Can regulation of supply chain finance be a force for good?

The supply chain finance industry has been tainted by some high-profile scandals in recent years, which have prompted significant debate on regulation and transparency. While no one can argue against transparency, the issue of regulation is not as clear cut as one might imagine. 

Supply chain finance is a valuable way for businesses involved in trade and trade finance to optimise cash flow in a period of ongoing uncertainty and regulation could potentially pose challenges, such as increased documentation burdens on lenders and businesses alike. However, regulation could also serve as a force for good, levelling the playing field in the sector. With the industry still facing increased scrutiny, the truly important task for lenders will be in understanding how to mitigate the challenges that come with regulation, and the role which technology can play to ease the burden.  

Increasing the burdens  

Those who argue that regulation will be detrimental to the industry often cite the additional bureaucracy and pressures it will bring. Lenders that remain paper-based could see time-consuming manual processes increase. Regulation is not simply a box-ticking exercise, but an ongoing process of certification and accreditation that could significantly hinder these lenders. 

The knock-on effects for the industry could be significant, potentially resulting in corporates and banks shying away from utilising supply chain finance, which could have a negative impact upon the corporate suppliers, predominately SMEs. SMEs are central to the economy making up 99.9% of the UK’s private sector businesses and providing 52% of turnover.1 The increased burdens that regulation may bring could see these all-important smaller companies not being offered supply chain finance by their corporate buyers, creating a lose-lose outcome. Banks would be concerned about additional costs in a business model that generally has thin margins. Many fear that increased regulations would cause more harm than good.   

Regulation as a force for good 

However, those on the other side of the debate highlight the level playing field that regulations could provide. Recent scandals in the industry have led to further scrutiny of supply chain finance and have raised questions about controls placed on the industry. In general, regulations exist simply to try to ensure the right thing is being done and that bad actors are prevented. A survey by PwC found that respondents had lost a total of US$42bn over two years of fraudulent activity including through supply chain finance.2 The introduction of regulation could help to mitigate risks and reduce losses.  

In addition, large banks have traditionally been the main lenders in trade finance, including supply chain finance, accounting for more than 80% of the flows.3 These banks which are so prevalent in the industry already face regulation. Therefore, the introduction of regulation in the supply chain finance industry would simply ensure all lenders are following the same rules.  

Regulation also has the potential to ensure that the supply chain finance industry is protected by increasing confidence in the security of its service.  Recent reports have suggested that two-thirds of SMEs are struggling to access overdrafts from their banks and one third finding it challenging to secure mortgages or financial leases.4 In light of this, supply chain finance will be more important than ever for SMEs. Regulations can help to sustain trust in supply chain finance, ensuring that suppliers to large corporates continue to benefit from its essential cash flow support.  

The role of technology in regulations 

Technology has the potential to negate the burdens that could arise and ensure that regulation is not feared by anyone involved in supply chain finance. Regulation does have the potential to create heavier processes such as the onboarding of new clients as a result of additional administrative procedures which leads to increased costs. However, technology can help ease these burdens and minimise time-consuming tasks, such as manual document verification. As a further example, technology can also automatically analyse data to determine the financial standing of participants in the transaction. This can provide certainty as to the quality and propriety of the businesses in question.  

Further to this, technology that adapts and reacts to different scenarios can help organisations to navigate the complexities of regulation. As well as direct regulation, companies face the difficulties posed by indirect regulation. A solution to this can be utilising a standardised system. If a company uses in-house technology, then the burden of keeping up with regulation falls solely on that business. Standardised systems, such as HPD Lendscape’s Supply Chain Finance platform, provide further security as large numbers of other organisations are also using the same technology – updated regularly and supported effectively to be fit for purpose.  

Ultimately, regulations can be regarded as a force for good. First and foremost, they exist to ensure that the right thing is being done while providing a level playing field across a sector that has faced significant challenges in recent years. Utilising a standardised system, which similarly regulated entities are using too, will ease the obligations regulations bring. The industry’s focus should not be, therefore, on debating if regulations are a force for good but on how we can look to mitigate the potential challenges they may pose.

Article written by:

Kevin Day
CEO, HPD Lendscape