PwC Germany is entering the consulting business for supply chain finance. They have brought Markus Rupprecht on board for this purpose, as confirmed by the founder of the supply chain finance company Traxpay in an interview with Börsen-Zeitung. Markus Rupprecht had left Traxpay, in which Deutsche Bank also holds a stake, about a year ago. For PwC, he will now build a team that advises banks and companies on supply chain finance (SCF) topics. SCF primarily includes financing forms like factoring, reverse factoring, and dynamic discounting.

In factoring, a company continuously sells its receivables from deliveries and services to a factoring institute, thereby securing immediate liquidity. In reverse factoring, the initiative comes from the purchaser of goods, who sells their liability for deliveries and services to a factor that then settles the invoice. Dynamic discounting involves flexible cash discount management, with maximum discounts for quickly paid invoices and lower discounts for slower payments.

Rupprecht and his team, which is expected to grow to around six members in the first year, will be integrated into PwC under the leadership of partner Holger Kern, who heads the financial services transformation division. PwC is currently restructuring into various platforms, and according to Kern, "Financial Services Transformation" encompasses all transformative approaches in the areas of banking, capital markets, insurance, and asset/wealth management.

Rupprecht himself joins PwC as a Senior Executive Advisor. He justifies his move from the fintech sector to the consulting conglomerate by stating that the world of SCF will undergo fundamental changes in the next three to five years. "A fintech is much more agile in building solutions," Rupprecht acknowledges. Nevertheless, he noticed that a startup faces more challenges when trying to convince traditional players in the corporate customer segment (B2B) of these solutions. "That's why I chose an established brand like PwC."

The reason PwC is discovering SCF at this particular moment is twofold. Firstly, the global trade finance market is expected to grow significantly. However, more importantly, SCF is on the cusp of a digital revolution. The focus is on the digitization of trade documents, in the context of the "Model Law on Electronic Transferable Records" (MLETR) adopted by the United Nations back in 2017. "The topic has now reached Europe," constitutes Rupprecht. For instance, the UK already passed a relevant law in 2022.

A German equivalent is currently under discussion. "I expect the initiative to be implemented in German law this year or next year," observes Rupprecht. This would suddenly make an old financing instrument, which has long been forgotten, interesting again: the promissory note. Since the promissory note law in Germany has never been changed, it still requires paper and a physical signature, making the financing instrument impractical. Yet, if the promissory note were to be recognized as a digital document in the future, it could potentially change supply chain finance, expects Rupprecht'.

Rupprecht believes that companies and banks could both benefit from the digital promissory note. For companies, the main reasons are related to financial reporting. "With reverse factoring, the question always revolves around how sold invoices are accounted for," says Rupprecht. Companies have a great interest in the item remaining a trade liability on the balance sheet and not becoming a bank liability, as it is better for the company's creditworthiness, rating and thus its financing conditions. Rupprecht mentions an item called "bill liability" which, under the German Commercial Code (HGB), does not even become a bank liability upon resale, but remains a trade liability. Still, it is not yet entirely clear how this would be treated under international accounting standards like IFRS and GAAP.

For banks, the digital promissory note would lower the barriers to entry compared to the current reverse factoring process of buying invoices. According to Rupprecht, banks currently have to conduct a comprehensive Know Your Customer (KYC) process for all the involved suppliers, which generates high costs. "That's why suppliers need a certain size for banks to justify this effort," says Rupprecht.

The digital promissory note would help banks by ensuring that every party that has signed the promissory note commits to paying it. "Hence, it's sufficient for the bank to thoroughly assess the creditworthiness of the main company," declares Rupprecht. For smaller suppliers, a much more cost-effective "KYC-Lite" process would then suffice. The promissory note provides banks with another advantage: an immediately enforceable title in case the promissory note amount is not paid on time. This enforcement can be applied against all parties that have signed the promissory note.

One potential loser of the digital promissory note could be the SCF platforms that have positioned themselves between companies and banks. According to Rupprecht, their central argument is that they handle the onboarding of many suppliers into the SCF programs. "The digital promissory note wouldn't immediately displace reverse factoring through the platforms," states Rupprecht. Banks have an interest in continuing their existing programs. However, in the long term, the digital promissory note has the potential to replace traditional reverse factoring and cannibalize the existing platforms.