To glimpse the future of supply chain finance, go to China

The concept of agility in technology is making its way into supply chain finance in China. As the collaboration between e-commerce platforms and banks starts to take off, it could herald the future of supply chain finance that should be a boon to small and medium-sized enterprises (SMEs) across the globe.

Like most SMEs, small and mid-sized Chinese firms face challenges to churn their operating cash flow. Often, they run short. Banks are not necessarily able to support them on a standalone basis. This problem gave birth to supply chain finance, which has become one of the stable sources of revenues for transaction banks.

The next iteration of supply chain finance is now taking shape in China. The lightning speed with which e-commerce is growing in China coupled with a robust payment system are making it possible to collaborate with banks.

But e-commerce is still largely based on consumers rather than B2B, an area that holds considerable promise. It is one of the motivations behind Alibaba’s approach to China Merchants Bank (CMB) to collaborate on how to encourage big business into their platform. This makes sense as thousands of suppliers now are using Alibaba.

Following a series of brainstorming, CMB, one of the largest privately owned banks in China, agreed to provide a mechanism to address the needs of large buyers. China Merchants Bank introduced into the structure its B2B bills pool (B2B票据池) service.

In the past, e-commerce B2B platforms allowed only cash payments between the two parties via Alipay, which is not a common payment practice used by most large buyers. The B2B bills pool makes it possible for non-cash payment to SMEs. For both CMB and Alibaba, this was a breakthrough. Indeed, this is the first time Alibaba is involved in a supply chain finance solution working with a bank.

By uploading invoices onto Alibaba’s platform, SMEs that are also members of Alibaba are able to receive payments via CMB’s bank acceptance bills with corresponding amount of funds in a short period of time without pledging any assets. To activate this B2B bills pool service, Ailbaba’s members are only required to submit an application form together with additional documents required by CMB.

This innovation in supply chain finance is in line with the digitization trend in China and supported by the government. In particular, Circular No. 224 in September 2016 issued by the People’s Bank of China simplifies financial institutions’ review process of e-commerce enterprise applications of guarantee for commercial acceptance bills. The new regulation opens up possibilities for banks to introduce innovative service by working with Chinese e-commerce platforms.

Partnering with banks, e-commerce platforms are starting to play a role in offering working capital solutions to SMEs. Currently, e-commerce companies such as JD.com and Alibaba already set up their own supply chain financing platforms.

For banks, this is both an opportunity and a challenge. “Alibaba can make payment in two seconds, which is much quicker than us,” says an executive at a European bank. “We make payment in two days. We are not on the same level”.

Chinese B2B platforms also benefit from the supply chain solution as a result. According to the latest data from iResearch, the revenue of China’s B2B platforms for SMEs totaled 23.59 billion yuan (US$3.5 billion) in 2016, up 17.1% from 2015.

According to iResearch, China’s SME B2B e-commerce market is dominated by Alibaba. Together with other main players, Alibaba accounted for 70% of the market. In 2015, total transactions through China’s online B2B market totaled 12 trillion yuan and the market is anticipating a 20% annual growth rate in the coming years.

Joint stock commercial banks in China are moving much faster than the state-owned banks in innovation by actively working with fintech companies. “The fundamentals of those (joint stock commercial) banks are as good as state-owned banks in terms of infrastructure and employee structure,” shares Lei Tao, CEO of Beagledata, a Beijing-based fintech company, in an interview with The Asset. “And they are willing to innovate”.

Date

17 Feb 2017

Channel

Treasury

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