That technology can reach into most parts of a modern treasury is almost a given. But just how far have the vendors, the banks and treasurers themselves taken these tools in the quest for ever more efficient and robust processes? We look at innovation in a number of key areas including cash management, payments and analytics, working capital management and liquidity position monitoring and discover that the sector has been very busy of late.
Technology has become an essential part of treasury so much so that banks, vendors and infrastructure providers have been pushing the boundaries in recent years. They now offer tools designed to ease processes, integrate workflows and deliver the kind of immediacy and accuracy of data processing that most companies could only have dreamt of a few years ago. Spreadsheets persist, of course, because of their familiarity, their ad hoc agility and their cheapness, but when complexity, geographic spread and risk aversion steers businesses in the direction of centralisation and automation, the time comes for more sophisticated tools to be deployed.
The pros and cons of any such capital expenditure must be weighed up but the traditional problem of justifying the implementation and maintenance demands of new tools (both in terms of cost and ownership) have in many cases subsided with the advent and, importantly, acceptance of cloud delivery. From payments initiation and processing to virtual collections accounts, cloud technology appears to have opened the floodgates for a more creative approach to treasury. In this Section, we look at some of the more interesting developments in the cash management space, looking also at the current and future issues that affect this sector.
Consumers almost everywhere appear more comfortable than ever using their mobile devices (phones and tablets) as a means of transferring money. The number of new apps and mobile transaction products that are announced has gathered pace rapidly in the past few years. Tech accelerators such as SWIFT’s Innotribe and Startupbootcamp FinTech cover a range of different financial areas but seem to provide guidance for more mobile-based innovators than any other type, helping them to develop their offerings and bring them to market, with or without bank help.
The preparedness to accept mobile as a means of payment is slowly filtering down to corporates, with banks increasingly offering mobile services to larger corporate clients, allowing them to approve payments, check balances and even initiate payments using their mobile handsets. After all, treasury departments are staffed by consumers, and their experience of payment technology in their personal lives (provided it is positive) can influence the technology they introduce into the corporate treasury. It is true too that the most avid users of mobile technologies are of a younger generation, the likes of which are now rising up the professional ranks into positions of authority and thus quite likely to bring their consumer habits – and expectations – with them into the workplace.
Mobile payments as they exist now are unlikely to revolutionise the consumer financial system, but they can make certain transactions easier; it is about channel options. In their current form, mobile payment solutions are not expected to raise the heat in the treasury world either. Again, these solutions add a degree of flexibility as a complement to existing payment channels. Corporates will continue to use desktop-based banking for high volume payments, as mobile is not typically seen as a practical medium for this type of activity. Authorisation can be made on the go, but Treasury Today conversations to date suggest few have the appetite for signing off large transactions in this way; two or three factor authentication allows decisions to be overseen but still the preference is currently for non-mobile transacting.
However, as the medium adapts to user needs and wants, it could start benefiting corporates at a much more fundamental level. “As a means of collecting payments, mobile can make treasury processes much more efficient and lean, improve cash handling, and help right down to the working capital level, simply because payments come in before it would have with the old way of doing things,” says Mark Wraa-Hansen, Head of MobilePay at Danske Bank Group (which offers a retail mobile payment application and is currently developing a corporate solution).
It could also transform the way some corporates invoice customers. As an alternative to Direct Debits (DD), invoices with a Quick Response (QR) Code allow mobile payments that are almost instantaneous. Furthermore, these payments have a token embedded in them containing information about the customer and the bill, thus saving the corporate on administration costs, as well as making it easier for the customer to pay. This form of payment could bring particular benefits to regulated utilities in billing customers who are either unable or unwilling to pay by DD but ultimately deliver the same immediate collection benefits to treasury. Indeed, the advantages of the mobile medium are particularly relevant to certain industries – such as utilities and, perhaps obviously, mobile service providers.
Trust in me
Mobile payment applications represent something of an architectural shift from what is used for web-based payment applications. This has posed new challenges in securing the solutions. “With the web model, you had a browser and some HTML code, but the bulk of the logic was on the back-end server. And that’s really the way mobile started as well: the first generation of mobile applications were effectively just web browser applications on your mobile device,” says Vince Arneja, Vice President, Product Management at Arxan Technologies, an application security group whose security is ‘baked in’ to some of the leading mobile payment solutions.
But recent mobile payment applications have progressed to the point where a large part of the functionality is now running on the device itself. “Now the application has effectively become a target because it doesn’t hide behind a firewall any more where trust is embedded in the firewall layer; the trust has to be embedded into the application itself,” he adds.
Users know this and are therefore much more willing to put their trust in a brand they know. “From our research, it’s very clear that people are much more likely to use a mobile payment application if it is provided by their bank rather than a third party because they trust their bank, they trust their banking application, they’ve had to go through the set-up, and they know it’s secure,” says Chris Dunne, Payment Services Director at UK payments infrastructure provider, VocaLink and a panel member of the statutory Payment Systems Regulator Panel.
For example, Zapp, a real-time mobile payment solution and a VocaLink subsidiary, is delivered through the user’s mobile banking application, and utilises the bank’s existing mobile security channel. This provides the twofold benefit of securing the solution using safeguards that are tried and tested, and gaining the trust of the user via their existing relationship with the bank.
At the end of April 2014, the UK’s Payments Council – the official body responsible for the running of payment services in the country – launched Paym (pronounced ‘Pay Em’) mobile payments service. Leaping ahead of the current trend for tap and pay and mobile to mobile solutions seen in many other European countries, this service is unique (for now) in that it links individual mobile numbers to the owners’ respective bank account numbers and sort codes which are securely held on a central database designed and developed by VocaLink. Payment initiation translates phone numbers into the correct bank details. The fact that it is bank supported and part of the national payments structure is intended to give it credibility.
Secure in the knowledge
In terms of the specific security threats facing mobile payment applications, one of the biggest is that of reverse engineering, where hackers repackage mobile applications after inserting malicious code and redistribute the application on secondary application stores online. The risk is that users will download these applications assuming that they are official bank products, only for the fraudsters to syphon funds from the account using the malware they had previously introduced. Arxan’s Arneja says several large banks have already approached secondary vendors in order to have reverse-engineered software taken down, to protect their customers, and to prevent damage to the bank’s brand.
Another risk with mobile payment solutions is that of non-repudiation, as it can be difficult to categorically identify the person who has entered or approved a payment. Some solutions turn the device itself into a security token, but in the absence of a smart card and reader – which are generally considered too unwieldy for mobile payments – this remains a challenge in the space.
An extra dimension of security that some banks have started using behind their mobile payment firewalls is forward profiling, which is particularly used for higher value payments. This involves the monitoring of transactions for patterns, and highlighting outliers that do not correlate with the others. The bank compares the types of payment that have been approved in the past with what is approved on a mobile device. This allows it to identify any differences in the payment patterns it is seeing that get approved through both channels, responding accordingly.
As with any payment method, there is a trade-off between security and usability, and this can be a difficult balance to strike. In the retail space, mobile PINs range from five to ten digits. Long PINs are very cumbersome to enter on a mobile device and the chances of getting it wrong and disrupting the transaction are very high. It’s a question of playing off the simplicity of the workflow against elements of security.
Danske Bank’s Wraa-Hansen accepts that the security-usability trade-off is a difficult call, but counters that mobile is not a riskier medium per se. “You could make the most secure mobile payment solution in the world, but it would probably be so complex that no one would use it. A lot of the concerns come down to perception; some people just have not realised yet that mobile payments are not inherently riskier than other methods. Security is always a hot topic around new technologies, and this concern will die down,” he adds.
Wraa-Hansen also believes human error – akin to ‘fat finger’ trading mistakes – is perhaps even more of a risk than fraud, and that solution providers should address this by making applications as simple and user-friendly as possible.
In the future, the usage of mobile payment solutions is likely to evolve in line with new developments in the devices themselves. New handsets and tablets are coming out almost every day and the processing capabilities of these devices are exponentially growing. On top of this, the wireless connection speeds available on mobile handsets, with 4G at least (and certainly with 5G when it is eventually rolled out), is comparable to that of fibre optic connections. Allied to these technological changes, a richer, more intelligent, and more predictive experience coming from these solutions is possible.
Ownership of identity, which currently resides with the banks under the existing mobile security model, could shift to clients, as a result of disruptive mobile technologies devised by the likes of Apple and Samsung. The integration of biometric security – finger vein or retina for example – into mobile devices could have a similar effect on mobile payments to what smart card technology had on online payment solutions, significantly impacting how authorisation and authentication take place.
According to Arxan’s Arneja, as mobile payment solutions evolve, so will the security behind them: “Mobile security is effectively where internet security was in 2003. It’s very, very early in the space. A lot of effort in enterprises right now is simply being directed to device management. But mobile security will inevitably mature, as it has for web.” The acceptance that mobile is a safe way to transact will gather speed as consumers and then businesses overcome their fears.
While mobile payment solutions may not have revolutionised the way corporates make their payments just yet, it is a new channel and it is evolving fast. This is not going to happen overnight, but certainly over time it will be expected of banks to include mobile capabilities in their end-to-end payment solutions. It is only as the use of mobile payments across the supply chain becomes much more widespread that the medium will have a more profound effect on the treasury function and begin to have a material impact on corporates’ working capital. There is a way to go yet.
Virtual payments and collections
Rationalising the number of physical accounts held and simplifying the management of those accounts is a reasonable aim for most treasurers. Improving visibility over cash and liquidity and reducing accounts receivable (AR) and reconciliation issues might be added to the list of requirements too. Achieve this without adding layers of complexity or expensive technology and many would sign on the line. And yet, even though such an offering already exists in the form of the virtual account, to date it has flown under the radar of many companies.
What is a virtual account?
Along with their associated account ‘numbers’ (also known as identifiers), virtual accounts are provided to a corporate by its banking partner. Essentially each account is a ‘subsidiary’ or sub-account of the client’s own physical account with the bank; they cannot exist outside of that immediate relationship, hence they are virtual. The identifier serves to segregate any funds from any other funds in the same main account and yet is inextricably linked to that account.
The key to a virtual account is thus the virtual account number/identifier. This may be provided to the client by the bank (in which case it will typically be structured like an IBAN) or to the bank by the client. If the client provides the identifier, it will commonly adopt customer identifiers – customer account numbers, for example – drawn from its own system of record such as an ERP or TMS. Either way, it eases subsequent integration of account data into those systems, potentially facilitating the full automation of payments and collections processes, which for in-house banks, payments on behalf of (POBO) and collections on behalf of (COBO) operations, is just perfect. It may also be possible for the client to generate virtual accounts using its bank’s online ‘self-service’ tool.
Regardless of how the accounts and their identifiers are created, each one will be uniquely assigned by the corporate to each of its own customers that it wishes to bring into the structure (in a large business this may be both external and internal). In theory there is no limit to the number of virtual accounts that a corporate may append to one of its physical accounts and it is entirely feasible to establish a multi-level hierarchy of virtual accounts to mirror the structure of its business relationships.
Typically, virtual bank accounts will be used to manage the allocation and reconciliation of high-volume, low-value transactions. According to Finnish banking technology vendor, Tieto, they may also be used in a supply chain context “to satisfy reconciliation requirements for supplier remittances and receipts.” The vendor says that virtual bank accounts can also be used “where customer pre-funding for an activity is required, such as investments.”
In the European market there is a serious driver for the adoption of such a solution right now. As part of the technology preparations for SEPA, many companies have been busy centralising their payments and collections processes. The pressure to re-engineer these processes has inevitably given rise to concerns around receivables, credit and risk processes. This ‘need’ is propelled further by the desire also to draw on internal liquidity rather than rely on bank funding. Anything that can enhance the mechanisms of payments and collections factories must surely be a welcome source of relief.
Asian clients of some international banks have been using virtual accounts for several years. Their development and roll-out has taken place in the region because it is home to a number of jurisdictions where local clearing truncates so much information that customers were unable to easily adopt straight through reconciliation processes. Institutions such as BNP Paribas, HSBC, Deutsche Bank, UniCredit, Allied Irish Bank, Barclays and Bank of America Merrill Lynch (BofAML), as well as providers such as Korea Exchange Bank and Indonesia’s Bank Mandiri, all offer virtual accounts in Asia, for example.
Wherever a business may operate, most are focused on accelerating their cash conversion cycle – applying cash faster and improving their reconciliation and DSO (days’ sales outstanding). Increased DSO obviously has a negative impact on working capital requirements, just as failure to reconcile remittances efficiently can lead to chasing payment from a customer who has already paid – streamlining the credit control process is vital in establishing an accurate picture of individual client and overall income, not just in being able to extend credit to good payers but in quickly tackling delinquent accounts.
As a relatively easy add-on to a normal corporate bank account, the virtual account concept can deliver a raft of efficiencies around account ownership and management. For the treasurer it means being able to centralise cash whilst retaining some segregation and delineation without the increased complexity and cost of running physical accounts. For the finance function in general it can accelerate collections and release liquidity from a corporate’s internal working capital flow by reducing the dependency on information from the payer, their bank or clearing institution. It can also give broader and deeper real-time visibility over physical account data and enhance the credit control process.
A virtual account has a far lower impact in terms of the cost, central bank reporting and audit requirements than a physical bank account has. But it is not just the immediate cost that is saved. Fewer accounts can mean increased standardisation and automation of processes which in turn facilitates automatic processing and matching which is faster, more accurate and cheaper than doing it manually.
Taking it further
Banks offering virtual accounts are unlikely to let the concept rest without further development. In the context of receivables reconciliation, virtual accounts may be just a very granular level of reporting. But centralisation of treasury or the set-up of shared services centres to handle both COBO and POBO really does have mileage.
By opening virtual accounts for each entity within a group and appending sub-level virtual accounts to these, clients of those entities can effectively remit to a central account (whether national, regional or global) using their own unique virtual account identifier. In this case it is not so much used to identify the payer but more as a tool for visibility and control over what each entity is doing. As a variation on (or even replacement of) the pooling concept, it can facilitate genuine benefits around liquidity management.
Any centralised receivables programme which would see a company regionally collecting into one account on behalf of other jurisdictions would continue to have the normal tax and legal consequences for ‘on behalf of’ traffic (both COBO and POBO models). Adoption of the model does not mitigate nor cause any new actions. However, the need remains for banks to work with customers to make them aware of transactions that can be done onshore, offshore or on-behalf of, and the considerations around that.
Indeed, it is important to consider that virtual accounts are not yet subject to direct regulation. Although nothing has yet been formalised, industry hearsay suggests that virtual accounts have attracted the regulators’ attention around their use as a POBO mechanism (but not COBO). Because a virtual account doesn’t really exist in its own right, this forces an interesting discussion. An eye needs to be kept on how regulation evolves and on what the opportunities or limitations may be. Each bank will thus need to undertake full and proper legal, regulatory and tax analysis in each country in this respect.
A different tack
As a development of the virtual account concept, better visibility of operational cash can be gained by exploiting Client Managed Accounts (CMAs). This is where the bank account infrastructure remains bank-connected but resides under the corporate’s control, either deployed as an in-house system or as a bank-provided service. CMAs give corporates the scope to determine their account structures, mapping them to their business requirements and establishing the rules that determine their behaviour. The way in which money is routed when it hits the main account can be predetermined and automated. Expectations of payments and receipts can be pre-populated against individual accounts so when money movements occur they are automatically reconciled against the expectations and an accurate real-time view maintained.
Where companies are multi-banked the same principles can apply, connecting multiple banks to a single set of CMAs is less of a challenge than most may assume. Either via direct connectivity channels or through industry initiatives led by organisations like SWIFT, there are plenty of options that can be deployed to make life simpler and accelerate the aggregation of balance and transaction data.
A progression of the virtual account is the virtual payment card. This offers the same working capital benefits as a regular corporate card programme but has some added benefits around process streaming (especially reconciliations), security and data management. This product is offered by major institutions such as Citi, HSBC, BNP Paribas and BofAML.
In the virtual card offering from Citi, for example, virtual card numbers are generated off the back of a physical account and existing corporate card programme. They can be used to set variable spending limits – even for large one-off transactions – based on the user’s specific purchasing needs. Virtual cards are used not only to safeguard against unauthorised spending and fraudulent purchases, but they also enable simpler reconciliation because the virtual card account generates a unique virtual card number for each transaction. This naturally serves to amplify the inherent security of this solution, particularly for ‘card-not-present’ transactions.
The level of authorisation controls granted to the account holder can be used to define the limits of virtual card usage that may include single or multiple use, individual or aggregate transaction amounts, date and time ranges and even single merchant or merchant group. Pre-approval of every purchase can be effected by establishing an approvals hierarchy.
The advantage of this virtual solution is enhanced corporate control. Because the card and its number is virtual/digital, all changes can be made in real-time, remotely. But there is a reporting advantage too. The standard data obtained from a provider is of course available but the virtual card offers additional reporting through custom data fields (Citi offers up to 30 per virtual card number).
Through bespoke reporting, companies can access better spend monitoring and compliance with capture of purchase description, employee ID, cost centre and so on. The data fields also facilitate purchase pattern analysis and the system provides allocation benefits in that expenses can be automatically mapped to the GL based on custom data fields.
Virtual cards can be used in two very specific instances: in a B2B environment for vendor/supplier payments, notes Mel Gargagliano, Head of Commercial Cards for GTS EMEA, BofAML or for travel-related expenses. Whilst a traditional purchase card might be used for small-ticket purchases, virtual cards can be used in this way too but tend to be for larger values where repeat transactions mount up (such as blanket purchase orders for stationery or IT periphery). Using a virtual card streamlines processes because it can be integrated within a formal procurement or travel and expense management tool (such as Ariba). The virtual card concept and its unique number-generation system also allow firms to tie rich data with specific one-time payments.
Typically P-cards rely on the merchant to pass on ‘level 3 data’ (such as item purchased or location) to support reconciliation processes. With a virtual card, a company can tie the specific information that it requires to each transaction, explains Gargagliano. “For book-keeping purposes it puts the power into the buyers’ hands.” There is a benefit on the supplier side too, she adds. Sometimes payments are received without a supplier necessarily knowing what they are for, creating a reconciliation problem. An invoice number can be tied to payments with a virtual card, with richer data added to complement the transaction. The type of data required can be set up in advance (and updated as required) but free-form data can be appended to fit the purpose. For reconciliation, with the virtual card it can be taken as fact that a one-time number, with the rich data appended, is tied to a specific purchase.
The inherent security element of a one-time use number applies also to merchant activity, says Gargagliano. If a buyer wishes to restrict the processing of that card purchase to a certain time or precise transaction amount, for example, then the relevant protocols can be applied, limiting in this case delays in redemption or claiming an incorrect amount.
The virtual card number itself is automatically and randomly generated by banking technology. Additionally, within the BofAML system, where a card image is required (as is sometimes the case in the hotel trade) the relevant one-time virtual image can be created and sent to satisfy this need too. In fact, the bank has tied a specific virtual card into the travel payments space with its BofAML Travel Pro offering. In business, travellers typically use a traditional individual card for incidental expenses and channel all bigger ticket travel payments through a travel management firm using a lodged card (instead of a single purchase invoice it provides pooled monthly periodic invoices with all the relevant data).
The lodged card is not necessarily beneficial for low-cost airlines and many hotels though where the same global data repository information is not always available to push travel details to, says Gargagliano noting that a lot of the detailed information for reconciliation is often just not available. BofAML Travel Pro uses a unique one-time 16-digit virtual card account number (and a virtual card image or fax if required by a hotel employee not familiar with the concept) for each transaction. This allows travel management partners to better control their central travel expenditure by expanding the range of spend on, for example, airline tickets, rental cars, hotel rooms and rail tickets. Crucially it captures more detailed data which can be set up or changed from the start and allows firms to set and change limits as they wish. “It provides clients with rich data,” says Gargagliano. “It solves some of the data flow problems with firms outside the established travel partner programme and it allows them to still manage all large ticket travel expenses centrally and securely.”
Liquidity position monitoring: making standards work
Sometimes innovations do not require a wholesale rewrite of the technology landscape or even the introduction of a single new solution; the answers may already exist. On the grounds that there is no new technology per se in the world of liquidity position monitoring, Eric Bayle, Director, Head of Payments & Cash Management, UK for Société Générale (SocGen), believes the real goal for corporate treasurers should be to optimise their current processes. “It is surprising how many very large companies still have cash scattered around the world and no visibility on it,” he notes. Many of these firms readily admit their inability to produce an accurate figure and full group-wide visibility, despite the risk this presents.
As a relatively simple tool, fuller use of SWIFTNet is Bayle’s suggestion to be able to receive statements of all bank accounts from all banks. As part of a rationalisation and centralisation programme, receiving this data on a single platform and in a single report every day (even intraday) will provide the necessary oversight of cash positions. He describes an in-house cash pool solution whereby corporates can receive MT940s (and the intraday equivalent, the MT942) centrally via SWIFT connectivity, these then generating book entries through the TMS. With the application of background analytics and supplementary data gathering and consolidation, dashboard-style information can, for example, be configured for delivery regardless of the treasurer’s physical location.
In Europe, the future of this relatively simple yet effective measure lies in SEPA and the use of SWIFT’s XML-based ISO 20022 camt (short for ‘cash management’) messaging standards. At the moment Bayle says there are very few banks that are able to send camt.052 (account reporting), camt.053 (account statement) and camt.054 (credit or debit notification) messages. This may be about to change as SWIFT seeks to promote XML’s further adoption. “Is it going to create a revolution? I don’t think so,” says Bayle. “An evolution – perhaps, with more available information.” Despite it being a fundamental part of any business, simple monitoring of cash does not need a revolution. Although he feels that, as part of the “trendy discussions” on POBO and COBO payment factory models, the information provided in the XML-based account statement “will be increasingly critical for reconciliation purposes,” it is often the case that finance directors and treasurers do not want more detail, “they just want to know their global position.”
Standardising the standards
Improving cash oversight is not just an important objective for large corporates; more midcaps are seeking cash visibility now, says André Casterman, Global Head, Corporate and Supply Chain Markets, SWIFT. Of all the SWIFT FIN messages sent by banks to corporates, 75% relate to cash visibility (with 51% for MT940s and 24% for MT942s, with MT940 traffic growing at an annual rate of 25% per year).
Currently the MT940/942 messages are the key to acquiring the basic cash position data. However, he acknowledges that although the header fields (the main fields) are standardised, when it comes to line item information, corporates and banks have tended to agree on different ‘standards’. The influence of smaller corporates on their banks when requesting very specific line item data is uncertain. “There is room for more standardisation in the MT940s, and this is what we have achieved with the ISO 20022 camt messages,” says Casterman, adding that the camt.053 flows that banks send via SWIFT to corporates have grown by 143% between H1 2014 and H1 2015.
The camt.053, as the MT940 equivalent, is the main subject of promotion by SWIFT today. At a recent SWIFT bank user conference in London it was agreed in principle that camt.053 should be added to the certification requirements list of the 613 banks that are SWIFT certified at the advanced level. Some 70% of these banks already have the capability to support camt messaging, the rest will seek to maintain their advanced level status by getting on-board in due course. The addition of this criterion to the SWIFT portfolio (along with the payment initiation format, pain.001 which around 90% of advanced certificated banks can handle) was proposed by Casterman to the SWIFT for Corporates governance advisory committee when it met in September 2015.
In Europe, SEPA has acted as a boost for awareness of ISO 20022 messaging. “Corporates involved in SEPA are increasingly keen to move payment flows into an ISO 20022 environment,” notes Casterman. “In Asia we have already seen some MNCs adopt an ISO 20022-only approach, only using SWIFT MT messages when ISO 20022 is not available. This is why we have proposed to increase the level of certification requirements for banks and also for cash management and payments system vendors.”
But Casterman knows that there is a need for more than just new message-types; there is a need to manage market practices, to avoid one side imposing its view on the other. “The decision of each bank is driven by commercial needs; if a large corporate imposes its format onto its banks, those banks will often agree to that. This is why standards are often implemented in various ways.” Being overly prescriptive is not achievable in the short term so SWIFT has developed a number of tools to try to help corporates and banks work together more efficiently.
The key to agreement is the CGI-MP (Common Global Implementation-market practice) Group. This is the new, more focused name for the old CGI, remaining the same group of industry stakeholders who have come together with the intention of creating a singular approach to SWIFT messaging standards, but now including all those under ISO 20022. In practice, CGI-MP seeks to build a uniform layer on top of the basic message formats. It recommends (not dictates) how these messages could be best used in the corporate world. Banks can still develop their own specifications on top of CGI-MP as a third layer as they will have some competitive proprietary tools tha require this. But, explains Casterman, these specifications are documented in the SWIFT standards repository, known as MyStandards, and are freely accessible by corporates either directly or via their own participating bank.
Ultimately, it is up to the individual stakeholders to work with these tools but if treasurers are increasingly looking for accurate and timely knowledge of their cash then the banks that seek advantage are going to have to get on board under their own steam. It is not SWIFT’s role to force compliance. As Casterman notes: “We cannot police the banks in terms of going from one standard to another.”
SCF platforms and working capital optimisation
Most suppliers would prefer that they have reasonable payment terms and that their buyers settle invoices on time. Indeed, so would the European Union which established Directive 2011/7/EU to try to prevent deliberate late payments by large buyers. But how much power does a small supplier have over a large buyer when it comes to setting payment terms? It’s a harsh commercial reality, but very little in most cases; well-meaning EU directives or equivalent domestic rulings offer little comfort for the majority of hard-pressed suppliers.
That large corporates seek to hold on to their cash is, however, understandable. With banking uncertainty post-financial crisis, reducing working capital requirements as far as possible has been the order of the day. Many large businesses have been extending payment terms, accelerating collections and stockpiling cash, fearful that their banks may suddenly pull liquidity.
The problem is that not only have some gone too far in the eyes of the public (and popular media) by extending payment terms to unsustainable levels, but also they are putting all the pressure and risk back into the supply chain. Here, a large percentage of small to medium-sized suppliers either can’t borrow working capital from their banks or can only do so at punitive rates (this in itself perhaps as an unintended consequence of yet more well-meaning but sometimes poorly thought-out regulation, notably Basel III).
With PwC quoting in the order $23trn of stockpiled cash sitting in corporate coffers, some earning very little or even negative interest, the entire liquidity problem of every small business in the world could be solved if the two sides were able to meet. This is where supply chain finance (SCF) may have a small role to play.
It continues to gain momentum globally, albeit gradually. The World Supply Chain Finance Report 2015 from BCR Publishing estimated that the discipline could now be worth as much as €43bn in terms of funds in use and is growing at a rate of around 30% per year. As corporates and their SCF partners are now beginning to master the challenges that once limited its roll-out across supply chains, this should continue.
SCF may get a boost from the growing popularity of electronic invoices. Regulation is the game-changer here. Across the world, many government authorities have endorsed the adoption of e-invoices and have even, in some instances, made its use mandatory for both public sector and B2B transactions. This is not just driving adoption of e-invoicing but, by virtue of offering wider visibility at the stage before the creation of the buyer’s confirmed payable, extending the scope of SCF too. And as more companies weigh the benefits of integrated e-invoicing and SCF, offerings from the likes of Tungsten, Taulia and CloudTrade, SCF might begin to reach corners of the market inaccessible through bank-centric SCF solutions. Banks offer SCF in a slightly different way to B2B networks. Bank SCF solutions are commonly seen as being aimed at the largest corporates with the highest credit ratings and only at their top tier of suppliers.
Matthew Stammers, European Marketing Director, Taulia believes it to be the case that the elitist programmes between businesses, global banks and the very largest suppliers, will shortly be replaced by a more democratised process between a business and all of its suppliers because of what e-invoicing brings to the party.
The ‘elitism’ of the bank-led SCF model was primarily due to the regulatory constraints on the banks surrounding KYC, anti-money laundering and also in more recent times Basel III. The on-boarding process with suppliers was therefore arduous, and the costs outweighed the benefits when companies were looking to on-board all but the very largest suppliers onto their SCF programme.
The new generation of SaaS based e-invoicing platforms, however, are game changers as they approach the subject from a very different perspective. These providers approach SCF and e-invoicing from a supplier-adoption approach, where the most important aspect is getting as many suppliers on the platform as possible. This is vital because without a critical mass of suppliers using an e-invoicing platform to send, receive and process invoices, a business doesn’t have a viable project. The ‘DNA’ of these SaaS-based vendors is therefore driven by this supplier adoption approach.
Traditionally the benefits of using an e-invoicing solution include increased automation, accuracy and efficiency. It is a useful tool to improve a business’s accounts payable processes. However, it is not a game changer in this guise. Where e-invoicing starts to get really interesting is when it’s used to enable and underpin a dynamic and electronic trading relationship between a business and its suppliers. The core feature of e-invoicing is that it connects a business with the majority or all of its suppliers. This network can then be used to offer early payments to these suppliers.
This can either be through utilising excess liquidity or, if the working capital position is sensitive, through the injection of third-party financing in the form of SCF. And because the goal of an e-invoicing network is to connect a business with all of its suppliers, financing opportunities are now available to the whole supply chain, not just the top 25-100 largest suppliers.
The primary benefit, therefore, from such a solution is that it resets the relationship between a company and its suppliers, allowing corporates to strategically approach the management of their supply chain. For example, a company can utilise the strength of its credit rating to offer third-party financing to all its suppliers, thereby strengthening the health of a supply chain. Or the treasury function can utilise excess liquidity to fund early payment in exchange for a discount, reducing a company’s Cost of Goods Sold (COGS). From a treasury perspective, this offers an opportunity to step beyond its usual remit and be involved more deeply in the strategic goals of the organisation. Of course, using a SaaS service offers corporates other operational benefits through using the cloud, including full visibility, real-time information, quick on-boarding and set-up, enhanced security, cost savings on resources and continually updated software.
The SCF and e-invoicing space is one that is constantly evolving and the current incarnation of SaaS providers have removed most of the barriers that have historically prevented widespread adoption. There are other developments in this space that providers are beginning to realise around the exploitation of Big Data. There are now years of supplier trading history on a provider’s servers; by using analytical tools built into the platforms this can be analysed, looking at areas such as risk and credit worthiness. This creates a powerful analytics suite that can allow corporates to model scenarios based on what suppliers have been doing and are likely to do.
Anatomy of a new SCF model
Even as these new tech-based B2B offerings made clear headway, a complete rethink of the existing model was on the cards. “The world’s working capital markets are broken,” states Chris Dark, President International of financial technology firm, C2FO. “They are broken because banks have never had true information symmetry between accounts payable and accounts receivable; they have been in the middle and have had to make a judgement call for each supplier about whether to fund them or not.” Whilst ‘traditional’ supply chain solutions have been available for many years, Dark believes that in many cases the providers do not know if an invoice is approved or not which he says can lead to higher costs.
A system that enables suppliers to accelerate payment of their receivables but at a level of discount they feel comfortable paying, whilst in turn providing gainful employment for the stockpiled corporate buyer’s cash, is perhaps the solution. Such a system exists in C2FO, claims Dark.
As a working capital exchange platform based on a unique bid/ask environment, C2FO (Collaborative Cash Flow Optimisation) is in essence a marketplace in which buyers can offer early settlement to suppliers who bid for that early cash by offering the percentage rate of discount that suits them. In doing so, it gives suppliers easier access to working capital, and offers large corporate buyers a healthier return (currently an average of 6.8%) on their otherwise moribund piles of cash.
The rates take their cues from (but are not set by) market rates, but even when market interest rates rise, Dark says that the achievable rates for both sides on this platform will remain more or less in parallel; in theory it is a sustainable solution with benefits for all parties. “It’s also risk-free because the cash comes from its own payables; it’s not a matter of if the company pays, but when.”
The cash generative aspect, when considering that the corporate buyer already has stockpiles, is not an issue because that cash can be used to generate margin; the buyer is effectively getting a discount on the goods, explains Dark. This, he adds, leads to accounting advantages. The average discount in the market is 0.5% (giving the absolute discount of 6.8% APR). This is treated as a reduction in cost of goods or operating expenses, not as an interest income. “It impacts the company’s P&L in a positive way, increasing EBITDA and directly influencing EPS.”
In practical terms, the C2FO platform connects with the buyer’s ERP (it works with all the main systems, says Dark). Once the buyer has sent an electronic file of its approved invoices to the platform, suppliers will log into the system and can bid to be paid early (which is usually on the next payment run). Suppliers are not bidding against each other but offering buyers their best percentage rate for early settlement of their invoices.
Most suppliers will have previously set their preferred rate and will automatically participate as approved invoices are loaded but can change the rate or opt out as required. The buyer sets the overall figure it wants to attain across all of its on-boarded suppliers (and may even set a different rate per currency). C2FO uses proprietary algorithms to blend and guide the available rates for each supplier at any given time. Buyers pay their suppliers directly, not through the platform, so C2FO sends the necessary instructions to the buyer’s ERP to make supplier payments.
Whilst other supply chain finance solutions exist – such as those offered by the banks as well as independent players such as Orbian, Demica, Ariba and GT Nexus – the market seems more than big enough for every player and approach. As a means of democratising the buyer/supplier relationship, Dark is certain that C2FO is carving a niche that can go a long way to filling the vast gap in the world’s working capital markets whilst providing the kind of yields that usually only exist towards the scarier end of the market.