Funding & Investing

Supply chain finance: what’s in a name?

Published: Sep 2011
Talking Treasury Forum group photo

From the impact of Basel III on trade to the growing trend towards supplier finance, five bankers discuss the changing world of supply chain finance, with an eye on creative solutions for the future.


Portrait of Alan Ainsbury, Head of Trade Finance Sales, Barclays Corporate

Alan Ainsbury

Head of Trade Finance Sales
Portrait of Nick Blake, Managing Director EMEA Corporate Sales, J.P. Morgan

Nick Blake

Managing Director EMEA Corporate Sales
J.P. Morgan logo
Portrait of Roque Damacela, Head of Trade and Supply Chain Products, EMEA, Bank of America Merrill Lync

Roque Damacela

Head of Trade and Supply Chain Products, EMEA
Bank of America Merrill Lynch
Portrait of Keith Karako, Global Trade Finance Head, Citi

Keith Karako

Global Trade Finance Head
Citi logo
Portrait of Eric Lemmens, Global Head of Supply Chain Finance and Trade Finance, RBS

Eric Lemmens

Global Head of Supply Chain Finance and Trade Finance
RBS logo
Portrait of John McQuaid, Global Head of Supply Chain Management Group, BNP Paribas

John McQuaid

Global Head of Supply Chain Management Group
BNP Paribas logo


Portrait of Richard Parkinson, Managing Director, Treasury Today

Richard Parkinson

Managing Director
Treasury Today logo

Richard Parkinson (TT): Is there really any substance to supply chain finance? Isn’t it just a fancy name for a set of straightforward products?

Roque Damacela (Bank of America Merrill Lynch): That really depends on how you define supply chain finance (SCF). Over the last few years, the term SCF has been used by multiple parties, including banks and service providers and has essentially become an umbrella term that encompasses whatever they may be offering in the supply chain space. Many associate the term with a specific form of payables financing, that is also known as supplier financing, but in my view it’s much broader than that.

SCF not only includes payables but it also includes elements that are further upstream, such as pre-shipment finance; elements that are in the middle of the cash conversion cycle, around inventories for example; and then downstream into the sales and distribution channels. This wider definition opens up a myriad of potential financing structures that are relevant to supporting clients in getting their product to market.

In other words, the SCF ‘label’ is as narrow as the service provider may want it to be, and yet it is as broad as the needs of the corporate. So, depending on who’s providing that service or solution, it will take on a different connotation.

Eric Lemmens (RBS): I agree that in the past we often looked at supply chain finance as a specific product group. Increasingly, however, SCF is coming to encompass much more than receivables finance, payables finance, pre-export finance and so on – it is becoming a total package of working capital product offerings.

So really, the aim is to connect the elements together to help a client find a suitable, holistic solution. There is also room for further expansion around the whole SCF angle, to include FX services, for instance. I think that is the model that many of us are at least trying to move towards.

Alan Ainsbury (Barclays): Eric has a very valid point of view and I also think that the banks and financial institutions are increasingly striving to deliver end-to-end supply chain solutions to clients. Yes, SCF comes in various guises and different ‘wrappers’ if you like, as each institution delivers solutions in a slightly different way. Nevertheless, ‘utopia’ for everyone involved is to be able to deliver end-to-end supply chain solutions to our clients, and for me, that’s what SCF should be.

Keith Karako (Citi): Equally, corporates aren’t just looking for the standard payables/receivables solutions anymore, they want SCF to be innovative and that is largely a reflection of the external environment. We are definitely seeing renewed interest in SCF from the corporates: in 2007 and 2008 there was a lot of interest because they had disruptions to both their physical and financial supply chains. In 2010, the noise around SCF somewhat subsided as the global economic situation began to stabilise. This year, we’ve had the Arab Spring, the awful natural disaster in Japan, sovereign concerns in the EU, not to mention rising commodity prices, and as such, we’re seeing renewed interest from the large corporates. They want to ensure that at both ends of their supply chain there is plenty of liquidity and availability of credit.

Therefore, I think that going forward, corporates are going to call on us for creative solutions. Whether it is based around traditional payables financing, or receivables financing, the key word is ‘innovation’. It’s a question of helping clients – both buyers and suppliers – to have mobile and yet safe supply chains.

Nick Blake (J.P. Morgan): Looking at this at the broadest level, supply chains continue to become more global and complex, not least because of macro and micro-economic factors, regulatory challenges and political issues. Over the last three to four years, we have seen more disruption in supply chains than we had witnessed for a considerable time.

It is understandable and indeed sensible that corporates are refocusing on, not just the security of those supply chains, but ensuring that their suppliers and their customers are financed appropriately. In turn, this means that the business continues to move forward and operate efficiently.

Given the underlying complexity in today’s global supply chains, it is inevitable that the financial aspect of the supply chain has to reposition and adapt in terms of product development to support that dynamic.

Roque Damacela (Bank of America Merrill Lynch): To Nick’s point, what the shifting dynamic calls for here are event-driven decisions by corporates to, for example, move supply sources to locations closer to itself, or to potentially have contingency planning in place for their supplier base that allows the corporate to hedge the supply of goods. These types of situations almost beg the question as to whether the banks should be looking at SCF as a set of products that are delivered in a cookie cutter model or really as an ad hoc solution that is tailor-made for corporate clients’ evolving situations and needs given the complex global environment in which they operate.

John McQuaid (BNP Paribas) was unable to get to the Forum, however he has subsequently added his comments: SCF is a banking business in its own right and has developed significantly over the last decade especially since the financial crisis of 2008. Clearly SCF utilises traditional banking techniques but these are applied in a new and more effective manner enabling banks to intermediate throughout the entire supply chain process. Banks have different definitions of what SCF means, ranging from simple receivables factoring to the entire product suite which is aimed at optimising working capital within the supply chain. As mentioned by Roque, SCF does not just mean payable financing and corporates are looking to the banks to provide tailor made rather than cookie cutter solutions that address their working capital requirements. Our clients’ supply chains are highly complex and fluid and the bank’s product offering has to be flexible and robust enough to cope with the evolution of the clients’ requirements.

Richard Parkinson (TT): We touched on the fact that corporates are facing more risk in their supply chains today, but which of these risks do you consider top priority and what should corporates be doing to manage emerging risks?

Keith Karako (Citi): The natural disaster in Japan for example, demonstrated the weakness of certain supply chains – in particular those relying on a sole supplier for key components. Since then, several corporates have revisited their supply chain structures and are instigating multiple production sites for very critical components.

The main area that corporates are coming to us for advice on is how to analyse the impact of such an event. We therefore take a consultative approach to our clients’ overall supply chain, providing the most appropriate solutions to meet their specific needs.

Portrait of Alan Ainsbury, Head of Trade Finance Sales, Barclays Corporate
Alan Ainsbury

Alan Ainsbury (Barclays): Would you say then that corporates have historically acknowledged risk but have done very little to actually address that risk? We talked earlier about the liquidity risk that corporates run with their supply chains, but it wasn’t until the liquidity crisis hit that they realised it was actually a risk. And Keith, you mentioned supplier risk in terms of Japan. Of course corporates now acknowledge that risk, but, in some cases there was little done prior to that point to mitigate that.

Keith Karako (Citi): When a crisis hits, it’s a top priority for a year or two and then if there isn’t another episode, it is easily forgotten. There is an opportunity for banks and corporates to work together to better assess and effectively manage these risks on a proactive basis.

Alan Ainsbury (Barclays): In that case, since corporates have historically done little to address their supply chain risks, it should be the banks’ role to pre-empt that behaviour and offer advice on how certain situations may impact the corporate and their supply chain.

Nick Blake (J.P. Morgan): Around that angle, a number of our corporate clients are moving into new markets where they have little or no experience in, or in fact may just be exporting into or importing from a market without having a real presence there. One of the things that we’re certainly trying to help with is ensuring an open dialogue with our clients specifically around market dynamics. We have people domiciled in a number of these markets, who experience on a day-to-day basis what the best practices are and what the risks specific to that market are likely to be. It’s a question of arming the client with knowledge and tactics for that particular market.

Eric Lemmens (RBS): Personally, I think that, after recent events, corporates realise all too well what the risk of a disruption in supply is, and what the financial impact of that could be. Also if you look back five or ten years ago, the retail and auto industries were always squeezing their suppliers very hard – they have definitely learned that pushing suppliers too far is not the most efficient thing to do for their own business.

Equally, I think any prudent treasurer, and any prudent CFO should have supply chain finance on their agenda to be considered at this stage, and at least explore the alternatives, the complexities and the associated costs. As we said earlier, these are straightforward products, but together they provide a holistic solution. Let’s help our treasurers to have much more predictable cash flows, predictable suppliers and better performing, more consistent businesses.

Portrait of Roque Damacela, Head of Trade and Supply Chain Products, EMEA, Bank of America Merrill Lync
Roque Damacela

Roque Damacela (Bank of America Merrill Lynch): We also have to recognise that the way the world works has changed in many ways. We’ve touched on the macro picture, but trading patterns have also changed significantly. There are different risks associated with trading on open account versus trading on traditional terms such as letters of credit, but banks are in the business of providing many services, some of which are risk-related. As such, it shouldn’t be a surprise to us that corporates are looking to banks to provide risk-related solutions for their open account trading activities in much the same way as they were looking to us to provide risk mitigation services for their documentary trade activities.

John McQuaid (BNP Paribas): The global nature of the supply chain brings several risks that corporates must manage. These range from the physical, ie the distance that inventory must travel and the subsequent risk of disruption due to natural disasters or blockages in transit, to financial risk on both their suppliers and buyers. Diversifying suppliers and their location can help reduce the risk of physical disruptions but will not eliminate it. This results in the requirement to build up inventory which in itself ties up working capital. The ability of suppliers and buyers to fund themselves poses a significant risk which, given the current financial crisis, is putting increasing pressure on the supply chain. This pressure arises both from the retrenchment by local and international lenders and due to regulatory action. Managing buyer credit risk and the commercial pressure to provide extended payment terms remains a risk that must be managed either via banks or the insurance market. The global banking crisis is far from over and the impact is becoming evident throughout the supply chain.

Richard Parkinson (TT): How has the role of the treasurer developed to encompass the growing number of risks and the more strategic elements of SCF that we have already highlighted? Also, where does the treasurer’s skill set need to develop next?

Nick Blake (J.P. Morgan): The treasurer is now being seen as the company expert around risk. This means taking on not just financial or counterparty risk, but now supplier-related risk. The challenge is how treasurers can bring their existing skill sets to the fore in analysing the financial and counterparty risks into the company’s supplier base.

Roque Damacela (Bank of America Merrill Lynch): We hear a lot about the treasurer being increasingly ‘in the spotlight’, but it’s true that the role of the treasurer has actually changed. The role of the treasurer used to be more limited to managing cash flows, managing bank relationships, and of course managing interest rate risk and so on. As Nick said, they’re now looking at supplier risk. And not only that, they’ve also been tasked with being the working capital management champions within an organisation. Some of the roles that were more traditionally within the CFO’s side of the corporation, have now shifted to the treasury function. So treasurers are finding themselves having to pick up a whole new set of skills, which might be part of the reason why they are looking to banks more and more to support them in an advisory fashion.

Eric Lemmens (RBS): Looking ahead, I think the next area of skills for the corporate treasurer will be Basel III, among other regulations, and looking at how it will affect them and their suppliers. Inevitably, Basel III will impact banks’ capacity to support our corporate customers and their suppliers, as well as making our services more expensive.

On the other hand, there are local initiatives, in the UK for example, and the government wants the banks to actually finance more MMEs and SMEs in the country, and is pushing us to extend the balance sheet. So with these two forces at work in a contradictory fashion, we somehow need to get them together to make sure that we all agree on which course to go.

John McQuaid (BNP Paribas): Working capital management is now firmly within the remit of treasurers and therefore SCF has become one of the key aspects of the treasurer’s responsibility. Whilst traditional treasury functions such as FX and interest rate management have been almost entirely within the control of treasurers, managing SCF and working capital management requires the treasurer to work in tandem with a number of other functions within their companies, eg accounting, purchasing, production, sales and IT. Unless the treasurer develops the skills to manage the expectations and requirements of this diversified group, then optimising working capital with the supply chain will be very difficult. The treasurer also needs to ensure that his company understands the implications of Basel III in respect of both the availability of funding and pricing and the realities of the current banking crisis.

Richard Parkinson (TT): Will prices really go up? Because as a corporate, I often hear the banks saying ‘oh, we’re going to have to charge more, the days of cheap credit are over’, but then nothing really changes.

Keith Karako (Citi): Firstly, Basel III is not final yet, but the indication is that for the large global banks which support a lot of the cross-border trade, the capital requirements are going to increase. With increased capital requirements on a given asset, to get the same return, banks will be required to increase their pricing. For traditional trade related to letters of credit, LC confirmations and things of that nature, the capital requirements are going to increase under current Basel III proposal.

Banks will of course continue to provide this important service to clients: it will just be at a higher cost. If we have to pass on these higher costs, that’s going to hit the corporates, and it’s another cost they will have to pass on either to their supplier base or to their buyers.

Alan Ainsbury (Barclays): We won’t be able to give a definitive answer on costs until the final decision is made. Everybody has an interpretation at this moment in time of what they think may happen. But for the time being there’s no certainty and the lobbying of the regulators continues.

Portrait of Nick Blake, Managing Director EMEA Corporate Sales, J.P. Morgan
Nick Blake

Nick Blake (J.P. Morgan): A number of surveys and reviews have been conducted around this and I’ve heard the cost of capital in the trade business is likely to increase by somewhere between 15% and 35%. Conversely, the negative impact on global GDP could be in the one to two or even 3% range. If that is correct, those are significant numbers.

To that end, the trade banks are working together with the regulators to try and determine whether trade assets should be risk-weighted at the same rate as other financial assets. I think the underlying feeling is that because of the low levels of default and the different nature of trade finance it perhaps shouldn’t be weighted at the same ratio. That is clearly an on-going discussion and we hope it results in a favourable outcome for the trade business.

Keith Karako (Citi): There is an opportunity for corporates to influence the outcome of this situation. The regulators are hearing a lot from the banks on Basel III but I propose that corporates could be playing a more active role in voicing their concerns. ‘What’s the potential effect if you actually go and implement these proposals? So if they do require a higher capital for what I think both corporates and banks consider low-risk trade, what’s the effect on that?’ If implemented as it stands, Basel III is definitely something that will affect corporates and I would recommend corporates continue to learn about this proposed regulation and become more involved in the discussion. This will ensure that Basel III decision makers understand how their decision will impact businesses and thus are better equipped to make important decisions in the coming months.

Alan Ainsbury (Barclays): I agree with you Keith, because at the moment the lobbying is coming from banks and bankrelated institutions, but I see very little lobbying from corporate institutions around the impact it will have on them. There needs to be more push from the corporates to understand what the real consequences might be.

This theme really goes back to the point we made earlier: it’s the corporate acting after the event. So corporates should now be engaging with their bank – and vice versa – to actually understand what the effects of this will be.

Keith Karako (Citi): Yes, we’re going out and talking to corporates about the proposals and explaining which products it would affect, how much more capital we would have to allocate, and how much higher the cost could be. Basel III leaves corporates with limited options – they are faced with either changing the way they do business (letters of credit or open account for instance) or managing added cost in the system.

Nick Blake (J.P. Morgan): But of course Basel III wouldn’t naturally apply itself in a linear fashion across all companies. The biggest companies will probably have more pricing leverage with their banks anyway and will get better deals, whereas the smaller middle market companies will have less leverage.

I think some of these larger corporations therefore need to start looking into their supply chain and thinking about their suppliers and resultant impact. They can probably absorb some of this cost whereas at the middle market end of the supply chain, there may be more impact and that ultimately could affect the whole supply chain.

Roque Damacela (Bank of America Merrill Lynch): Absolutely. Corporates need to look both upstream and downstream. Upstream into their supply chain and downstream into their distribution chain. It is indeed the smaller companies which are likely to get penalised because the ratings assigned to them by banks tend to reflect higher risk. It’s also important to highlight that suppliers and distributors located in emerging markets may not be viewed very favourably under the proposed regulations. In my view it’s a two-way street, and we need to be doing more to educate our clients, but equally the banking industry could do with a little more input from the corporate side.

John McQuaid (BNP Paribas): We need to look not just at Basel III but also at liquidity costs generally and the impact of local regulators. If the Basel III regulations remain as currently proposed there will be a negative impact on pricing. Clearly given the risk weighted approach of Basel III the pricing impact will not be linear but overall pricing will increase. Apart from Basel III we need to consider the liquidity crisis that we are currently experiencing. In several regions banks are trying to strengthen their balance sheets by reducing lending. This is impacting weaker credits much more than highly rated companies. We are also seeing several regulators, eg the Chinese, dampening down lending both by local and foreign banks. This is pushing pricing up. As all these factors are occurring together I believe that pricing will increase.

Richard Parkinson (TT): Is there anything banks can do to help their corporate customers to cut costs in other areas of their financial supply chain – through technology for example?

Eric Lemmens (RBS): All of us are being pushed to become more and more efficient and effective for our corporate customers, and to a certain extent the increased regulatory cost will push us harder. One way of doing that is to work more with them on a straight through processing to increase their efficiencies and hopefully reduce costs. The other angle here is around giving the customer choice, so rather than taking a solely proprietary approach, banks need to work with bankagnostic platforms as well.

Alan Ainsbury (Barclays): At the moment, many of the platforms that provide SCF solutions are quite simplistic. I agree therefore that the banks will have to go further down the STP route because most of the platforms at the moment are driven from an invoice perspective. There is certainly room to look at the purchase order side of things, for example.

To Eric’s final point, I think the clients will definitely drive whether they want a single platform or whether they’re prepared to accept multiple platforms from different banks. It is our job to listen.

Roque Damacela (Bank of America Merrill Lynch): My sense is that corporates would obviously prefer the path of least resistance: that may or may not be a single platform. In fact, it might actually be a standardised set of data requirements, much like you have within the banking system, in SWIFT for example. In the mid- to long-term, things might move in that direction with regard to the technology.

I also believe there will be an interim step, and we will potentially see some level of consolidation. You’ll have the very large banks who have the capacity and have already invested significant amounts of capital in developing their proprietary platforms. Then you’ll have the banks like Bank of America Merrill Lynch, who have the flexibility to work with their own platform, as well as third party platforms. Finally, you’ll have banks that are smaller, or have other needs for their investment dollars, and choose to outsource their platform needs.

But by and large from a corporate perspective, my sense is that if they’re a customer with global operations, they will want to do things in fairly much the same way in Europe as they will in Asia and in the US, and I think that will continue to push the industry towards some level of standardisation on the technology side.

Keith Karako (Citi): We are seeing more large corporates review the supply chain technology with a renewed risk perspective, whether it be provided by banks or non-banks. Historically this review was probably in its infancy, but with the further development of supply chain solutions, corporates are using a growing number of different platforms from different providers. So even if a corporate standardises all of its feed processing, they are reviewing what risk they are taking with multiple platforms.

It’s probably still too early to say what the outcome of this review will be, but I think corporates are going to start saying: ‘Am I taking on additional risk by using multiple outside platforms rather than using one from someone I know and have a long-term relationship with?’

Elsewhere, I agree with Roque that corporates want the platform feeds to be the same. In the long-term, we will see a consolidation of platform providers and thus standardising of feeds. As an industry, it’s not efficient for every bank to have its own platform. From a risk perspective, can the industry and our corporate customers continue using third parties whose balance sheets may not be as strong? This is an important point to consider when technology needs continue to require increased investment.

Portrait of Eric Lemmens, Global Head of Supply Chain Finance and Trade Finance, RBS
Eric Lemmens

Eric Lemmens (RBS): Also, I think that corporates need to very carefully distinguish between technology and the risk element, as well as which banks are participating to provide the funding. For example, one can still have a bank-agnostic technology and yet have only one bank funding it. So I would very much recommend to treasurers, that whether you pursue a bank-agnostic platform or a bank proprietary platform, make sure you understand and you’re comfortable with who is actually funding it behind the scenes.

From a corporate treasury viewpoint it would be great if banks, corporations and governments would come to work together on structures where the governments’ suppliers could be more easily financed by us, as financing SME and MMEs is exactly what UK government wants us to do in the UK. So I see there is a responsibility for the three of us – corporates, banks and governments – to work together on grander solutions that help support the economy at this stage, and that are also technology-based.

Nick Blake (J.P. Morgan): I think you’re right, after all, we’ve looked from the finance industry a number of times to the public sector to help drive change. On the cash side, if you take SEPA for example, it took a long time for the SEPA payment environment to start generating transactional activity and the early expectation was that the public sector would support and help drive change. Unfortunately, it turned out that they were in some ways more averse to change than the corporate world was.

Eric Lemmens (RBS): Funnily enough, governments in emerging markets are often very proactive and some have actually created portals where investors can step in and actually provide liquidity to the SMEs and MMEs.

Roque Damacela (Bank of America Merrill Lynch): A few have gone beyond providing portals and actually endorsed private sector programmes and provided the backing of the state to those programmes with the aim of supporting SMEs and MMEs. This has been achieved with great simplicity and without the need of overly-complicated, quasi-capital markets structures that we’ve seen in some programmes in developed markets.

So there’s certainly something to be said on that front, not just in terms of making the access for the suppliers easier, but we’ve also seen governments, ECAs and other multi-lateral institutions very engaged in trying to support trade as a way to revitalise economic activity.

John McQuaid (BNP Paribas): Improved technology, per se, is a means to providing our clients with a better service and enabling the banks to monitor the underlying risks. However, improved technology does not reduce the cost of risk but rather allows banks and corporates to monitor and share risk information.

A separate question is whether corporates wish to see individual banks developing their own platforms or whether the ‘bank agnostic’ provider is the preferred route. We all saw some financial institutions withdraw from funding supplier financing and receivables programmes during the 2008 crisis, quite often with undue haste. Some argue that if there was a bank agnostic platform the other participating banks would have remained and replacement banks found for the withdrawing banks. This analysis is somewhat simplistic. Corporates need to choose their banks and the respective platforms carefully. Replacing a bank funder may well be easier than replacing a platform, especially in the short term. Finally, banks must improve their ability/willingness to provide multi banking platforms both for trade payables and receivables programmes.

Richard Parkinson (TT): What about card technologies – do these have a place as SCF tools for corporates are they firmly in the cash space still?

Nick Blake (J.P. Morgan): We’re starting to see more procurement spend from corporates being settled with cards, as opposed to documentary trade settlements, or standard payment settlements. We are also seeing procurement-led value gain across card programmes now. It’s hard to tell whether there’s necessarily a linkage with the supply chain finance angle though. I think some corporates are starting to look at that in terms of potentially releasing some working capital from the business.

For example, if a corporate can settle some of their procured goods on a card it tends to give them more liquidity as well as a settlement period, which means that they end up paying later than they would do through other settlement techniques.

That’s really the angle that comes up when we’re engaging with the procurement side of the large corporates, but they also want to help provide security and mitigate some of the risk of fraud in the way they settle with suppliers, whilst also helping the company’s working capital cycle.

Alan Ainsbury (Barclays): I think you’re right. Cards are very much at the lower value end of the market. In reality, cards are never going to be the sole option, but card programmes will certainly be relevant, and I think as we go forward cards will become more and more popular, certainly for the lower value transactions that corporates undertake as part of the supply chain process.

Roque Damacela (Bank of America Merrill Lynch): There are very different strata on the procurement side – some will fit the supplier finance solution set, others might fit an e-invoicing type solutions set, and yet another might be more suited to the card space. There may also be some overlap between solutions, but in general, cards are more within the procurement realm than treasury as such.

John McQuaid (BNP Paribas): Card technology is much more a procurement tool rather than an SCF one. It would be possible to integrate the suppliers who accept card payment into a trade payable programme but I would imagine that the volumes concerned would be low.

Richard Parkinson (TT): Looking forward, what are the major trends that you are seeing in the financial supply chain space? And what advice would you offer to corporates based on those trends?

Eric Lemmens (RBS): In terms of advice, one suggestion would be to quantify the added value that you can provide to your company. Investigate what the real benefits of supply chain finance might be for your organisation – information around this is not frequently provided by banks. On that note, I think treasurers should be more demanding and get their banks to actually calculate the benefits.

We can calculate the benefit fairly precisely in terms of freed up working capital. These are, in my view, very conscious decisions that treasurers should take. It’s important to get the procurement people involved as well to make sure that everyone is well informed about the numbers – after all, at the end of the day this is a numbers game.

Alan Ainsbury (Barclays): Yes, picking up again on some of the earlier themes we discussed, I think that corporate treasurers need to be more demanding of their banks in terms of advice and information. Of course the banks have a responsibility to keep their clients informed, but it is also the treasurer’s responsibility to enquire as to how external threats – like Basel III – will impact them. And I think if they can do that, identify the risks that they are taking, and also ask the bank to help them better understand those risks, there will be a benefit to the business both in terms of risk mitigation and also in terms of their working capital optimisation.

Roque Damacela (Bank of America Merrill Lynch): Just to come back to where we started our discussion, there’s certainly a very strong need for internal alignment – in particular on the payables side – between various parts of the organisation to make these SCF programmes successful. And so my advice would be to treasurers that are engaged in looking at these solutions to make sure that their working capital needs align internally before embarking on these ventures. This is because the success rate is largely dependent on multiple parties within the organisation in addition to procurement technology, accounting and so on and it is very important to ensure buy-in at an early stage.

Nick Blake (J.P. Morgan): In addition, on the SCF angle, there are different drivers for why a company may implement a supply chain programme, and based on that you probably need different sponsors in your business to support you in that effort – whether you’re looking to the security of your suppliers, whether you’re looking to improve your working capital position or whether you’re looking for some leverage in terms of pricing of contracts.

There are a number of different reasons a company may establish a supply chain finance programme and each programme will involve slightly different people in the company whose collaboration and support is vital for the programme to run efficiently and effectively. So, as well as quantifying the value, it is important for treasurers to ask what the driving principles are and why the company is entering that programme. As Roque alluded to, it’s also key to ensure that you’re aligned with your internal partners in procurement and finance, and to certainly think about how those partners will beimpacted (positively and negatively) by an SCF programme.

Portrait of Keith Karako, Global Trade Finance Head, Citi
Keith Karako

Keith Karako (Citi): I agree with what has been said around quantifying the benefits, but at the same time it’s actually rather difficult to do so because many of them are intangible. For instance, it’s easy for the banks to claim that if you extend your trade terms by 20 days, your savings will be x amount.

But what we’re finding is that, whether it’s the payables or receivables side, or letters of credit, customers are keen to understand the intangible benefits from the customer relationship point of view. I would say that at least half of the benefits of SCF are intangible and cannot be put down on paper, certainly not at day one.

The other angle customers really want to work on is reducing risk with regard to adequate financing of suppliers.We talked about risk management early on in this discussion and supply chain finance has a lot to do with risk management. How much risk does the corporate want to take? How much does it want to distribute through supply chain solutions, so that it can start to mitigate some of these risks? Of course the bank may not be able to eliminate these risks altogether, but if you can help your suppliers, your customers, through the volatility that we talked about, it’s going to position the corporate more favourably versus the competition.

Is that going to show up in lower costs of goods sold initially? Or more sales? It’s very difficult to say, but I think in these volatile times – in my view, the next few years are going to be more volatile than five years ago – how much risk are you willing to accept and how much risk are you going to ask your banks to help you to mitigate?

Having an SCF programme in place is also about options – it’s about being able to go out and offer your customers, or your suppliers, solutions, even if they don’t elect to utilise the option. Simply having such a facility available to offer to them during these difficult times will add value. The role of the bank is to help identify what is the most competitive way to deliver these solutions to benefit both the corporate and their suppliers.

Elsewhere in terms of trends, the banks are also seeing SCF as an increasingly important function and I think that trend is going to continue. Each bank’s SCF department, play a much more important role in our banks than they did five years ago. And I think if Basel III gets implemented as proposed, we’re going to play a more important role five years from now than we play today.

Roque Damacela (Bank of America Merrill Lynch): I would add that the profile of the trade organisation is also different, because a different set of skills is required to structure some of these solutions, particularly as you begin to move away from the procurement side of the trade flows.

What we’ve really seen over the last few years is a convergence of trade with commercial finance-type structuring capabilities, much more focused around receivables finance as opposed to documentary credits. They’re very different skill sets and so the investment is not just a raw number of people, it’s also an investment in a totally different type of expertise in the organisation.

Nick Blake (J.P. Morgan): As global trade continues to grow and I think it will, as one of the accepted ways of bringing growth back into individual GDPs and world GDP, the need to finance that is only going to continue to increase, and we as banks have to find ways to do that. To the point earlier around regulation, we are unlikely to be able to take all of this on our balance sheets, so we’re going to have to think of innovative ways to bring in third parties in an easy manner to help support that growth. At the moment it can be challenging to obtain that third party financing, whether that’s government-backed or otherwise, into these structures.

Eric Lemmens (RBS): One more piece of very tangible advice I would like to give to treasurers is that SCF programmes are only ever successful if the suppliers actually co-operate and participate in them. If I were a treasurer looking to set up an SCF programme, I would make very sure that the bank I sign up with has the capacity to do the on-boarding in a very swift way: on-boarding is a crucial service we provide to our customers, and treasurers should be looking out for the on-boarding capacity of the bank they decide to do the business with.

Alan Ainsbury (Barclays): Finally, I think it’s really important that treasurers own the whole SCF programme – they actually have to acknowledge that they must drive it through the company, push the SCF programme through their procurement areas and push it through their suppliers, to make sure it happens. If they don’t it’s unlikely to happen, and actually for the business, it will not achieve maximum benefit.

John McQuaid (BNP Paribas): SCF will extend to all aspects of the supply chain. SCF is not limited to payables programmes. Treasurers are now responsible for managing risk throughout the supply chain. This will include, inter alia, (i) liquidity for their suppliers, buyers, and themselves, (ii) impact of Basel III on pricing and availability, and (iii) risk management on their buyers. There has been a lot of focus on supplier financing but it needs to be recognised that extended terms of payment is now seen as a key marketing differentiator and the treasurer will need to manage liquidity and risk appetite on his customers. The use of insurance as a risk mitigant will increase. It should be noted that the insurance market has developed significantly and is prepared to look at sophisticated trade transactions.

In terms of advice it is clear that treasurers must understand the importance of managing working capital within the supply chain and, as importantly, ensure that they have the unequivocal buy-in of the other key internal players in their company, if they are to succeed. I agree that treasurers must challenge their banks and be fully aware of all of the options that are available. Finally, make sure that you choose your core banks carefully!

Richard Parkinson (TT): Thank you everyone.

Thanks again to our participants

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Bank of America Merrill Lynch
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