Conclusions

In this thesis a model has been proposed to value reverse factoring for the buyer, supplier and bank, in both domestic and international settings. It has been proven that, as theory already suggested, reverse factoring does not add value to the supply chain in perfect capital markets. In perfect capital markets in might only cause a redistribution of income. However, since always one of the three participants will makes a loss by changing the payment period or introducing a reverse factoring fee, the trade terms will remain the same and hence nobody will make a profit.

By introducing information asymmetries into the model, it has been proven that, under the right contract, all three participants are able to make a profit. Based on the developed model, the following conclusions on the profitability can be drawn:

Supplier - In order for reverse factoring to add value, the supplier needs to have; (1) higher information

asymmetry with financial markets than the reverse factoring fee charged by the bank, corrected for the payment period extension and (2) a significant need for external short term capital. The benefit for the supplier is larger when (1) the initial payment period is larger, (2) the supplier has more information asymmetry with financial markets, (3) when the reverse factoring fee is smaller and (4) when the payment period extension is smaller.

Buyer - For the buyer reverse factoring adds value when (1) the payment period is extended. And hence

the benefit from reverse factoring for the buyer is larger when (1) the payment period extension is larger and (2) the buyer’s interest rate is larger (independent of composition between risk premium and deadweight cost of capital).

Bank - For the bank the benefit from reverse factoring is positive when (1) the reverse factoring fee plus

the buyer’s deadweight cost of capital is positive. The benefit for the bank is larger when (1) the deadweight cost of capital from the buyer is larger, (2) the reverse factoring fee is larger and (3) the extended payment period is larger. For banks it is therefore more profitable to focus on buyers of which they have more information. This means the bank has already invested in information on this buyer and therefore information asymmetry between the bank and financial markets on this buyer is bigger,

both the buyer and the supplier is larger and (2) initial payment period is larger. Hence reverse factoring adds more value in industries where payment periods are larger.

By extending the frame work from domestic reverse factoring to international reverse factoring, it has been proven that in international setting the potential added value is much bigger. This is because internationally differences between information asymmetry and credit rationing are much bigger.

From the sensitivity analysis performed on a real business case within RBS, it appeared that over time, the value of the program for the supplier can become negative. Therefore the supplier should ensure the contract has enough safety margin for the interest rate of the buyer to fluctuate. Further the supplier should monitor the program and quite the program or renegotiate the terms once the program does not add value anymore.

For the bank some operational issues were identified as well, though not from the model’s perspective. For banks, important operational issues are, credit notes, buyer and supplier default, too high exposure, economic crisis, high set up cost and Basel III regulation. High set up costs come from the IT development needed to build an automated interface between the buyer and the bank. Though Basel III does not impact reverse factoring differently than other on-balance sheet assets, it appears in practice that the risk of a trade claim is lower than that on a regular bank loan.

Despite the upcoming economic crisis in Europe, supply chain finance is expected to grow by 10% to 30 in developed countries and 20% to 25% in developing countries. This growth will primarily be driven by developed regions such as the USA and Europe and the larger emerging markets as China and India. Target industries for reverse factoring in those countries are currently retail, consumer goods, manufacturing, automotive, engineering and machinery industry. For the future the chemical, pharmaceutical and telecom industries are believed to have further growth potential.

In order for supply chain finance to take the next step some conditions have to be met. (1) Market consensus, (2) Standardization and (3) Organizational changes within banks. Within the supply chain market, different definitions of supply chain finance exist. Mostly supply chain finance is used as synonym for reverse factoring, while by others it is used as a collective noun for all financial products supporting the end to end supply chain. In order for banks and other players in this market to move to the next stage en answer a growing demand for web-based multi-bank solutions, banks should agree on those definitions. Further standardization is needed in order to make supply chain finance offerings available for a wider public. Currently SCF programs need high development investments, these can only be compensated by onboarding large clients. Once products and IT become more standardized these

offerings will also become available to the SME market. Finally banks need to change their internal structure from a product based silo structure to a holistic structure that is able to bundle different financial products and support the end to end supply chain.