The future of supply-chain finance and the major challenges banks face in its implementation

Published on June 3, 2025 by Ravindi Peiris

Supply-chain finance (SCF) is a crucial and evolving trade financing product driving global trade. The global market for SCF is valued at USD2.3tn by the International Finance Corporation (IFC) and World Trade Organization (WTO), with rapid growth expected in the next decade—reflecting the future of supply chain finance as a critical driver of global trade.

SCF enables suppliers to obtain much-needed liquidity for working-capital optimisation and better cashflow management, based on the strength and borrowing capacity of their buyers. It is a mutually beneficial arrangement between suppliers and buyers that prevents supply-chain disruptions, strengthens long-term relationships and builds sustainable value chains that fuel business growth. From a bank’s perspective, when structured appropriately, SCF in banking is a lucrative product proposition that supports large trade financing ticket sizes and generates recurrent ancillary income through transaction banking. This is a stickier and more sustainable product proposition that not only strengthens existing customer relationships but also paves the way for new business opportunities through the customer’s supplier portfolio.

Key global trends that will likely influence SCF

Expansion of SCF in emerging markets with a focus on small and medium-size enterprises (SMEs): There has been increased participation of emerging markets and SME suppliers in global trade and SCF recently. Africa and Asia accounted for most of this growth in 2023, with over 60% of those adopting SCF being SMEs. This growth has been fuelled by funding lines directed by development finance corporations and large commercial banks towards emerging markets, citing trade opportunities, and efforts to address the gaps in emerging-market financing and SME financing. SMEs are also increasingly seeing the value of SCF as a cheaper source of financing, enabling them to benefit from technology enhancements, better supply-chain management and improved agility.

Multi-tier SCF: Cascading credit contracts would be driven by large buyers looking to finance multiple layers of their value chain, ranging from the larger-scale direct suppliers to the smaller-scale suppliers further down the value chain. These structures would enhance sourcing transparency, improve visibility of financing flows and mitigate the risk of overfinancing for large buyers and banks, enabling them to secure the supply chain from top to bottom. The cascading of deep-tier contracts would be facilitated and simplified by smart contracts and blockchain financing solutions in the future.

Digital transformation: Technology would play a pivotal role in credit evaluation and financing of ongoing SCF transactions. Artificial intelligence (AI) and predictive technologies will likely be used increasingly for performing credit assessments, specifically for SMEs, through the evaluation of transaction histories, behavioural patterns and real-time financial matrices, replacing traditional methods such as historical financial statements. SCF would become more agile, with automation at the forefront—reflecting emerging supply chain finance trends such as invoice tracking, approval, financing, and settlement powered by advanced technologies like APIs and blockchain solutions.

ESG roles in SCF: Regulation on de-carbonisation, the need to bridge the SME financing gap and the consumer push for circularity and sustainably sourced products are driving ESG compliance for large corporates, trickling down to their value chain. Sustainable SCF would be linked to achieving ESG KPIs and would continue to be incentivised by pricing benefits offered by banks. This would ensure the sustainability of value chains and act as a risk-mitigation strategy, ensuring that suppliers are ESG-compliant, further preventing reputational risk to the buyer and the bank.

Major challenges banks face in implementing SCF

Compliance risk: Considering that suppliers have no direct relationship with banks, know your customer’s supplier (KYCS) checks and anti-money laundering (AML) and sanctions screening are required at the onboarding stage. This is becoming increasingly important with the expansion of trade in emerging markets and the extension of financing to SMEs where anti-bribery and corruption, AML and sanctions regulation may not be as established. Annual reviews of supplier portfolios are also required to monitor changes to supplier risk profiles, in addition to ongoing transaction screening for each disbursement and supporting payments. Adequate resources and automated screening platforms are critical to meeting compliance requirements to prevent fines and reputational risk to the bank.

Legal and regulatory risk: SCF agreements need to consider contractual obligations and fiduciary duties between the customer, supplier and bank. Contracts would require periodic review, in contrast to traditional working-capital facilities, given the involvement of multiple parties and the evolving macroeconomic landscape. Such periodic reviews would have to take into account changing regulations, market dynamics, legal structures and the exit of or change to the profile of any given supplier in the portfolio. Cross-border legal agreements are typical in the SCF space, and the execution of such agreements could be even more complex. Banks would need to consider cross-border regulations, accounting treatments and legalities in trade, exchange control and taxation, and further data protection policies as SCF offerings are digitalised.

Geopolitical tensions and constant changes to global market dynamics: Global markets have become increasingly dynamic with geopolitical tensions impacting trade policy, commodity prices, currency movement, tariff structures and import and export settlements. Recent trade conflicts between major global economies such as the US and China, and Russia and Ukraine, and regional conflicts in the Middle East and the Red Sea have created domino effects, resulting in supply-chain disruptions and frequent changes to settlement terms and financing requirements. This has called for more flexible financing structures that can absorb shocks and safeguard all parties involved from geopolitical risks.

Change in tariff structures: The imposition of tariffs by the US and reciprocal tariffs imposed by China and other trading nations have resulted in shifts in global supply chains and re-shoring pressures. While SCF has become even more crucial for customers and suppliers to manage the cost impact of tariffs and short-term liquidity requirements, it also poses challenges to banks. Tariffs may alter supplier contracts, increase sourcing costs, result in order cancellation and create inventory buildups and shortages. This would not only impact the financing limits and repayment tenors initially negotiated with suppliers but also make order matching difficult for banks. Hence, banks would need to carefully package SCF structures to recognise early warning signs including tracking individual loan repayments and tightening internal and external covenants to effectively mitigate credit risk.

ESG adoption: With demand for sustainable SCF solutions on the rise, banks are faced with several challenges in expanding their sustainable SCF loan books. Given there are no or very limited globally accepted monitoring and reporting standards specifically for ESG trade finance, banks are required to develop their own inhouse ESG rating score cards and KPI monitoring mechanisms until such standards are formalised. ESG scoring would require the expertise of an external rating agency in the absence of inhouse expertise, which would come at an added cost to the bank and the customer. While sustainable SCF offers preferential pricing to customers, credit lines at cheaper cost are not always freely available for onward trade financing. Hence, banks would need to absorb the pricing benefit and depend on ancillary income flows to profitably expand their ESG loan books. Banks would also have to upgrade their existing trade financing systems to accommodate the ESG monitoring requirements of sustainable SCF.

Technology enhancement: The automation of supply chains and progressive technologies such as AI and blockchain would play a crucial role in the growth of SCF, with customers looking for more agile, multi-tier financing structures from banks. Hence, there is a strong need for banks to continue to invest in technology platforms in partnership with fintechs, to offer fully integrated and agile SCF solutions while focusing on portfolio returns and risk management. This would require a considerable investment budget and resources to support technology upgrades and requirements relating to system migration.

How Acuity Knowledge Partners can help

Acuity Knowledge Partners provide end-to-end expertise for loan and trade finance operations. We have nearly 20 years of experience in supporting global banks across the loan lifecycle, having provided tailormade solutions to 90+ banking clients in the retail, business, middle-market and real estate and leveraged finance segments.

Our expertise in SCF operations tasks include factoring, forfaiting, invoice/bill discounting, pre- and post-shipment finance and working-capital finance along with client onboarding and screening. We are also able to assist with project implementation for SCF-related technology enhancements and system migration.

Sources:

• Optimizing SME Supply Chain Financing Through Data Analytics in Banking

• CONVERGENCE CAPITAL GROUP | Supply Chain Finance in 2025: Adapting to Economic Shifts and New Opportunities

• Trade Finance Gap rises to $2.5 trillion USD – five key takeaways from ADB's latest report on trade finance gaps, growth, and jobs – Trade Finance Global

• Joint Statement on ‘Boosting Supply Chain Trade in Emerging Markets'

• Supply chain ESG solution sets new standard for working capital optimization

• What is driving the growth of SCF? – Deutsche Bank

• Supply Chain Finance Market Growth, and Demand Forecast 2025-2033

• Supply Chain Finance Market Report, Share & Analysis | 2034

• final-issues-paper_supply-chain-finance_5-nov-14.pdf

• Tariffs may prompt clients to revisit supply chain financing: Wells exec | Banking Dive

• How Tariffs Impact Supply Chain

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