Supply Chain Finance at crossroads 

Luca Mattia Gelsomino

date: January 31, 2024

The biggest and most active sector of our economy, the one of acronym and catchwords generation, has recently produced its latest effort: ‘never-normal’, the idea that after ‘new-normal’ and ‘next-normal’, we should stop thinking in terms of ‘normal’, but rather in terms of a continuous reshaping of the landscape in which we operate.

Catchy neologisms apart, there is an underlying truth about our current times feeling substantially different than 2019. One of the main differences is the role that supply chains play in society and their implications in the political discourse. This is exemplified in three pieces of news that have come up in late 2023 / early 2024 and are in our view especially relevant from a Supply Chain Finance perspective.

The Biden Administration and Supply Chain Resilience: The Biden administration has implemented various actions to strengthen America’s supply chains. This includes using the Defense Production Act for domestic production of essential medicines, establishing new cross-government partnerships for supply chain data-sharing, and creating a Supply Chain Resilience Center. Additional actions include substantial investments in critical supply chains, such as $275 million in grants for clean energy supply chains, and planning for long-term industrial resilience. This multi-faceted approach aims to ensure supply chain security and resilience against emerging threats​​​​.

Germany’s Struggle with the Energy Transition: The German government faced significant challenges with its energy transition and budget management following a constitutional court ruling. The court’s decision created a €60 billion shortfall in the government’s finances by ruling against the transfer of unused pandemic emergency funds to the Climate and Transformation Fund (KTF). This ruling had a profound impact on the government’s plans for green initiatives and industry support, including energy efficiency and renewable energy projects. Despite these challenges, Chancellor Olaf Scholz affirmed the government’s commitment in pursuing its green transition plans, emphasizing the importance of modernizing Germany and maintaining its competitive edge in a climate-neutral world. The government also had to navigate fiscal constraints while managing its 2024 budget and financial plans through 2027, in the wake of increased government spending due to COVID-19 and the Ukraine war. This situation required difficult decisions to plug funding gaps, particularly for energy and climate programs​​​​.

Bitcoin and the SEC: In a significant move, the U.S. Securities and Exchange Commission (SEC) approved the listing and trading of several spot Bitcoin Exchange-Traded Products (ETPs). This decision marked a change in the SEC’s stance, following a court ruling which found that the SEC had not adequately explained its reasoning in a previous disapproval of Grayscale’s proposed ETP. The approved Bitcoin ETPs will provide investors with exposure to Bitcoin without the need to directly hold the cryptocurrency, a development that could draw significant investment into the sector. Companies like BlackRock, Ark Investments/21Shares, Fidelity, Invesco, and VanEck are among those whose applications were approved. The SEC, however, made it clear that this approval does not signify an endorsement of Bitcoin or its value. The decision is expected to have a substantial impact on the cryptocurrency market and investor accessibility to Bitcoin​​​​​​.

Those pieces are not directly connected. However, all three, in their way, speak volumes about the relevance of Supply Chain Finance. Not in terms of approved payable financing, but in terms of integrating the physical and financial supply chains.

The central role of supply chains in the modern geopolitical discourse, the deep implications on the socio-economical structure of Western Europe of the inevitable energy transition and the institutionalisation of cryptocurrencies all indicate a world in which events, actions and activities that happen within the physical supply chain are increasingly interconnected with their financial counterpart, acting as financing triggers and enablers. The relevance of supply chain resilience has transformed the topic from a backroom, obscure logistics concept to a corner stone of business (and financing). The energy transition calls for effective financing across global supply chains, identifying and targeting emissions from the point of extraction of raw materials down to product disposal. All of this requires an unprecedented level of supply chain transparency and visibility, which is enabled by technological approaches (such as tokenization) allowing for seamless connections of the physical and financial flows across supply chains.

We are not there yet, but we are definitively getting closer. To fully get there, we need to solve a challenge that has persisted in Supply Chain Finance for as long as we can remember. It’s the tension between its narrow definition, which typically focuses on approved payable financing and little else, and its broader interpretation, the bridging of the physical and financial supply chains. While this tension may have once been merely a matter of semantics (and, to be honest, always quite skewed towards the first interpretation), today it holds greater relevance than ever before. The view sketched above cannot be fully realised without all stakeholders (especially corporates and providers) joining a truly “purpose-driven SCF” that goes far beyond approved payable financing, payment term extensions, working capital, single buyer-supplier relationships and into financing with a conscious intention across the entire global supply chain networks.

To embark on this transformative journey and fully harness the potential of SCF, it is essential to adopt what we might call the “Low Church of SCF”. The Low Church denotes a lack of emphasis on rituals, formalities, and tradition and instead a focus on liberalization and cooperation. In SCF terms, the Low Church is about bridging the physical and financial supply chains, rather than focusing on the rules, formalities and institutions connected with approved payable financing or similar technical forms.

The Low Church is about downplaying what is or is not SCF in favour of enhanced cooperation. This has never been needed as much as today. In the ‘never normal’, SCF finds itself at crossroads. We can either adhere to the conventional practices of financing approved payables with occasional forays into dynamic discounting or take a bold step forward towards a future where SCF truly serves the needs of society. This is purpose-driven SCF, playing a key role in growth, resilience, and sustainability.

Do you also want to be part of the purpose-drive SCF discussion? Then we invite you to join our events for 2024, starting from Munich on March 5, and keep up via our LinkedIn page or newsletter.

Luca Mattia Gelsomino

Assistant Professor at University of Groningen.

Luca Gelsomino is an Assistant Professor at the University of Groningen and the Academic Director of the SCF Community. In this role, he oversees the Community’s research projects, international network and publication strategy. His teaching interests include supply chain management, financial analysis and Supply Chain Finance. He holds a Ph.D. with merit from the School of Management of Politecnico di Milano (Italy), on the topic of measuring the financial performance of supply chains. While working for the School of Management, he directed the School’s permanent research program on Supply Chain Finance. His research focuses on the relationship between physical and financial supply chains.