Research on supply chain finance products at standard chartered bank

ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH
---------------------

NGUYỄN THU MINH

RESEARCH ON SUPPLY CHAIN FINANCE PRODUCTS AT
STANDARD CHARTERED BANK
NGHIÊN CỨU VỀ SẢN PHẨM TÀI TRỢ CHUỖI CUNG ỨNG
TẠI NGÂN HÀNG STANDARD CHARTERED

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2019


ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH
---------------------

NGUYỄN THU MINH

RESEARCH ON SUPPLY CHAIN FINANCE PRODUCTS AT
STANDARD CHARTERED BANK
NGHIÊN CỨU VỀ SẢN PHẨM TÀI TRỢ CHUỖI CUNG ỨNG
TẠI NGÂN HÀNG STANDARD CHARTERED

Chuyên ngành: Quản trị kinh doanh
Mã số: 60 34 01 02
LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS. NGUYỄN NGỌC THẮNG

HÀ NỘI - 2019


DECLARATION
The author confirms that the research outcome in the thesis is the result of
author‟s independent work during study and research period and it is not yet
published in other‟s research and article.
The other‟s research result and documentation (extraction, table, figure,
formula,

and other document) used in the thesis are cited properly and the

permission (if required) is given.
The author is responsible in front of the Thesis Assessment Committee,
Hanoi School of Business and Management, and the laws for above-mentioned
declaration.
Date…………………………..

i


ACKNOWLEDGEMENTS
I would like to express my deepest gratitude to all of the following people for
helping me complete my thesis.
Firstly, I would like to express my special thanks to my company for giving
favorable conditions for my study and my master thesis completion at Hanoi school
of business and management (HSB).
Secondly, I am extremely grateful to all of the lecturers from the Department

of Business Administration - HSB for providing me with research methods and
professional knowledge during the course, especially the active and creative
research skills.
My appreciation also goes to the teachers in the thesis review committee for
giving me valuable ideas during my thesis completion process.
My profound gratitude is also conveyed to my instructor for his helpful
assistance and guidance. This thesis could have never been completed without his
enthusiastic counsel and support.
Despite the efforts during the research period, there are still many limitations
in the thesis. I would hope to receive valuable comments from the teachers and coworkers to make this essay more completed.
Thank you very much./.
Ha Noi,

ii

2019


TABLE OF CONTENTS
DECLARATION ........................................................................................................ i
ACKNOWLEDGEMENTS ....................................................................................... ii
TABLE OF CONTENTS .......................................................................................... iii
ABBREVIATION .......................................................................................................v
CHAPTER 1: INTRODUCTION ...............................................................................1
1.1. Rationale of the study...........................................................................................1
1.2. Research objectives and research questions.........................................................3
1.3. Scope of the study ................................................................................................3
1.4. Significance of the study ......................................................................................3
1.5. Structure of the study ...........................................................................................4
CHAPTER 2 LITERATURE REVIEW .....................................................................5

2.1. Supply chain management and financial aspects .................................................5
2.1.1. Supply chain management .............................................................................5
2.1.2. Financial impacts ...........................................................................................6
2.2. Supply chain finance ............................................................................................7
2.2.1. Definition of supply chain finance ................................................................7
2.2.2. Framework of supply chain finance ..............................................................9
2.2.3. Types of supply chain finance .....................................................................11
2.3 Supply chain finance benefits and risks ..............................................................20
2.3.1 Benefits .........................................................................................................20
2.3.2 Risks..............................................................................................................20
2.4 Factors affecting supply chain finance ................................................................21
2.5 The ecosystem for supply chain finance .............................................................25
CHAPTER 3 METHODOLOGY .............................................................................27
3.1. Research philosophy ..........................................................................................27
3.2. Research approach .............................................................................................28
3.3. Research design ..................................................................................................29
3.4. Research strategy ...............................................................................................30
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3.5. Research method ................................................................................................30
3.6. Data collection ...................................................................................................31
3.6.1. Secondary data .............................................................................................31
3.6.2. Primary data .................................................................................................32
3.7. Questionnaire setup ............................................................................................32
3.8. Data analysis technique ......................................................................................35
CHAPTER 4 ANALYSIS AND RESULTS .............................................................36
4.1. Introduction of Standard Chartered Bank‟s trade finance .................................36
4.1.1. Overview of Standard Chartered Bank (SC Bank) ......................................36
4.1.2. Trade finance at SC Bank ............................................................................38

4.1.3 The ecosystem for supply chain at Standard Chartered ...............................46
4.2. Analyzing on factors effected to supply chain finance in SC Bank ........................47
4.2.1. Description of the sample ............................................................................47
4.2.2. Operational models ......................................................................................48
4.2.3. Products and services ...................................................................................50
4.2.4. Sales channels ..............................................................................................52
4.2.5. Human resources .........................................................................................54
4.2.6. Credit risk management ...............................................................................55
4.2.7. Management decision ..................................................................................59
CHAPTER 5 CONCLUSION AND RECOMMENDATION .................................61
5.1. Conclusion ..........................................................................................................61
5.2. Recommendation................................................................................................62
5.3. Limitations and recommendations for future researches ...................................65
REFERENCE ............................................................................................................67
APPENDIX . QUESTIONNAIRE ............................................................................72

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ABBREVIATION

SC

Supply Chain

SCM

Supply Chain Management

SCF

Supply Chain Finance

CSF

Critical Success Factor

WC

Working Capital
Cash Conversation Circle =DIO+DSO+DPO

CCC

DIO: Days Inventory Outstanding
DSO: Days Sales Outstanding

SC BANK

DPO:
Days
PayableBank
Outstanding
Standard
Chartered

v


LIST OF TABLES

Table 2.1: Summary of SCF definitions .....................................................................8
Table 2.2: The evaluation checklist of SCF program ...............................................23
Table 3.1: The evaluation checklist of SCF program in SC Bank ............................33
Table 3.2: Minimum sample size based on nature of qualitative study ....................35
Table 4.1: Standard Chartered Strategic Priority ......................................................37
Table 4.1: Trade Finance products – Import and Export Services ...........................39
Table 4.2: Summary Description of the sample ........................................................47
Table 4.3: Evaluation of operational model of SCF program in SC Bank ...............48
Table 4.4: Evaluation of products and services of SCF program in SC Bank ..........50
Table 4.5: Evaluation of sales channels of SCF program in SC Bank .....................53
Table 4.6: Evaluation of human resources of SCF program in SC Bank .................55
Table 4.7: Evaluation of credit risk management of SCF program in SC Bank .......55
Table 4.8: Evaluation of credit risk management of SCF program in SC Bank .......59

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LIST OF CHARTS AND FIGURES
Figure 2.1: Supply chain flows ...................................................................................6
Figure 2.2: The simplification of SCF framework ......................................................9
Figure 2.2: SCF Lending Framework .......................................................................11
Figure 2.3: The complete SCF portfolios..................................................................12
Figure 2.4: Distribution of SCF Instruments ............................................................13
Figure 2.5: Reverse Factoring work flow .................................................................14
Figure 2.6: Dynamic Discounting Process Flow ......................................................16
Figure 2.7: Receivable Purchase Process ..................................................................17
Figure 2.7: Invoice Discounting ................................................................................18
Figure 2.8: Trigger points for the provision of financial supply chain services .......19
Figure 2.10: Competency framework of a successful SCF program ........................23
Figure 2.11: The ecosystem of supply chain finance ................................................26

Figure 3.1: The research onion model .....................................................................27
Figure 4.2: SC Bank Supply Chain Finance Model ..................................................45
Figure 4.3: Network Driver – Ecosystem ...............................................................46
Figure 4.3: SC Bank Products and Services .............................................................51
Figure 4.4: Performance highlights of Business Segment Corporate & Institutional
Banking .....................................................................................................................52
Figure 4.5: Volume New-to-bank client on Commercial Banking Segment ............54
Figure 4.6: Supplier finance solutions benefits over traditional bilateral funding in
multiple ways ............................................................................................................56
Figure 4.7: Supplier finances process in SC Bank ....................................................57
Figure 4.8: Risk Management Approach ..................................................................59

vii


CHAPTER 1: INTRODUCTION
The first chapter explores current development of Supply Chain Finance (SCF). The
importance of SCF is briefly presented in this chapter. The researcher also provides
rationales of choosing the studied topic. Research objectives and research questions
are proposed. This chapter highlights the scope of work and what the contribution
of the thesis.

1.1. Rationale of the study
The role of supply chain management has been increasing over the time given to the
fact that the competition in business world becomes more intense. To compete well
in the market, the organizations must pay attention to their supply chain (SC) and to
identify the way of effectively and efficiently managing their SC (Marak and Pillai,
2018). Regarding to the importance of SC and supply chain management (SCM),
there are tremendous efforts from previous researchers to reveal how to improve
physical and information flows between the focal companies and their suppliers and

customers but there are less number of empirical evidences to be developed to
address financial aspects of SC and SCM (Bailey and Francis, 2008; Lamoureux
and Evans, 2011; Caniato et al., 2016).
Recently, supply chain finance (SCF) is more and more critical products and
services to the organizations, especially after the global financial crisis which was
happened in late of 2008 (Marak and Pillai, 2018). Global financial crisis raised the
concerns to the banks and the investors regarding to high default rate from their
loans. In this context, SCF market has been changing in the way of trade credit
extension but it leads to unexpected result as weak suppliers are subjected to higher
payment period or get delaying in their repayment (Fabbri and Klapper, 2016). The
behavior of weak suppliers result to the higher risk in SCF process (Raddatz, 2010;
Boissay and Gropp, 2007). Therefore, the need of revising current SCF
management model and identify the ways to improve SCF process are urgent need.

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During the time, there are literatures which are developed about SCF (Stemmler and
Seuring, 2003; Hofmann, 2005; Gomm, 2010). Some empirical evidences are
provide in the way of defining SCF, determining of the benefits from participating
SCF programs, and proposing SCF‟s initiatives (Gelsomino et al., 2016; Xu et al.,
2018). However, previous researchers are less touching to the outcome of SCF as
well as determining key successful factors to SCF programs.
For chief executive officers focusing on profitable growth, working capital control
has become a key metric. Working capital represents the amount of day-by-day
operating liquidity available to a business. Supply chain finance can be defined
(EBA, 2013) as the use of financial instruments, practices and technologies for
optimizing the management of the working capital and liquidity tied up in supply
chain processes for collaborating business partners. The development of advanced
technologies to track and control events in the physical supply chain creates

opportunities to automate the initiation of SCF interventions.
Supply Chain Finance aims to improve the financial efficiency of the supply chain
and substantially reduce the working capital of both buyers and suppliers. It allows
buyers to extend payment terms while providing suppliers access to better financing
rates. It creates a true win – win for the parties involved as one of the most
attractive tools for companies to diversify funding sources, enrich and solidify the
relationships with their trade partners.There are benefits of having a banking partner
with local and global knowledge of cash and trade. It is also important to retain an
advisor that can ensure compliance and regulatory adherence as well as the
operational infrastructure and product capability that is going to have financial
impact (Deutsche Bank 2016)
As one of biggest providers of trade product with its global strategy, Standard
Charter Bank (SC Bank) is offering comprehensive suite of SCF solution. SCF at
Standard Chartered Bank is a partnership with selected corporate clients to provide
working capital support for their chosen suppliers and buyers. The strength of the
client‟s supply chain linkage (i.e. the commercial arrangements and relationships
between buyer and seller) is given due consideration in evaluating credit quality of
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suppliers/buyers. This is very different from the traditional practice of standalone
risk evaluation which was focused only on suppliers/buyers financial strength and
historic financial performance.( Standard Chartered Bank, 2016)
1.2. Research objectives and research questions
Given to the problem statement above, the thesis‟s research objectives are:
-

To define a framework and a checklist in which key successful factors to
SCF programs to be developed and measured

-

To determine the desirable outcome of SCF programs

-

To examine how key successful factors to be maintained in the case study of
Standard Chartered Bank

Then, the thesis addresses the following research questions:
-

What are key successful factors to SCF program?

-

What are the desirable outcomes of SCF programs?

-

How key successful factors to SCF program to be maintained in Standard
Chartered Bank?

-

What are the recommendations to the financial managers in Standard
Chartered Bank to effectively maintain SCF program?

1.3. Scope of the study
The scope of the thesis is chosen as below:

-

Content of the study: Supply chain finance programs in global commercial
banking industry.

-

Location of the thesis: Standard Chartered Bank at Group level

-

Time of the thesis: February 2018 onwards.

1.4. Significance of the study
The thesis explores key successful factors to SCF programs and examine how these
factors to be maintained in Standard Chartered Bank. The top management team
and financial managers in commercial banks will understand the key concept of
SCF and what the key successful factors. Other researchers gain benefit from
reading the thesis since they can utilize the results extracted from this thesis as
reference in their own studies.
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1.5. Structure of the study
The thesis is developed with five chapters.
Chapter I Introduction
The first chapter explores current development of SCF. The importance of SCF is
briefly presented in this chapter. The researcher also provides rationales of choosing
the studied topic. Research objectives and research questions are proposed. This
chapter highlights the scope of work and what the contribution of the thesis.

Chapter II Literature Review
The second chapter mentions the concept of supply chain and supply chain
management before going further to the definitions of SCF. Then, framework of
SCF is discussed along with its key components, including the actors, the levers,
and the objects. The researcher provides the understandings about what the key
successful factors of SCF in this chapter.
Chapter III Research Methodology
The third chapter proposes research methodology to be used to fulfill research
objectives and to answer research questions effectively. The data collection method
and process are also proposed in this chapter. The method of data analysis and the
sample size for data collection process are mentioned accordingly.
Chapter IV Analysis and Results
The fourth chapter aims to extract the findings from the data collection. It covers the
discussion of the case study of Standard Chartered Bank and how key successful
factors to SCF programs to be maintained in the commercial bank. This chapter
covers obstacles in the bank‟s managers regarding to the implementation and
operation of SCF programs.
Chapter V Conclusion and Recommendation
The last chapter summarizes key findings from previous chapters. It is also designed
to provide the recommendations to the banks‟ managers to manage their SCF
process and to develop the SCF programs effectively by offering the most suitable
products to bring benefits for their customers and to be able to position their
reputation on the competitive financial market.
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CHAPTER 2 LITERATURE REVIEW
The second chapter mentions the concept of supply chain and supply chain
management before going further to the definitions of SCF. Then, framework of
SCF is discussed along with its key components, including the actors, the levers,

and the objects. The researcher provides the understandings about what the key
successful factors of SCF in this chapter.
2.1. Supply chain management and financial aspects
2.1.1. Supply chain management
To explore the concept of supply chain management (SCM), it is necessary to
collect the understandings about supply chain (SC). According to Christopher
(1998), SC is defined as a network which is developed by the organization in
order to manage both upstream and downstream activities. In the manufacturing
industry, SC term refers to the process of transferring raw materials from the
suppliers to the manufacturers and the process of delivering final products from the
manufacturers to the distributors or the customers (Beamon, 1998). SC is also
perceived as the connection which is established by the organization to connect
every part of its businesses and to deliver the products and services to the customers
(Bridgefield Group, 2015). Moreover, SC includes the information inflow between
the business of the organization and between the organization and its customers
(Assey, 2012; Little, 2015). In this context, SC creates a bridge between the
suppliers, the manufacturers, the distributors, and the customer together (Chow and
Heaver, 1999). Moreover, SC includes financial flows and it is one of the most
important elements to ensure proper functions of operational activities (Ayers,
2001).

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Figure 2.1: Supply chain flows
Source: Hofmann&Belin, 2011
In order to manage SC, the organization defines and implements a management
framework and names it as SCM to ensure that all activities in this framework run
smoothly and effectively (Langley et al., 2001). The objective of establishing SCM is
not limited to the management of the activities but also expanding to the identification

of alternative options which help to optimize the business flow (Ganeshan and
Harrison, 1995). SCM is positioned in the highest hierarchy of Fith Party Logistic
Model (5PL) and it is developed from self-sufficient logistics function (1PL) to
capacity provider (2PL) to outsourced logistics service (3PL) to integrated logistics
service (4PL) to SCM (5PL), according to Ogorelc (2007). In nowadays business,
SCM has vital role because of the organization needs to reduce the error happed in its
business process to compete with other competitors (Cohen and Russel, 2004).
In this thesis, the concept of SCM is taken from Mentzer et al. (2001) and it is
defined as the combination of the organization‟s stakeholders, the cooperation and
the collaboration between them in order to optimize the flows of goods,
information, and financial resources entirely. In addition, the thesis focuses on
supply chain finance (SCF) topic because of financial performance becomes critical
concern SCM managers (Pfohl and Gomm, 2009).
2.1.2. Financial impacts
SCM impacts significantly on the financial performance of the organization (Ellram
and Liu, 2002). Such impact of SCM is affirmed since the organizations today are

6


growing their businesses with more business integration, global business context,
and the establishment of additional functions and the organizations need to manage
its SC effectively to reduce operating cost and cycling time and effective financial
resource usages (Hofmann, 2005). According to Sweeney (2004), financial aspect
of SCM reflects how the funds flow to be managed across entire SC system and
between the suppliers, the distributors, and the customers. The financial flow along
the chain directly impacts on working capital management and business
performance. Moreover, financial and economic downturn which were happened in
the last decade enforce the organizations to conduct cost cutting and to urgently
identify the new opportunities to reach their business goals, leading to the

development of and the interests towards SCF (Kleemann, 2018).
2.2. Supply chain finance
2.2.1. Definition of supply chain finance
There is no universal concept of SCF, showing through the fact there are more than
30 different definitions for this term (de Boer, 2017). The main reason of so many
concepts of SCF refers to broad field of solutions and techniques used in SCF and
the number of studies about SCF is still limited (Kleemann, 2018). In this section,
the researcher would like to identify and to capture some comprehensive definitions
of SCF.
Hofmann (2005) defines SCF as the collaboration of two or more organizations in
which they together create value in SC by managing financial resources through
different financial means. Pfohl and Gomm (2009) view SCF as the actions to
optimize financial resources used in SC processes and to increase the value for all
parties involved into these processes. PricewaterhouseCoopers (2009) defines SCF
as a balanced approach which is developed to reduce the risks happened in SC and
to improve the business relationships among parties and this approach utilizes
intermediary tools to enhance working capital in the transaction between the buyers
and the sellers. Seifert and Seifert (2009) consider SCF as innovative financial tools
to reduce working capital. Hofmann and Belin (2011) study about SCF term is
translated to the optimization of working capital in SC. Camerinelli (2011) define
7


SCF as financial products and services which are developed by financial institutions
in order to facilitate both physical and information flows of SC. Wuttke et al. (2014)
refer SCF to cash flow optimizing actions which are undertaken for upstream
activities in SC. Euro Banking Association (2014) provides a comprehensive
definition for SCF as the utilization of financial instruments, financial practices, and
financial technologies to optimize working capital for the parties involved into an
SC. On the other hand, SCF involves all financial activities and elements in an

entire SC (Euro Banking Association, 2014).
Table 2.1: Summary of SCF definitions

Source: Martin Jemdahl, 2015
In summary, the concept of SCF is depended on the level of interpretation in which
a broad interpretation of SCF is associated with financial management of SC
(Hofmann, 2005; Pfohl and Gomm, 2009; Gomm, 2010), a mid-level interpretation
views SCF as financial instruments such as working capital financing, trade
financing, supplier financing, and fixed asset financing (Aberdeen Group, 2006;
Atkinson, 2008; Camerinelli, 2011), and finally a narrow interpretation addresses

8


buyer-centric supplier payables financing solution (Demica, 2009; Morna, 2010;
Jacquot, 2011).
2.2.2. Framework of supply chain finance
In the thesis, framework of SCF is taken from the study of Kleemann (2018) in
which there are three entities, namely the actors, the levers, and the objects. This
framework is depicted as in the figure below:
The actors
Primary members
Supportive members

The Levers

The Objects

Duration
Volume

Capital cost rate

Assets
Operating working
capital

Figure 2.2: The simplification of SCF framework
Source: Kleemann (2018)
2.2.2.1. Actors
SCF framework involves the actors which are characterized by primary members
and supportive members (Kleemann, 2018). Two levels of members in the actors
are developed upon on supply chain network structure provided by de Boer (2015).
In more detail, SC network today is developed sophistically in which it is not
limited to the relationship between the organization with single supplier and
customer but expansion of different tier of suppliers and customers. According to de
Boer (2015), a focal organization cooperates with main suppliers and they are socalled as Tier 1 suppliers and each Tier 1 supplier has its suppliers or Tier 2
suppliers and so on. Regarding to customer side, this framework is the same with
the participation of Tier 1 customers and Tier 2 customers and so on. In SCF
framework of Kleemann (2018), focal company is determined as primary member

9


and all its Tier 1 suppliers and Tier 1 customers and supportive member is
considered as all Tier 2 suppliers and Tier 2 customers.
2.2.2.2. Objects
SCF framework of Kleemann (2018) involves the objects with two primary
financial instruments, including the asset and the operating working capital.
According to Pfohl and Gomm (2009), SCF is financial solution which is delivered
by financial institutions to finance fixed assets and working capital. It is perceived

that working capital is the value of current assets or how it is used to finance for
long-term sources (Wieczorek-Kosmala et al., 2016). A simple formula of working
capital is derived from the net off between current assets and current liabilities of
the organization. According to Kleemann (2018), the importance object in SCF
framework is to manage the cash conversation cycle (CCC) which measures how
fast the financial returns to the organization‟s account balance.
In fact, CCC is associated tightly with working capital management in the
organization and it reflects the gap in time between the collection of sales and the
expenditures of goods (Padachi, 2006). A generic formula of CCC is the sum
between days of sales pending and days of sales in inventory after deduced days of
payables pending. As result, CCC is either positive or negative value. Positive CCC
indicates that number of days for paying the financial obligations is lower than the
number of days for receiving payment from the customers and negative CCC
captures a contrast situation (Hitchinson et al., 2007). In order to keep negative
CCC, the organization should identify the ways of reducing time in inventory,
collecting account receivables as early as possible, and negotiating to the borrowers
in term of payment terms (Bodie and Merton, 2000).
2.2.2.3. Levers
SCF framework mentions the levers which imply duration, volume, and capital cost
rate. According to Pfohl and Gomm (2009), the multiplication of these implications
results capital cost. The explanation of capital cost, therefore, is reflected through
each indicator. Duration is defined as the required time that needs to be financed,

10


the volume refers to the value of invoices, and capital cost rate is interest rate for the
financial amount used by the organization (Kleemann, 2018).
2.2.3. Types of supply chain finance
There are various events or triggers that can release cash and reduce the cost of

financing in the supply chain (Global Business Intelligence, 2012). These events
or triggers are typically pre-shipment finance, shipment or in transit finance and
post- shipment finance which are visualize on below Table

Figure 2.2: SCF Lending Framework
Source: Global Business Intelligent, 2012
Pre-shipment finance is made available to a supplier based on a purchase order
received from a buyer and targets the early stages of the supply chain before the
invoice is provided to the buyer (Global Business Intelligence, 2012). In another
words, supplier needs a working capital finance for purchasing raw material and
funding operating expenses for manufacturing and labor. Pre-shipment finance
requires the bank to understand their customer‟ supply chains and buyer-supplier
relationship in depth (Global Business Intelligence, 2012). In practice, preshipment insurance is required to cover the risk of bankruptcy.
In-transit Finance/Inventory Finance: It may be supplier or buyer who owns
inventory needs to get financing while it is in transit. Such product as vendormanaged inventory financing is an example of shipment or in-transit financing.

11


Post-shipment finance is provided to a seller using the receivables as collateral.
The seller provides shipping documents as evidence of a receivable while the
bank may also require to a bill drawn on the buyer for the goods exported. Most
banks only offer once the invoice is approved by the buyer. The window for
financing is only 30 to 60 days of a 130 to 150 days of transaction (GXS, 2009).
This product latter is more often known as payables finance, reverse factoring,
confirming, and approved payables finance.
While the market for SCF is still evolving and the definition for SCF structures
and components are not well established, the categories of SCF and trade finance
set out in below table are generally well accepted.

Figure 2.3: The complete SCF portfolios
Source: EBA, 2014
In The EBA research it also mentioned how popular the products under SCF on the
market. Following, the details of the most popular methods to be discussed.

12


Figure 2.4: Distribution of SCF Instruments
Source: Europe Banking Association, 2014
2.2.3.1 Accounts Payable Centric (Buyer centric/led)
It is called Approved Payable Finance or Reserves Factoring; Supplier Finance;
Confirming or simply Supply Chain Finance and based on the discounted payment
of accounts payable in favour of suppliers by accessing a bank‟s or a buyer‟s own
liquidity. Another related instrument is Dynamic Discounting, through which a
buyer itself provides variable discounts for early payment of supplier invoices
This type of SCF is provided by large buyers to their smaller suppliers. A
financial institution is used to leverage the buyer‟s credit rating to enable early
payment to the suppliers. This type of SCF stabilises the entire supply chain by
providing continuous flow of goods from the supplier to the customer.
Reverse Factoring (Approved Payables Finance)
ING Group (2008) believes that reverse factoring holds the most significant
advantages of all the different types of financing tools. During reverse factoring
buyers provide financial and information reconciliation to key suppliers based on
approved invoices, hence buyer-led financing. A central technology platform is
integrated into the buyer, seller and financial institution to facilitate invoice and
credit note reconciliation, invoice trading and settlement between the parties.
Reverse factoring is a solution that aims to reduce the risk of disruption in the
collaboration of information flows, physical flow of products, and financial flow
(Popa, 2013). Reverse factoring is based on factoring where suppliers sell

13


their receivables to factors for immediate cash. The difference between traditional
borrowing and factoring is that receivables are rather sold than pledged that results in
no liabilities that are credited on the suppliers‟ balance sheet. Suppliers would typically
sell receivables from more than one buyer, thus before factors enter an agreement
they have to evaluate buyer portfolios (Seifert et al., 2011).
Reverse factoring has three distinct characteristics from factoring. First, factors
do not have to evaluate heterogeneous buyer portfolios, since it is buyer-led, and
can charge lower fees. Second, since buyers are usually investment grade
companies, factors carry lower risk and can charge lower interest rates. Third, as
buyers participate in reverse factoring, factors obtain better information and can
release funds earlier (Seifert et al., 2011).
Figure 6 shows how the process of reverse factoring works. During reverse
factoring the buyer issues a purchase order to the supplier and the bank and
the supplier delivers the goods and presents the documents. The bank checks
documents and notifies the buyer whether all is in order to proceed. The buyer
accepts and the bank advises acceptance. The supplier requests to be paid early by
the bank, while the buyer pays the bank back on the original due date.

Figure 2.5: Reverse Factoring work flow
Source: Citibank, 2013.

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Dynamic Discounting
Dynamic discounting (DD) offers suppliers the early receipt of accounts payable
due from the buyer in return for a variable discount. Typically, the funds are

provided by the Buyer from its own liquid resource.
This refers to a discount policy which is often applied in SCF practices and it is
developed upon on well-integrated system between the buyers and the sellers and its
objective is to bring a dynamic settlement of invoices (Polak, 2012). The root of
development of DD is to reduce the uncertainties related to working capital
demands and it allows the suppliers to manage their cash flow effectively (Polak et
al., 2012; Nienhuis et al., 2013).
DD process is also different to base case process. According to Gelsomino (2016), a
base case model illustrates the relationship between the buyers and the sellers
through three phases. The first phase is to upload the invoice and it is exchanged
between the buyers and the sellers through Electronic Data Interchange (EDI)
system. After electronic invoice is uploaded and sent successfully to the buyers, the
second step is carried out in which the buyers process necessary approval for
payment. The third phase refers to invoice archiving whether both the buyers and
the sellers need to store the invoice after the transaction is finished. Compared to the
base case, DD process has some differences. With the application of technologies,
the sellers and the buyers can exchange Early Payment Proposal (EPP) and EPP
consists of two important information, including the time of early payment will be
made and the proposal of discounted value (Gelsomino, 2016).

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Figure 2.6: Dynamic Discounting Process Flow
Source: EBA, 2014
Even though DD is not a distinct SCF instrument offered by banks, the existence of
the technique is of interest to them. For example, a bank might integrate into its
cash management capabilities of DD and related liquidity. Besides, the buyer may
require funding at some stage and deploy its own liquidity at another (EBA, 2014)
2.2.3.2 Accounts Receivable (Suppler centric/led)

It is called such as Receivable Finance; Receivable Purchase and Invoice
Discounting and Factoring. Receivable Finance allows suppliers to raise finance on
the basis of their receivables related to one or many buyers and thereby receive
early payment, usually at a discount to the face value although various pricing
structure
Factoring
Factoring was popular financial instrument in SCF before RF takes its place
(Kleemann, 2018). It is defined as a type of receivables purchase whether the
suppliers of focal companies to sell their discounted receivables to financial
providers (EBA, 2014).

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