The financial supply chain has been one of the ‘hot’ topics in treasury for a while now. But what is really happening in this space? In this Talking Treasury Forum, banking experts from across Europe meet to discuss what is happening and the future developments that we are likely to see.
Managing Director Corporate Sales Executive
Alberto Amo Mena
Head of Supply Chain Finance Services Global Transaction Banking
Jan Dirk van Beusekom
Global Head Financial Supply Chain
Product Management Director
Supply Chain Solutions
Head of Trade Finance, Germany
Richard Parkinson (TT): The supply chain has been one of the leading topics at conferences and the subject of many articles over the last year or so. I wanted to start by asking you all what you are seeing going on in the supply chain space right now.
Alberto Amo Mena (Santander): My impression is that in most of Europe there is still more noise and publicity than significant supply chain finance volumes being handled in platforms or products under development by banks or other players. On the other hand, in Spain, supply chain finance is highly developed, with about 9% of GDP being paid through such solutions. So market penetration in Spain is greater than any other geography. Santander’s Factoring subsidiary pioneered this market as long ago as 1990 when it introduced Confirming® as a form of reverse factoring.
Over the years, Confirming® has been refined, web-enabled and has become increasingly sophisticated. This product has gradually been adopted by other financial entities in Spain to the point that more than 15 institutions are now offering a Confirming® solution. Similarly, Confirming® has been successfully exported to countries where Spanish banks have expanded their branch networks, such as Portugal and Latin America. Over the last few years supply chain finance has been a hot topic internationally, which is great news for Santander, given our deep expertise in this field, providing us with an opportunity to offer our solutions in a growing range of countries and enrich the solution’s cross-border capabilities.
Jan Dirk van Beusekom (Fortis): We see various solutions offered in the market also in the northern countries. However it’s very fragmented and at Fortis, we put those fragments together and take a more holistic view including cash management and commercial finance and not only taking the trade side of the supply chain. Obviously there’s been a lot of changes in the trade business, automation of the processes and moving from letters of credit and documentary credits to open account trading. The challenge is to create visibility of the total chain and to combine the different elements of the solution. That’s one of the reasons why we are looking at the flow side of all these different moments in the life of a trade or transaction.
Anne Collard (LTSB): I think it can be as fragmented on the corporate side as on the banking side. The challenge for the banks is trying to understand what the corporates are looking for and what we should be offering.
Sometimes you find supply chains have been developed where the corporates have been working together, the automotive industry for example. In this model, the banks have been disintermediated and the corporates can cherry pick the elements they want to do – including financing, for example.
So I think the banks are trying to understand where they can add value and how they can then start to understand the opportunities available by bringing together the physical and financial supply chains to deliver greater value. They’re getting better at doing that through initiatives such as SWIFT’s TSU.
David Hennah (SWIFT): From a SWIFT perspective, a lot of the publicity attached to what SWIFT has been doing over the last couple of years has been in relation to the development and launch of the TSU, but that neglects the reality that SWIFT has a broader trade and supply chain strategy that addresses other aspects of the business.
Just to mention a couple of other things, one is we’ve done a certain amount of research into the usage of our traditional trade messages for letters of credit, collections and guarantees, consulting not only with banks, but also with corporates and software vendors. There is work going on at the moment to extend the usage of some of those messages, for example to support LC Advice, LC Amendment and LC Application messages into the corporate-to-bank and bank-to-corporate space. So that’s one activity. The other one is e-invoicing, where I think there is a huge amount of potential to introduce improvements into the supply chain. So we’re keeping a watching brief there, participating in the EU Experts Group, looking at proposals for ISO standardisation. SWIFT is taking a broader perspective on all of this. Everything is inter-related and it’s important to keep a coherent approach.
Axel-Peter Ohse (Deutsche Bank): As banks, we seem to have looked too much into just financing. When it comes to the cost side, it’s just the interest rate and the interest cost, etc, that we have traditionally been concerned with. And only recently have I seen approaches where we try to go back to the physical supply chain and figure out the various trigger points in order to make up our minds where, as bankers, we can actually link in.
We have several products and services that already exist at the bank which we can appropriately link into the supply chain. And, on top of this, pockets of new services which can potentially be developed to meet demand. Coming from the risk side, we are building up advisory services on the basis of which we are now able to sell cash management, supply chain finance products and related services in a much more integrated way.
Once you cross into the corporate sector you really need project management skills to get these things across and get them implemented.
van Beusekom (Fortis): A lot of banks are still looking at the relationship with only the CFO or the Treasurer and it’s very much credit based. We at Fortis initiate discussions with the procurement manager, the sales manager and the financial director to be able to include all angles of the supply chain in a company. We have been doing this in the commodities business for decades and are expanding that practice to other segments and industries.
“As banks, we seem to have looked too much into just financing. When it comes to the cost side, it’s just the interest rate and the interest cost, etc, that we have traditionally been concerned with.”
Ohse (Deutsche Bank): An interesting experience for me was that whenever I would talk to clients, I’d tried to figure out their counterparty risk assessment procedures. And the result is that more than 80% have some sort of counterparty assessment capabilities – which is quite good – and if not, they generally outsource this. Now, when you switch over to the liability side of the balance sheet: how do you score suppliers? Who has a supplier scoring system? Who measures suppliers’ sustainability? One out of five? One out of seven?
Talking about supply chain finance and related risk within financial supply chain management, it all starts with a qualification process. If you don’t have a reasonable qualification process on the corporate side, it’s very difficult to assess the end-to-end process – and this is surely credit relevant.
David Aldred (J.P. Morgan): I agree. We work with companies and focus on their diminished value risk. That is, the value of the underlying contract and the financial risk if they were to miss their target delivery date. For example, if a manufacturer of shoes is late getting their product distributed and onto the shelf, they might miss or certainly be late for a particular season – there is not as much demand for boots in summer! So what impact does that have on that stock value? The missed sale opportunity, a stock surplus that will probably need to be discounted, and the missed opportunity of sale accessories – polish, laces, socks, etc.
Clients have asked why J.P. Morgan is involved in this area and why should they not utilise a consultant or niche supply chain company? My answer is, because of our experience and daily exposure in the traditional trade business. We know our way around the documentation side and we know about the movement of goods on a global basis. It’s simply a logical extension to provide advisory services to help clients have an efficient supply chain.
“If a manufacturer is late getting their product distributed and onto the shelf, they might miss a particular season.”
Parkinson (TT): Do you charge for that advice?
Aldred (J.P. Morgan): Absolutely. It’s all part of the value add we bring, so it’s all about looking at the wider solution that you can offer to the client and the significant savings you can help them make.
Ohse (Deutsche Bank): We run specific risk advisory services. The big difference between a professional risk consultancy and a relationship manager, who in the past used to provide some sort of risk advisory, is that you provide a specialist to the corporate and that gives you reason enough to ask for a fee. That’s number one. Number two, you build a track record for reference purposes. And third, on the basis of risk advisory, you get a wealth of information from your client in a much more structured way than you got it in the past. The art is basically to take that type of information and convert it into business opportunities.
Where you can make money is where you can create value for your client and also for yourselves. And this is very, very different compared to some years ago.
Aldred (J.P. Morgan): The complexities of dealing with this on a global basis are a challenge for any company, particularly for a medium sized one that does not have a centralised business.
Take the defence industry as an example and the strict process they have to adhere to in exporting goods. The regulations around this are intensive and the penalties for non-adherence are severe and rightly so as no-one would want their goods falling into the wrong hands. But who is willing to take on that risk? Banks are used to taking risks. They are used to operating on a global basis and we see that as a natural extension of traditional trade flows to assist clients.
Yes, we’re competing with consultants in that space but I think to Axel’s point, as long as you can demonstrate the value, be it bottom line to a CFO, then there is a budget there for clients to pay for those services.
Collard (LTSB): Doesn’t it also depend on how the customer would want to pay for those services? – because there are challenges around consulting fees. It’s sometimes not within a corporate’s budget, but if consulting is considered as part of a solution, which will have to be implemented, I think that’s where banks can add a lot more value.
If you take this view, then you’re not just looking at the financial supply chain, you’re looking at the total relationship. By addressing the whole value chain for the customer, you’ve got elements right the way along where, as a transactional services bank, we are able to add significant value. And I think that’s where, both strategically and tactically, the banks can start to give much more help to their customers.
van Beusekom (Fortis): And being a partner, it’s always a balance between relationship banking and asking fees for certain advice. Either you have to really be very specific about it, or get reward for that advice in a different way.
Parkinson (TT): The current economic environment must be encouraging companies to look at supply chain management and working capital management.
Ohse (Deutsche Bank): The reason why I think that corporates are more receptive to the idea is that the credit crunch presses people to start thinking about alternative funding sources. And also to think about alternative funding partners, such as banks which can employ a balance sheet actively – which is very good news in the current climate.
It’s bad news for (investment) banks which thought to provide an ABS structure behind a vendor solution because it appears that in the current market environment, there is limited investor appetite for ABS structures that aren’t currently working well.
Aldred (J.P. Morgan): What we’re seeing, is that companies are looking internally at where they can squeeze working capital and liquidity out of their system. It’s not just a case of reducing DSO and increasing DPO. You can’t just do that because you have relationships with your suppliers. So workflow management is around creating efficiency and companies are listening because banks have been doing this for some time, particularly around the order to pay and purchase to cash processes, ERPs and traditional shared service centres and payment factories.
Hennah (SWIFT): Supply chain is where the money is. It accounts for between 60% and 90% of all company costs. The larger corporates, the multinationals and particularly those that have implemented centralised treasury operations or shared services centres, have grasped not only the concept of supply chain management, but also the actual practice of supply chain management. As more and more mid-market companies get involved in low cost country sourcing, then they need to grasp the nettle as well.
But the focus has been more on the logistics side rather than on the financial side and that’s where the link still needs to be made in terms of process efficiency and liquidity management. And this is where the TSU, for example, can help.
Collard (LTSB): There’s a growing recognition of the savings that can be made as well. Some of the customers we’re working with on our supplier finance solutions, had expectations of working capital benefits at the beginning which are half what they’ve actually realised, a third of the way into getting suppliers on board.
“The larger corporates, the multinationals and particularly those that have implemented centralised treasury operations or shared services centres, have grasped not only the concept of supply chain management, but also the actual practice of supply chain management.”
Parkinson (TT): Supplier finance always seems to be one of the services that a lot of banks talk about. But is it anything more than just leaning on the buyers’ credit worthiness?
Amo Mena (Santander): Supplier finance is much more than just leveraging the buyer’s credit worthiness. The whole approach is more efficient in terms of risk analysis and industrial scale processes, such as handling electronic files, STP bulk payments, automated reconciliation of invoices financed and settled. In other words the complete life cycle of invoice approval and settlement for both the buyer and supplier. Regarding risk management, I would put less emphasis on a buyer’s credit worthiness and greater focus on his access to credit. This is an important nuance, since the amount of credit access is important as well as the price differential. These are key benefits that can be shared along the supply chain, improving working capital for buyers and suppliers.
van Beusekom (Fortis): The driver next to funding and liquidity is reducing costs, and it’s not only in that bit where you are financing on top of the credit rating of the buyer. If you extend it another step, you’re talking to the buyer and all the suppliers. Think about including all buyers of the buyer and the suppliers of the supplier. There’s a lot to gain and especially in providing information we, as banks, have on transactions. You add a lot more value which deviates, in fact, from the purely supply chain finance bit between one buyer and a lot of suppliers, and using its credit rating to finance those suppliers. We firmly believe that information is the principal link between the physical and the financial supply chain.
Aldred (J.P. Morgan): And information flows, let’s not forget, that’s what banks are good at. Providing information and, if you can, show the value between linking a treasurer and, say, a procurement officer, you can give them visibility over the entire order to pay process. Do you make that payment early? Do you accelerate it or do you give a discount? Each of these may have a different financial impact depending on their relationship with the supplier and the value of the transaction. By giving them the information, they can make an informed decision.
Collard (LTSB): If you’re working on that basis, you can start forecasting some of the flows and the pro-activity around some of those flows, which provides a stronger foundation for managing risk.
Ohse (Deutsche Bank): Let me try to explain it with an example. You have an OEM with a supplier and a pre-supplier in the chain. Each of these three parties banks with a different bank. Every party walks up to its banker and asks for funding separately. And, just for the sake of that example, say everybody has a financial requirement of 100, so the final product value is 300, once it’s finalised to go out of the OEM’s door. Now the pre-supplier gets from his bank 60, the supplier gets 80 and the OEM gets 200 – a lot more than he actually needs. The other parties get less than they actually need.
Now, ideally the CFO of the OEM – who could be in command of financing and risk along the whole chain – comes back and asks for one bank to be involved throughout that vertical chain to make sure that the first party – the pre-supplier – gets his 100 once he needs it, and the second one – the supplier – gets the second 100 with the first 100 and so forth. So he would end up with, first of all, less credit, less credit process cost and he also gets his funding just in time and just for the days it is needed. This is all based on the information flow which is available in the chain anyway.
I believe that credit process management within the supply chain is one of the areas where there is substantial cost savings potential for all participants and additional earnings potential for those banks who either employ a global network or work together with partners who can supply this. There are some banks, like Deutsche Bank, who try hard to market to particular industries which have vertical supply chains. We try to combine the information flow derived from the logistical data with our financing and payment structures at base in order to provide ‘just-in-time funding’.
“If you finance the whole chain, then you have a view on the total risk. When you get more information, your perceived risk moves very much closer to the real risk.”
van Beusekom (Fortis): If you finance the whole chain, then you have a view on the total risk. When you get more information, your perceived risk moves very much closer to the real risk. In fact the real risk does not change, the transactional risk does not change, it’s just that you get better information about the real risk.
Amo Mena (Santander): We should bear in mind that supply chain finance relies on the level of confidence and trust between a buyer and his suppliers. It is important that the buyer and suppliers have an existing business relationship developed over time. Banks take this into account when assessing risk and build up transaction data on real business flows, which improves our understanding of the risk profile and track record.
Aldred (J.P. Morgan): And it’s taking these solutions global. That works very well in the Spanish market, but does it work in other markets? I think that’s why you have to look at some of the industry verticals and ask, where does this lend itself to be applicable on a global basis?
We look at solutions that are in the US and ask how can we try and globalise them. They don’t always lend themselves to the European market for good reason.
Amo Mena (Santander): Yes, a number of industries have developed vertically over a period of many years and have achieved deep integration between buyers and suppliers. The automotive sector is a good example. Here there have been major initiatives involving EDI and even e-invoicing, but subsequently they failed to integrate the financing piece. When you deliver supply chain finance into an integrated vertical industry your product has to be highly flexible, because your clients’ production line and how they interact with the suppliers may be very complex and automated, so it can be hard to add value unless you have considerable experience in this field.
We are working with some major car manufacturers in Latin America and Spain. These clients have recently extended the scope of their supply chain finance programmes, extending the reach of these products globally. These industries are now embarking on new developments in e-invoicing combined with supplier financing, as there are exciting synergies between these complementary products to optimise the cash conversion cycle.
Parkinson (TT): E-invoicing needs standards. Can we talk about formats and standards? Are there any standards emerging in this market? Because I understand if everyone banks with the one bank it’s easier, but that’s not reality, we all know that.
van Beusekom (Fortis): There’s so many different systems around still and of course there are some directives and a lot of initiatives, but none that are really rolled out and implemented in the market.
Aldred (J.P. Morgan): There are two challenges. One is the demand for consistent standards and the other is the demand for multi-banking delivery channels. The two are clearly related.
Collard (LTSB): And consistency of working together and that’s where some of the collaboration is starting to happen. But it’s down to us to help our customers understand the value of adopting common standards, rather than just understanding ISO standards and going away to develop it.
If there is no collaboration between the bank and the corporate, the solution comes back looking very different to the ISO standard that‘s coming out of the counterparty you’re using in Asia, for example.
You know, we’re becoming translators as much as we’re becoming solution providers. So whether common standards are a reality today, given the fact that they might all be based on XML, it’s starting to become less important.
Hennah (SWIFT): Perhaps we just need to be a bit careful with our use of language here. I wouldn’t strictly describe XML as a standard. It’s more of a framework that supports the exchange of structured data. The advantage lies in its flexibility. In e-invoicing, the absence of common standards fragments and slows the market. There is some evidence of convergence. SWIFT may have a role to play in future in supporting global harmonisation and interoperability.
“It’s down to us to help our customers understand the value of adopting common standards, rather than just understanding ISO standards and going away to develop it.”
Parkinson (TT): What about the future? Where do you see supply chain activity growing?
Amo Mena (Santander): I would say the natural starting point is the domestic market within the EU. Terms of trade are open account, volumes are enormous, there is confidence between buyers and suppliers and there are lower regulatory or compliance issues to solve. So the pre-requisites for e-invoicing are present. I think it will grow relatively quickly in the next few years as bank solutions in this field are increasing and the different players in the supply chain are now realising they can achieve real benefits.
Hennah (SWIFT): If we’re talking about geography, should we talk about the credit crunch perhaps? I can’t be the only person around the table who has a distaste for the term ‘credit crunch’ because it’s just become a kind of buzz word or catch phrase, as if the impact is the same the world over.
There was a time when, if the United States sneezed, we all caught a cold. I don’t think that’s the case any more. Whilst the United States may very well be headed for a deep and painful recession, and the eurozone perhaps not too far behind, there are other economies in the world, in developing markets like China and India, oil-based economies, countries that are big in commodities, where the economic outlook is very promising and demand is on the up. It is the opposite of the credit crunch. It’s about managing growth.
Aldred (J.P. Morgan): I agree as long as we can help companies access those trade channels and overcome the challenges that these bring. Doing business in any country brings with it new regulatory requirements, different import/export controls, screening classification and a lot more. For these reasons alone, we are in a very good position to help our clients enter these markets and do so in an efficient manner.
AEO or the Approved Economic Operator scheme for example, comes into force in 2009 where, if a company does not have a process that is compliant and has been approved by their local custom regulator, their goods have a very good chance of being delayed at the border. As a result, this can have a detrimental financial impact.
So we’re also working with companies to ensure that their process is efficient and meets that standard to almost guarantee that they can move goods freely. That’s a different angle on the supply chain for a bank to offer but again it’s a natural extension.
Collard (LTSB): In the current climate, the return of cash has never been more important than the return on cash because we’re now back to ‘cash is king’. The transaction market place will continue to develop and deep bank-client relationships will remain the cornerstone for the development of our supply chain solutions.
We’ll continue to focus on how our clients are actually managing their businesses and help them to create long term efficiencies. Nobody wants to pay high prices in the market place to borrow money, if you know you’ve got inefficiencies in your supply chain, where you can actually generate that working capital and make it happen for yourselves.
Ohse (Deutsche Bank): One area we haven’t touched on so far are the channels, the collaborative platforms which would be necessary and are on offer by some banks.
Parkinson (TT): And then you worry about the interfaces with the other banks, is that the idea?
“Multi bank supply chain finance is not an issue for corporates if they consider it appropriate.”
Ohse (Deutsche Bank):I would certainly look into that. The first thing is that the client chooses the platform and interfaces with it – there are various forms of interfacing available. Second, once the clients decide to take the Deutsche Bank portal, they provide the key data on purchase orders and/or invoice data. Third, there is a financing process.
There are a number of banks in Germany, usually smaller banks, which would not like to invest in developing such a platform, but which would like to join the financing opportunities.
So, basically, yes, I could open the portal and invite them to the financing part, if the client desires it. But let’s be clear, the portal is a relationship between the client and Deutsche Bank.
Aldred (J.P. Morgan): The challenge today for banks is to bring this all together in one portal. We’ve achieved it in the cash management space, and clients now have much more visibility and control over their cash than they have ever had. It’s now time to take that to the next level around traditional trade, but what else can be done on the supply chain?
Amo Mena (Santander): I don’t think one common portal or format is really necessary. We use a range of domestic channels as well as numerous international channels, like SWIFTNet, to communicate with many international companies for whom we need to be very flexible in meeting the connectivity challenge.
One way or another, we will integrate with a client’s ERP to obtain all the required data to contact the suppliers and complete their transactions. In Spain there are six or seven standards from different banks, the main players in the market, and we are all able to process everybody else’s standard through different channels. Multi bank supply chain finance is not an issue for corporates if they consider it appropriate.
van Beusekom (Fortis): For instance bringing receivables management, payables management and mandate management for direct debits onto one platform. So there will be one portal, one channel to communicate regarding the total offering to all stakeholders.
Hennah (SWIFT): SWIFT does have the potential to help the banks in these areas. We already have SWIFT SCORE which provides corporate access to multiple banks and we’re enhancing our traditional trade messages to support corporate to bank communications. So already, we’re starting to go down that road of helping corporates to communicate with multiple banks using a common standard via a single interface. But this is an evolutionary process and there is plenty of scope to build on that going forward.
But we have not yet debated the hottest topic of all, the TSU, the Trade Services Utility. Four of the five banks here are actually subscribed to the TSU. Perhaps I could just give a quick summary.
The TSU was made commercially available in April 2007 and now has more than 60 banks across 73 locations in 25 countries. We’ve also got five software vendors accredited to work with banks to integrate TSU functionality into their front office and back office systems. Plus, of course, banks such as J.P. Morgan who have similar applications that they are able to make available to other banks on a white label basis. So, this whole exercise in the first year, really, has been about building community and I feel that we’ve been extremely successful in terms of building that community.
Now the next step down the line, of course, is to generate volume and generate revenue. There is a huge amount of activity in terms of testing and training, but still not a huge amount of activity in terms of live traffic. It will take time for those volumes to evolve and to encourage growth, we will also introduce new features with Release 2.
Parkinson (TT): What will this do?
Hennah (SWIFT): Release 2 will support a model which involves more than two banks to a transaction, so it introduces the concept of syndication whereas today it’s just a two bank model: buyer bank, seller bank.
We will also support additional data sets. At the moment we have purchase order, commercial invoice and transport. In the next Release we will also support insurance and certificates. There is also going to be a reference in the payment message that will enable automatic reconciliation between the TSU transaction and the settlement instruction. And there will be two additional messages. One is called the NIP, which is a Notice of Intent to Pay. This is actually a corporate message, so it’s the corporate’s Notice of Intent to Pay, conveyed from one bank to the other. But it’s not a legal obligation. The second one is a Bank Payment Obligation, which is a true obligation on the part of the bank to pay. That will strengthen the value proposition, particularly from the exporter bank perspective, and I believe encourage wider usage in a live environment. So that is where we are today.
Amo Mena (Santander): I really think that TSU arrived on the scene quite early for many banks but its day will come and I do believe it’s the right way to go.
van Beusekom (Fortis): Aren’t you adding an extra level with the NIP, the Notice of Intent to Pay? That’s exactly one of the modules we have been looking for for some time.
Aldred (J.P. Morgan): It’s not irrevocable.
Hennah (SWIFT): It’s not a legal obligation but it does provide an additional level of comfort.
Collard (LTSB): But the more credibility the corporate builds up from the fact they have paid in the past will mean others will want to do business with them in the belief they’re going to get paid, which is the eBay model.
Hennah (SWIFT): I truly believe the TSU has the potential to be anything that we want it to be, and it’s up to all of us to mould it in the right direction.
Parkinson (TT): Thank you everyone.
Thanks again to our participants