Viewpoint: Does the SCF Industry Need a Code of Conduct to Prevent ‘Extreme’ Programmes?

Michiel Steeman

date: April 7, 2020

Governments and regulators are calling for a reappraisal of some supplier finance programmes. We should respond positively, says Michiel Steeman.

Supply chain finance has faced renewed criticism in the media just a month into the year. The bad press is not new – we are familiar with similar accusations against multinationals taking their SCF programmes to extreme levels and insisting small suppliers take large discounts to receive payment on time.

Yet the latest spate of negative headlines gives us all an opportunity to consider what we should do to prevent further deterioration of our industry’s reputation and improve the behaviour of those corporates looking to implement SCF programmes.

This is particularly important as government scrutiny into SCF ramps up.

In this column, I want to speak, not only to the providers of SCF, but also to corporate treasurers who may be misunderstanding what I consider the real purpose of supplier finance.

The latest headlines revolve around the now widely-reported case that Australian mining company Rio Tinto and telecoms firm Telstra ditched their SCF programmes in late January after press articles said that a dynamic discounting programme was “forcing” small suppliers to accept discounts on invoices of up to 2 percent to receive payment in a timely way.

Though Rio Tinto responded saying its programme was voluntary and that smaller suppliers were able to be paid within 30 days, such was the degree of media and government pressure that both companies cancelled their SCF programmes in an attempt to salvage their reputations.

Since then Rio Tinto and Telstra have moved to 20-day payment terms for their smaller suppliers. Both decisions have been welcomed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell who advocates for the interests of small businesses – which is now conducting a supply chain finance review and recently published its position paper in early February. It includes draft recommendations about more enforceable payment terms legislation and calls for further consideration as to whether SCF should be considered a regulated financial product.

Where does this leave our industry? The stories of Rio Tinto and Telstra are not the first and won’t be the last examples of media criticism of SCF – the fallout from Carillion’s collapse in 2018 has far from been forgotten.

Yet, the two cases act again as a reminder for us all that SCF programmes should not be misused solely for the benefit of the buyer, where discount levels and payment terms are pushed to “extreme” levels.

These problems often boil down to the culture of the multinational as to whether they use the programmes ‘fairly’ or to generate maximum financial benefits to the buyer at the cost of the smaller suppliers.

I fear a trend that  too many treasury departments want to use reverse factoring or dynamic discounting as a way to make as much money as possible from their payables portfolio.

This may be due to high or unreasonable KPIs set by senior management, ensuring they become overly concerned about return on cash rather than how SCF can be used to support suppliers.

Treasurers should not look at SCF as an investment category for idle cash. Rather than pushing pricing to extreme levels to get the best return on cash, treasurers would be better advised to use spare cash to support the supply chain rather than make money from it.

We in the industry know that, when used correctly, SCF has a myriad of benefits to support businesses throughout the supply chain, providing much-needed certainty of payment and additional early liquidity if the suppliers need it.

Even ASBFEO Carnell has recognised SCF can be “a legitimate and effective tool that can be used to free up cash flow for small and family businesses.”

Yet, somewhere this message is being lost. Could part of the reason be that treasurers typically have limited or no interaction with suppliers themselves. Are they aware of the real impact of their decisions on small suppliers?

When SCF is abused, it is frequently the smallest companies that suffer the most, with SMEs grouped with larger firms and forced to accept business-crippling payment terms.

This does not seem fair. The company providing sandwiches for lunchtime meetings should not be put on the same 100-day payment terms imposed on larger suppliers of multi-million-dollar equipment, for example.

There needs to be a much more segmented approach to dealing with different types of suppliers, with small suppliers being paid as quickly as possible. The impact of the payment on the large buyer’s liquidity is minimal anyway – therefore it is a question of improving operational systems to ensure faster payments. Too often, small suppliers become the victim of general policies.

And for those of us providing these programmes – what can we as an industry do to bolster the image of SCF?

Perhaps it is time to be more selective in choosing who we work with. At what point do SCF providers say: “No I am not going to collaborate here. I am not going to work with you.”

We’d potentially save ourselves from future bad publicity by laying out our conditions early before setting up a new SCF programme. For example, stating what level of discounts or payment terms the provider is happy to work within and what it does not want to support.

If the payment culture of a large global company does not fit with the SCF provider’s policies – it may be wise to opt-out of the project entirely.

This is already starting to happen with Greensill Capital announcing this month it would stop providing SCF to large companies that do not offer fair payment terms.

The pressure on our industry is only likely to increase as various governments consider whether SCF requires more legislation around it to safeguard the interests of small suppliers.

With that in mind, we as the SCF Community need to seriously consider what role we can play in improving the reputation of supply chain finance and to ensure it is used for the right reasons.

Michiel Steeman

Professorship at Windesheim University of Applied Sciences

Michiel Steeman was selected in 2013 as the inaugural holder of the Supply Chain Finance Professorship at the Windesheim University of Applied Sciences in The Netherlands. He is also the founder and chairman of the Supply Chain Finance Community that has already brought together over 30 leading business schools from more than 20 countries around the world who actively collaborate with companies, banks and governments in the developing field of Supply Chain Finance.