specific history, household, circumstances, life events, preferred interaction channels, and more by exploiting client data in this way. With this information, the company intends to offer corporate credit cards, insurance, working capital loans, current accounts, and other financial services to its small business customers. With access to substantial data on MSMEs, financial services solutions may be tailored to their specific requirements and delivered on time.

Conclusion

However, technology is transforming SCF methodologies today, widening the addressable market to encompass micro, small, and medium-sized businesses. Improved connection, more readily available consumer data, and new technology reduce costs and enable the extension of digital SCF solutions to small merchants at the tail end of global supply chains.

SCF promotes more effective company operations and cash flow management for all players along the chain by connecting credit to the flow of commodities, leading to higher sales, faster turnover, and, eventually, better profitability and growth.

We think that independent third-party technology providers are best positioned to mediate different parties and lead the operation of a flexible and scalable SCF solution. We also see a significant potential, particularly for FSPs and FMCGs, to create the basis for the success of such a platform strategy. A digital SCF solution will not only help merchants develop their businesses, but will also create genuine financial inclusion for millions of people who have been left out or neglected by the present system. With almost 141 million microenterprises in developing countries, digital supply chain financing provides a scalable way to increase sales across the supply chain, hence promoting inclusive growth.