Supply Chain Finance.

Signs of optimism amid so much uncertainty

Times of uncertainty

These moments of crisis are also opportunities from which we can come out stronger, especially if we interact very closely with our customers. We have seen it during the pandemic and it's now time to underline it more than ever: the customer always at the centre. If we act like this, it will accompany us on this journey.

Times of opportunity

There is an opportunity called NextGen. European funds are already reaching companies and Bankinter has already advised more than 1,000 companies, together with our partner, the specialist consultant FI Group. We businesspeople have the ideas. The funds are not going to give them to us, but they are a new source of support for developing these initiatives.

A perfect storm that demands innovative solutions for the supply chain

The supply chain has been destabilised in the last two years by a string of natural, fortuitous and geopolitical phenomena that no one could have foreseen: From the Covid-19 pandemic, which threatened international trade and the financial stability of companies, to the Evergreen accident in the Suez Canal, which made sea freight more expensive and quadrupled rates per container, and the recent microchip crisis and rise in energy prices.

And just when it seemed that we were recovering from these crises, or at least the foundations for recovery were being laid in Europe, the war in Ukraine breaks out. Besides the terrible human consequences, the conflict is causing more destabilisation, damaging certain trade routes and depriving us of the world's largest granary.

The joint challenge facing companies and financial institutions is to guarantee supply chains. In this globalized world, lately exposed to so many exogenous factors, we cannot always guarantee the supply of certain goods vital to our business. At times like this, there is a clear demand for a new category of financial services encompassing the entire range of supply chain transactions: from issue of the purchase order to receipt of payment.

Banks have traditionally offered products to facilitate and guarantee both purchases and exports, from reverse factoring lines to finance purchases to factoring lines and letter of credit discounts. But that arsenal of financial products is currently insufficient. It also needs to be more efficient.

A technology platform with a 360-degree supply chain service

We are not talking about a financial product, but about a service: an internal technology platform, at the Bank itself, that allows companies to finance their inventory and manage and secure the supply chain. Assistance and intermediation are provided through the platform itself rather than through an external service, making both the supply chain itself and the long-term relationship with suppliers more robust. In short, an option with more benefits than traditional reverse factoring.

The idea is to switch from a product model to a service platform. These are the four strategic reasons for using Supply Chain Finance:

• Improvement of credit rating.
• Increasing shareholder value.
• Use the free cash flow generated by the programmes to repurchase shares or pay dividends.
• Securing supply through key suppliers without compromising the cash situation.

All this with a service typically for major companies available to small and medium-sized enterprises.

• With the supplier: Standard reverse factoring, prompt payment reverse factoring and guaranteed reverse factoring.
• Times of opportunity: Factoring, forfaiting, discounting and portfolio purchases without recourse, in addition to trade finance in the case of export.

The SCF platform will allow us to integrate and provide a personalised service in all phases of the supply chain and in real time. These are some of the features of the service:

• 360º service in supplier management.
• Multi-currency: lets you operate in 27 different currencies.
• It makes it easier for SMEs to register their suppliers within the same platform.
• Language assistance (call centres for America and Asia) for contacting suppliers and facilitating payments.

As regards Bankinter, we have begun to implement financing mechanisms for our customers' suppliers; SCF Confirming Solutions for, subsequently and in a second phase, dealing with the products aimed at financing sales and that will allow us to close the loop for our customers in the financing of working capital and in the various modalities.

This is how supply chain finance works around the world

The supply chain finance industry has developed above all in the United States and has been arriving in Europe through fintechs. An activity that is growing 17% a year and is already moving more than 1.3 billion dollars worldwide. These are the sectors and companies that most use this new financial service with their suppliers:

• Automotive sector: BMW, Toyota and General Motors.
• Aerospace and defence: Lockheed Martin, Airbus and Raytheon Technologies.
• Technology: Cisco, Intel and Dell.
• Industrial: Schneider Electrics, 3M and Siemens.
• Chemical: Ecolab, BASF and DuPont.
• Health: Johnson & Johnson, AbbVie and Pfizer.
• Fast-moving consumer goods: Colgate-Palmolive, Nestlé and PepsiCo.
• Retail: Walmart, Alibaba and Inditex.

As stated in the book “Uncovering Supply Chain Finance” by Oliver Berlin, the most paradigmatic case of a company that was losing its competitiveness due to its supply problems is the Michelin story. When the company was obliged to pay in cash because, otherwise, its suppliers were going to manufacture for the competition. The problem was solved when the company put itself in the hands of a financial institution that provided a supply chain finance platform and took responsibility for financing the supplier.

It's the future: Europe and the United States have a quality banking sector and financing facilities that their suppliers do not. The key is to also make these facilities available to the supplier at source.

The importance of hedging exchange risk in such a volatile scenario

The changing scenario that we are navigating increases the risk for transactions in other currencies. The euro is under pressure that we did not foresee and fluctuation against the dollar and the pound is becoming one more contingency to take into account, according to the experts who participated in the webinar.

These are the indicators and the signals being issued by the markets:

• The harmonised ICP in the eurozone is already at 5.8%, according to the latest data announced by Eurostat, two tenths higher than expected. In Spain, inflation is already at 7.5%, a figure not seen since the end of the 1980s. And there is a debate on a possible rate hike on the table.
• If we cross the Atlantic, the outlook for inflation is not encouraging either, with 7.5% year-on-year in the United States and confirmation from the chairman of the FED, Jerome Powell, of an imminent rise in interest rates, which the market is placing at half a point.
• Forecasts point to the euro being damaged even more than the dollar and the pound due to greater European exposure to Russian gas and the difficulty of substituting the gas pipeline for a supply by sea or from North Africa. If the conflict is not resolved but goes on for a longer time, the euro will be even more affected.
• The market forecast pointed to two rate hikes in the eurozone in 2022, but that possibility is now being postponed until March 2023, so as not to compromise the stimulus to the economy currently underway and avoid a recession on the continent.
• Although OPEC, at its last meeting and with a vote in favour from Russia, agreed to an increase of 400,000 barrels per day, this production is not enough to offset the rise in hydrocarbon prices and take pressure off Western economies.
• It's time to pay close attention to meetings of central banks, the Fed, the ECB and the Bank of England. Safe-haven currencies right now are the Swiss franc and the Japanese yen.

Currency risk management: always start with the worst scenario

When companies charge or pay in different currencies, they have to cover their exchange risk. It is the first commandment of the exchange market. The current volatility is forcing us to think about what to do as a company. It's the big question: Should I wait? Should I insure now? It's a free market and that's why we need cover. That is why it is so important today, before deciding on any risk cover, to know what the worst scenario I might face is. And see if I'm able to take it on.

How is the current scenario affecting importers and exporters? Everyone has been conditioned, but this is a snapshot of today and the products being offered by Bankinter's foreign exchange desks and foreign exchange brokers:

• Importers: They have seen how positions were left uncovered while waiting for a better euro/dollar exchange rate. They are trying to improve pricing with new products that add value. We offer them currency cover through simple and leveraged accumulators, extendable forwards and plus forwards.
• Exporters: They are in a favourable position today, focused on products that provide profitability and liquidity. They are covering pricing and improving prices, encouraged by the euro/dollar relationship. We provide them with products to improve the exchange-rate insurance strike price. And in the specific case of those with liquidity who can endure without exchanging those dollars, they require products that can remunerate those balances: forward swaps and dual currency. Both guarantee the capital at maturity.