How is risk management gaining momentum in Supply Chain Finance (SCF)?

The Supply chain industry has become increasingly complex with the ongoing wave of globalization. In fact, 85% of global supply chains faced at least one disruption in the past 12 months. This complexity was particularly evident during the COVID-19 pandemic, which has led to various disruptions, including insufficient finance, credit risk, operational inefficiencies, and legal risks. Similar challenges confront supply chain finance (SCF), extending to coordination issues among buyers, suppliers, and financial institutions alongside outdated technology.

Despite these obstacles, SCF is experiencing a resurgence, with global volumes expected to rise in 2024. This expansion is driven by the increasing importance of risk management and mitigation strategies pursued by companies of all sizes, striving for their domestic and global presence.

Fintech takes the spotlight

Businesses increasingly recognize the importance of fintech assistance in addressing the mentioned risks. In recent years, there's been a growing interest in exploring how fintech intersects with operations and supply chain management. With the global fintech market set to hit $312.92 billion in 2024 and India leading with a market size of $111.14 billion, it's evident that it aims to have a significant role in SCF as well. This growth involves introducing innovative financial products and services, leveraging big data, and creating new business models to enhance operational performance and mitigate financial risks.

However, this prompts businesses to consider some key questions: Is the traditional approach to credit risk assessment adequate for today's needs? Can technological integration entirely resolve the challenges in the SCF industry? What solutions do fintechs provide in SCF risk management?

Seeking answers

Traditionally, B2B credit risk assessment relied on historical financial data, credit scores, and manual processes, leading to verification delays and fraud risks. Fintech is a crucial bridge connecting businesses and suppliers, empowering buyers to extend payment terms for optimized payables while offering sellers faster payments. This dynamic enhances cash flow and minimizes payment variability.

Furthermore, fintech is vital in utilizing technology for supplier onboarding and legal documentation, especially for reaching untapped suppliers in emerging markets. When it comes to technological advancements, Artificial Intelligence (AI) is gaining significant traction, and for good reason. It's having a profound impact, particularly in B2B risk assessment and monitoring. AI can process huge amounts of data and uncover hidden patterns, particularly excelling at detecting anomalies in documents and transactions, thereby mitigating compliance risks.

Ongoing AI management offers precise insights, enabling users to accurately monitor their entire supply chain. It provides end-to-end visibility from procurement to logistics, alerting managers to potential issues before disruptions occur. As supply chains evolve, AI-driven risk assessment is crucial for building resilience and maintaining efficient operations. However, the success of AI depends on businesses being ready to embrace it. Leveraging automated processes, API-enabled authentication, integration with buyer ERP systems, and early warning systems can streamline operations and manage risks effectively.

Is technological integration enough?

While technology has made significant strides in SCF risk management, it alone is not sufficient. To create value in their supply chain while mitigating risks, companies need a coordinated effort among supply chain and procurement staff as well as legal, compliance, and finance teams. Traditionally, companies depended on a limited number of local partners, including upstream suppliers, logistics providers, and financiers. Now, by leveraging fintech tools such as automation, IoT sensors, and blockchain technology, organizations are vastly improving information sharing, communication, coordination, and collaboration with remote and potential partners, thereby strengthening their resilience.

With this collaboration, fintech has significantly improved SCF resilience and sustainability. Additionally, diverse fintech approaches enable businesses to tackle complex challenges like information search, supply chain management, financial assistance, and fluctuating client demands, which previously created uncertainty throughout the supply chain.

As businesses increasingly seek financial solutions to strengthen their supply chains, the SCF industry is set to surge, emphasizing the need for effective risk management strategies. This underscores the need for digital tools to aid business growth, with fintechs playing a crucial role in providing resources to help firms navigate recent supply chain disruptions. Ultimately, successful risk management will require a multifaceted approach to address emerging challenges and ensure the resilience and sustainability of supply chains in our ever-changing global landscape.

By Arun Poojari, Co-founder and CEO of SCF platform Cashinvoice