Financial technology adds new link to supply chains

A new breed of financial institutions, called 'fintechs,' have emerged to help large buyers and their suppliers streamline the payment process and — as a big bonus — fund both parties’ needs for operating capital.

When you’re a small or mid-size supplier, landing a contract with a big-name manufacturer is certainly cause for celebration.

Soon you are ordering the raw materials and other supplies you need to fulfill the contract, maybe even investing in more equipment, and hiring more workers. You manufacture the desired product and arrange for its delivery to your customer. Finally, you send your invoice.

And you wait to get paid. You wait and wait, for weeks or even months, for the money to show up. The delay isn’t because your big customer is struggling financially, but because it has chosen to hold on to its cash as long as possible.

During the past five years, scenarios like that have been all too common in supply chains. Now a new breed of financial institutions, called “fintechs,” or financial technology companies, have emerged to help large buyers and their suppliers streamline the payment process and — as a big bonus — fund both parties’ needs for operating capital.

The rise of fintechs adds new links to traditional supply chains and takes them beyond their previous role of sourcing materials, making products, and delivering the products.

Studying fintechs has brought together the expertise of Professor of Supply Chain Management and Logistics Dale Rogers and Professor of Supply Chain Management Thomas Choi, researchers for the Center for Advanced Procurement Strategy, or CAPS Research.

Financial crisis spawned change

The old supply-chain system worked, the two say, until the Great Recession squeezed the finances of both buyers and suppliers. That’s when fewer buyers began paying their suppliers in the traditional 30 days, opting instead to hang on to their cash and stretch out payments to as many as 120 days. Suppliers that needed capital used to turn to banks to bridge the gap, Rogers says, but the subprime fiasco and subsequent tighter control on banks by the federal government created opportunities for new, less-regulated third parties like fintechs.

Now, the movement of money in the supply chain is getting as much attention as the movement of raw materials and finished products, Choi says. Adding finance and capital components to a company’s supply chain, he explains, helps managers speak the language of C-suite executives and investors, who focus more closely on the firm’s financial picture than on the details of sourcing, manufacturing, and delivery.

“Firms are being judged on the health of their balance sheet in the stock market,” Rogers says. “They always have been, but how do you have a healthier balance sheet? You better manage your working capital, and part of better managing capital is extending out your payables and reducing inventories, and all of this helps with that.”

The last five years have seen an explosion of different kinds of fintechs, Rogers says. Some are niche firms, such as Orbian and Prime Revenue, and others have been created by more traditional sources of capital such as Citi Group and other big banks.

Just as constantly increasing computer power has helped bring innovations like tap-and-go mobile payments to consumers, it has helped fintechs bring financial innovation to the business-to-business world. The fintechs act as an online marketplace, connecting banks, insurance companies, pension funds, and even wealthy individuals willing to lend money for short terms to suppliers that want to be paid quickly and/or reliably. Some fintechs even offer reverse auctions to find the best match between what financial sources will charge and what suppliers are willing to accept.

“With connectivity, these fintechs know who has money and who needs money,” Choi says. They provide a matching service, much like online dating in the consumer world.

For example, a supplier may offer to sell its approved invoice from the big buyer. The fintech buys the invoice at a discount and pays the supplier earlier than the manufacturer would. The discount depends on the generally strong credit rating of the buyer, not that of the smaller supplier, meaning that the lender takes less risk in getting its payment.

The process fills the supplier’s need for operating capital, which is the best kind of capital, Rogers says, because equity capital is scarce, and companies and access to debt capital has its limits. “You’re using your supply chain to fund things, so you’re leveraging the supply chain to fund your organization,” Rogers says. “You’re actually introducing a mechanism into the supply chain that can assist with a very important part, which is paying for things.”

Both sides benefit

Fintechs offer advantages to both buyers and suppliers in a supply chain, the two say.

For buyers, the advantage is a stronger financial picture, Rogers says. With fintechs, fulfilling the suppliers’ needs for quicker cash, the bigger companies can use their available cash to fund growth in emerging markets or develop new products. Some buyers even offer fintech services to strategic suppliers as a way to build deeper relationships in the supply chain.

For suppliers, the big advantage is the ability to get paid earlier than usual and to get paid on the day of their choosing, Choi says. Having that certainty of when the funds will arrive helps suppliers plan how to next use their operating capital. The payments also contribute to making the company healthy and enabling it to stay in business.

Fintechs take payment for their services in a variety of ways, from fixed dollar amounts to small percentages of transactions. Each transaction may carry a low margin, but the high volumes of transactions make the business attractive.

Looking to the future, Choi and Rogers see non-financial companies getting into the fintech space, not unlike automakers that long ago started their own finance divisions. One example is electronics manufacturer FoxConn Technology Group, which in 2018 invested in a blockchain startup developing software to improve global supply chains.

The budding industry of fintechs is still ripe for Rogers and Choi to study and to provide practical information on the new link’s role in supply chains.

Choi, Rogers, and Rutgers University professor Rudolph Leuschner already have collaborated on a Harvard Business Review article that highlighted the fintech trend for the magazine’s audience of CEOs eager for cutting-edge information. From there, the ASU pair and Leuschner, assistant professor of supply chain management at Rutgers, began writing a book on fintechs. Intended to introduce supply-chain practitioners to the new link in their work, Supply Chain Financing: Funding the Supply Chain and the Organization has officially been published by CAPS Research and is available for purchase on Amazon.

The bottom line

The growth of fintechs as part of the supply chain has implications for various stakeholders, Choi and Rogers say:

• Big companies that are buyers now can use the supply chain to finance other activities, such as entering emerging markets or developing new products. They also can use fintechs to maintain and build close relationships with suppliers.
• Small and mid-size firms that are suppliers find that fintechs offer them more financing options. That gives them more opportunities to control their own destinies, especially regarding the timing of payments from customers. Money flows become more consistent, allowing for more accurate planning.
• Fintechs and banks can get their cut of the estimated trillions of dollars in transactions being generated by the new marketplaces.
• Workers looking for promising careers can consider fintechs because of the innovation being created and the large sums of money being invested in them.