Richard Parkinson (TT): Supply chain finance and cash management seem to be getting closer and closer. Is that a correct perception? If so, is that something the banks are encouraging, or is that being driven by the corporates?

Colin Hemsley (Lloyds): Most of the major global banks have been promoting supply chain and working capital solutions for quite some time; although with varying degrees of enthusiasm and success from the corporate side. Over the last eighteen months, corporates have become far more focused on liquidity and that has driven them to look towards monetising their supply chains. This is how the areas of cash and supply chain have grown closer together. On the back of this liquidity focus, we are also seeing greater determination to actually progress with programmes in a way that I don’t believe we had really seen in the previous five years or so.

Jason Barrass (J.P. Morgan): I agree. The last eighteen months have been traumatic for the banking community and corporates alike. Many of the natural forms of finance have ebbed away and some of the markets for funding have dried up. It’s quite natural that a treasurer who’s looking to manage cash on a daily basis should start to look at the company’s balance sheet and how it can be made to work harder; for both their customers and themselves. Cash and trade are very much tied together.

Alan Ainsbury (Barclays Corporate): It’s important to take into account that the last eighteen months has seen more of a European/UK focus in terms of supply chain, whereas we are still substantially behind the curve in terms of our US cousins when it comes to implementing this type of facility. The liquidity problems over the last two years have actually focused treasurers in the UK more around the working capital cycle and the benefits therein. Supply chain finance has therefore become less of an education piece from finance institutions, and more about requests from corporates to actually engage with them.

John Bugeja (RBS): I agree to a point that there is a commonality between supply chain finance and cash management, but I think there is still quite a significant difference as well. Although the data for both supply chain and cash transactions comes from the same source, the cash management workflow is primarily process driven, and almost ‘one touch’, whereas supply chain finance is much more credit intensive. When we mention supply chain finance, we currently tend to focus on the approved payables file, whereas perhaps we should be thinking about other data events that come out of the physical supply chain which could drive credit interventions. This would then make it slightly different from cash.

One of the lessons for the corporates here is that you have data which can drive a variety of different transactions, whether supply chain transactions or clean payment transactions. It makes sense to use that data as efficiently as possible to optimise your own working capital position. Our goal at RBS is to help clients to deliver the data to relevant parties, supporting both types of transactions as seamlessly as possible.

Bruce Proctor (Bank of America Merrill Lynch): While I don’t disagree, I would argue a different point here. The banks are finally starting to realise that clients don’t want to buy a product anymore; corporates want us to understand how they run their businesses. So I don’t think that corporates really look at it as ‘cash’ or ‘supply chain’. Clients are interested in: “I need to buy raw materials, I need to transport them, I need to convert them, sell them and collect and then I need to start that cycle all over again. If you can help me do that and facilitate the movement of cash or the movement of goods, that’s really important to me”.

The events of the last year or two have really refocused treasurers and business managers on their supply chains. One of the big lessons learned was that you can squeeze your suppliers too far. So, what we are seeing is more of a willingness on the part of corporate treasurers and corporate export managers or logistics managers to identify key suppliers and work with them to ensure sustainability.

Lex Greensill (Citi): To take that a step further I think that one of the interesting things I’ve seen is the shift away from the supply chain relationship being solely based in procurement. It has dawned on companies that credit liquidity is so crucial to the supply chain that it is incumbent upon the treasurer of the corporation and the treasury operation to help to mitigate the risks associated with supply chain operations. Returning to the original question therefore, perhaps the integration of cash and supply chain demonstrates a realisation that our clients’ organisations need to actually pull together to protect their supply chain and ensure that it is able to withstand exogenous events.

Parkinson (TT): Treasurers certainly seem to have a mandate to advance into areas of the business that they haven’t gone into before and as you say, a growing understanding of what is involved, but what about the products and technology that you supply to treasurers? You all tend to supply your own products but aren’t standardised solutions what corporates really want and this is what some third-party solutions provide?

“Corporates want choice. Being flexible and working with a third-party supplier is a better solution than rigidly saying, ‘you use our platform, otherwise you don’t do business with us’.”

Bugeja (RBS): Previously we used to design a product and the technology that supported it. We’ve moved beyond that now and are much more flexible about the technology side of offerings. We have different technology solutions for different circumstances, and are open to working with third-party technology providers if that is what the customer wants. RBS supports multi-banked solutions, and the recent developments in bank-agnostic connectivity have made it easier for our clients to retain multiple banking relationships, whilst benefiting from a consistent approach to bank communication and standardised formats.

Corporates want choice. Being flexible and working with a third-party supplier is a better solution than rigidly saying, ‘you use our platform, otherwise you don’t do business with us’.

Ainsbury (Barclays Corporate): Also, as the size of the supply chain finance programmes have grown, it would not be sensible for a single financial institution to carry the entire burden of risk. An easier way to do that therefore is to share the risk with other institutions. There are third-party platform providers that finance institutions and banks can actually tie up with that will give them the flexibility to go into a large programme. I think that standardisation may be achieved through that process.

Barrass (J.P. Morgan): There are alternatives to working with third-parties, and when we refer to third-parties we mean non-bank entities. For instance, the supply chain market could mirror the rest of the trade market – you could have one bank fronting and then partner banks coming in on a club basis. A move towards a standardised documentation model would allow banks that are joined together in club deals to have consistent levels of comfort of compliance.

Coming back to the point about third-party involvement though, this does pose quite a large reputational risk. The third-parties might be capturing the approved payables data and discounting proceeds and so on, it might also be their platform that the supplier sees, although we do the funding. If the third-party platform falls over at a critical time for your clients, it is imperative to have a contingency plan in place.

Hemsley (Lloyds): I think that the interesting point in the question here is about standardisation. I am sometimes left questioning whether standardisation is actually good for the corporate. Very often we’ll have discussions with the customer who’ll say, “Are you talking about supplier finance or reverse factoring or supply chain finance?” and there’ll be different variations and names in every institution.

It comes back to Bruce’s point that generally we don’t want to be talking about a product at that stage. It is about understanding the supply chain and understanding the client’s objectives and particular circumstances. The key is to identify what’s causing the client a problem and trying to provide a solution. So standardisation, I am not sure is a good thing, but flexibility certainly is.

“Today, core banking relationships are really critical to your success as an organisation and companies are beginning to realise that perhaps capital isn’t a commodity after all…”

Ainsbury (Barclays Corporate): Most bank systems at the moment have a standard back-end. They all look fairly comparable and the data download they take is much the same from a customer’s accounting system or similar. So in that sense, there is already an element of standardisation. But if you look at the marketplace, certainly in the UK and Europe, we are still pretty young in terms of large supply chain programmes. The difficulty actually starts to arise when the programmes begin to grow and the credit appetite of individual banks is not sufficient to meet the programme size.

Any standardisation around the back-end which enables you to create an asset class that can easily be sold would therefore be a positive step. Anything which makes it easy to engage in risk participation, and do a true sale and get it off your balance sheet completely, or a risk share agreement, that’s the sort of standardisation that the customer doesn’t need to see, but would create appetite and scalability.

Greensill (Citi): Perhaps just to extend on some of the points raised, I think that there’s been a change in the way that corporates approach the balance of risks in their supply chains. In 2007, capital was virtually free and banks were almost seen as utilities. Today, core banking relationships are really critical to your success as an organisation and companies are beginning to realise that perhaps capital isn’t a commodity after all.

Equally, corporates began during the crisis to hedge their bets between core and speculative banks. It’s the interplay between those two changes that has perhaps altered the way that corporates think about using a third-party provider, in addition to their core banks.

Parkinson (TT): So what I am hearing is that although you do have your own products, you are all pretty agnostic as to who you deal with, and how you deal with them. You’re happy to deal with third parties?

Hemsley (Lloyds): We are certainly willing to deal with third parties. I think the focus, inevitably, given the events of the last eighteen months, will be on relationships and supporting these relationships effectively. As core banks to our clients we want to be able to support their programmes in the best way possible, which means including third-parties. This focus on clients doesn’t mean that we are closed to new transactional business but I think the focus for most banks will be around supporting their core relationships, particularly as constraints around Basel III start to impact.

Parkinson (TT): What are the issues around Basel III and what does the corporate need to worry about, if anything?

Proctor (Bank of America Merrill Lynch): We’ll all have a different interpretation of this, but I think the impact of Basel III for a corporate treasurer is going to be that as capital adequacy requirements are raised in most banking jurisdictions, and as those requirements are passed through the bank to the operating units, the requirement to build in the necessary cost of carrying that capital provision is going to have an impact on the availability of liquidity or credit. This will therefore have a direct impact on the pricing of products and services that we are able to provide to our clients.

The preferential capital weighting of trade instruments is also something to consider.

Bugeja (RBS): Under Basel II, there is still reasonably preferential treatment for traditional trade instruments. Basel III, which is really just a proposal at this stage, suggests that off balance sheet exposures or derivative exposures should be treated the same as cash. The rationale behind this was trying to deal with the use of off balance sheet structures to leverage the balance sheet through proprietary transactions and riskier types of transactions. However, the off balance sheet nature of the traditional trade instruments is simply a factor of the business that our customers are doing. We’re not leveraging up the flows that our customers are giving us: they are the same flows, it just happens that they are contingent obligations if they are traditional trade, rather than cash obligations. If Basel III happens in the way that is suggested, that’s going to be a huge challenge for all banks.

Hemsley (Lloyds): On the question of what corporates can be doing, short of lobbying the regulators, I think they really just need to be aware. If there are companies out there that are heavy users of contingent liability products and guarantees, LCs, bonds, and so on, that is a real threat. Those corporates need to be thinking about, and certainly monitoring, how the regulatory landscape evolves and thinking about how they would handle any changes. It is much better to be prepared in advance, rather than be hit with a surprise down the line.

Parkinson (TT): Back to the theme of standardisation, what is SWIFT’s role and how relevant is SWIFT’s TSU offering to corporates?

Barrass (J.P. Morgan): Fundamentally, corporates of a certain size can and do deal with multiple banks. The banks all talk to each other using SWIFT messaging and it makes sense to extend that to corporates, allowing them to communicate with many banks through a single interface. While SWIFT’s Trade Services Utility (TSU) and the Bank Payment Obligation (BPO) associated with it do extend into the corporate space, as that is where the data is coming from ultimately, the large part of interaction is between the banks.

Bugeja (RBS): The Bank Payment Obligation is often referred to as a ‘lite LC’, which is an interesting analogy. Essentially the BPO encapsulates some of the elements of a letter of credit, without the paper documents and with fewer data checkpoints. It is basically an agreement between banks for a payment to be made, thereby providing the seller with some level of comfort.

“There’s no doubt of the movement towards SWIFT connectivity for the corporate cash management market, and that’s something that’s expanded more dramatically over the last few years…”

Hemsley (Lloyds): There’s no doubt of the movement towards SWIFT connectivity for the corporate cash management market, and that’s something that’s expanded more dramatically over the last few years. From a trade perspective, we don’t detect the same focus or interest there at the moment. As alluded to, I think that for the open account market there are, perhaps other ways of arriving at finance.

Bugeja (RBS): It would be great to have comprehensive feedback from corporates, as this provides us with insights into their underlying issues, which in turn allows us to develop solutions to these issues. Would the BPO cause corporates to move from a pure open account basis, where they have acknowledged that there is no bank risk mitigation built into the cycle? Would they be able to do more business as a result, source more goods or sell more goods because this risk mitigation gives them more capacity? And will they be able to borrow more on the back of that because the banks will lend more when it is underpinned by a BPO, rather than on a straight overdraft or debt working capital basis?

Proctor (Bank of America Merrill Lynch): One of the big issues with the TSU, in my opinion, is that it has been adopted essentially by the large global banks only. The vast bulk of the SWIFT banks in the emerging markets are not members. But most of the trade that this is designed to handle is in the emerging markets.

So, when people are looking at the BPO, the idea was to solve two problems. Firstly, how do you give those banks in the emerging markets an opportunity to say, ‘Now I have a financeable instrument because, the two primary banks have agreed that they’re going to honour this obligation.’ It was also, I believe, viewed as a way to get more of the emerging markets banks involved in the TSU as a whole.

The TSU offers a matching capability and is an agnostic system in the sense that we’re all SWIFT members. It also offers a set of standards. The BPO is an alternative to the traditional approach to extending financing and how companies make sure their suppliers are able to obtain the working capital they need.

Bugeja (RBS): That’s why, in some respects, I think it would get more traction if it were positioned as a ‘lite LC’. Everyone understands that an LC can be used to raise pre-shipment finance.

Barrass (J.P. Morgan): The industry has hundreds of years of track record with a letter of credit, and it is a trusted instrument. All of a sudden you bring this ‘big bang’ moment, trying to introduce something different. Unfortunately, that moment happens to coincide with a global financial crisis, and people are therefore not as open to new methods or instruments as they might be.

Parkinson (TT): So, as a corporate, why should I be paying attention to this development?

“To actually make some success of the TSU, there has to be demand for it from our corporate clients. When there is demand, there’s value in a bank delivering that kind of service, but that’s not what we’re seeing at the moment…”

Hemsley (Lloyds): Really, what corporates should be doing is getting back into a dialogue with their bank, making sure that their bank understands their supply chain and financing needs. Within that, we’ve talked about some of the available solutions already today and we’ve all got other solutions that may or may not be more appropriate. The TSU should really be viewed as an additional outlet rather than a fully blown solution.

Ainsbury (Barclays Corporate): To actually make some success of the TSU, there has to be demand for it from our corporate clients. When there is demand, there’s value in a bank delivering that kind of service, but that’s not what we’re seeing at the moment. There is certainly a great deal of interest but nobody’s actually knocking on the door and asking for TSU capabilities.

Hemsley (Lloyds): The TSU does touch on the issues around e-invoicing though and solutions may evolve from TSU with the aim of becoming more streamlined. The banks need to build their financing proposition around the flexibility and simplicity of the TSU. Is e-invoicing the way to do that? We’ve all set up e-invoicing programmes and put our toes in the water. As I see it, this area is very much one to watch.

Barrass (J.P. Morgan): It’s important to consider the financing of that invoice also. The faster the invoice enters the workflow, the sooner it can be financed. If the bank can actually get involved in looking at the invoicing and auditing that as well, there’s an opportunity then to finance for an even longer period. So I would argue that for banks to insert themselves right in the middle of this whole process is a value add. For example, there are certain invoices which the bank could audit and potentially make savings on for the client – such as invoices which are incorrectly raised.

Proctor (Bank of America Merrill Lynch): I think one of the clear worries for corporates coming out of the turmoil of the last two years is, ‘can you count on your banks to be there, when you really need them?’ Realistically, many corporates had very difficult experiences of credit limits being cut and purchase orders not being financed for instance. That happened for a variety of reasons.

But the expectation that ‘I have a line of credit at bank x and I’m going to be able to draw on it when I need it’ has completely changed. Those people that have moved to open account have essentially made a conscious decision to self-finance and move away from reliance on banks. The TSU was designed to re-intermediate the banks, through the payment streams, back into trade.

But it was up to the banks to create the product – we had to decide how we were going to market this to our customers. And were they going to view the BPO as a proxy for an LC or were they going to view it as a super-payment? SWIFT called it an enhanced payment, but it’s really more than that. For me, that is the whole driver behind the TSU, but I think unfortunately that many of our clients either haven’t understood or we haven’t explained it very well as to what the real value is here.

“One thing that we’ve seen recently, which surprised me slightly, was corporate clients choosing to self-fund a supplier financing arrangement…”

Bugeja (RBS): But when the banks were dis-intermediated it was because the corporates were happy without the intermediation of the banks. So the fact that we want to re-intermediate is great but the corporates have still got to have a reason to let us back in – they’ve got to recognise that they receive some value from our intermediation.

Barrass (J.P. Morgan): The last couple of years should actually have set the tone for corporates to realise that perhaps open account isn’t the best way. Corporates might be thinking, ‘Maybe we want an instrument which is not as labour intensive as a letter of credit but delivers many of the same benefits and provides a financing vehicle on the back of the risk mitigation, which works better than credit insurance.’ After all, many corporates in the open account space have said that they don’t need the banks because they have access to credit insurance.

Bugeja (RBS): I think the danger is that we ask our clients the wrong questions. If you ask them outright, ‘Do you want a BPO?’, they are going to say, ‘No, not really, I’m happy on open account.’ We need to ask them questions around what’s keeping them awake at night when they are financing or taking on export contracts. ‘What is it that worries you? What are the constraints on doing more business? If you could have more of one thing, what would it be?’ If the corporates come back and say, ‘We are concerned about the risk,’ or ‘Our suppliers can’t get enough pre-shipment finance therefore they can’t do the business’, that would be a clue for us as to the value in the BPO.

But call it a BPO, call it a ‘lite LC’, call it what you like; I do think it would be a lot easier if we could piggy back on the existing rules for LCs, so that there’s legal precedent and a greater degree of certainty about what happens in the event of a dispute. That would certainly make the BPO much more useful.

Parkinson (TT): What other trends are you seeing in the supply chain space at the moment and what crucial advice would you offer to corporates?

Proctor (Bank of America Merrill Lynch): One thing that we’ve seen recently, which surprised me slightly, was corporate clients choosing to self-fund a supplier financing arrangement. In other words, they set up their programme, without any bank funding involvement. I find that interesting because one of the big drivers supposedly behind supply chain finance is the provision of additional liquidity, but certain corporates are making an argument (which may be temporary) which is, ‘interest rates are so low at the moment that I’m getting almost no return. Perhaps my most effective use of capital at the moment would be to finance my own suppliers.’ If rates rise dramatically, they may decide that this isn’t in fact the best use of capital.

At the same time, we’ve also had a number of requests from the second generation of suppliers, where someone who is a supplier in a programme for a large buyer says, ‘I’d like to do this for my suppliers.’ So, it’s starting to work its way down into the second level of the market.

Bugeja (RBS): And it comes down to credit appetite again, because you’re working on the general assumption that the supplier does not have as good a credit rating as the buyer. One of the opportunities is then to leverage the fact that you’ve just enhanced the credit quality of that supplier by virtue of the fact that they are on your buyer-led programme, so your appetite to support them in an upstream programme should be greater.

Ainsbury (Barclays Corporate): The simpler the customer requirements, the more standard the product becomes. At the top end of the programme, clients want a bespoke solution that fits their system. The further you move down the level of complexity a standardised product becomes a necessity from a delivery perspective because the scalability of that particular programme will not be sufficient to make a bespoke type solution viable. So that standardisation becomes key, the further down the chain you actually go.

Greensill (Citi): But doesn’t that then create an issue for the clients? A question some of my clients have posed to me is, ‘Aren’t you just cherry picking the best credits out of my suppliers? And so by plucking those out don’t you just exacerbate the problems of my suppliers and perhaps make the situation worse, or make it difficult for them in terms of their ability to otherwise, finance the working capital of their business?’

Hemsley (Lloyds): I think that one of the interesting things to note is that of the very large programmes that we’ve put in place, the number of suppliers that take up the offer is still very limited. We have also had a number of suppliers, however, that have participated in a larger programme and looked to extend that. The great thing with that is that the communication that they then give to their suppliers is usually considerably more directed as they understand the positives of such a programme.

“I’ve heard stories of companies with almost €3 billion of receivables on their balance sheet, which they weren’t monetising…”

Barrass (J.P. Morgan): Of course, there is still a great deal of uncertainty in the banking landscape. I don’t think that either the markets or the banks have fully recovered from a liquidity perspective, compared to pre-crisis levels.

There is also a significant amount of uncertainty around regulation, such as Basel III, which we touched on earlier. While the majority of banks have been very diligent with regard to capital adequacy and so on, certain European banks have not put away perhaps as much capital as they ought to in order to meet the G20 standards.

I would therefore encourage treasurers to look at how they can make their balance sheet work much harder. They need to look at what they’ve got on it, not just on the supply chain side for their customers, but also on the receivables side. I’ve heard stories of companies with almost €3 billion of receivables on their balance sheet, which they weren’t monetising. If you start to monetise that correctly, it could be that the company doesn’t have to go to the capital markets for a year. At a time when the capital markets are still not back to where they were before, that could be a distinct advantage.

Ainsbury (Barclays Corporate): My advice to corporates is that they really need to stay close to their key banks and develop relationships with them so they understand where the markets are and what tools are available to them. Like Jason, I believe that corporates don’t always make their balance sheet work hard enough because primarily they don’t understand what’s available to help them to make that happen.

As for market trends, I think that you will see a push back down the supply chain. At the moment, with the payables piece at least, there is a move to push back further from a bank perspective. That can only benefit corporates, however, if they understand the rationale behind that and where they are currently missing out – such as the ability to finance invoices earlier if they are presented electronically.

Hemsley (Lloyds): The focus on liquidity for corporate treasurers and the supply chain is a very logical one, and as such I would expect that to persist. Treasurers should continue to look to maximise the opportunities to monetise across the supply chain and maintain the level of dialogue with their banks and key strategic partners.

However, I don’t believe that we have yet maximised the opportunities and efficiencies that can be found across the supply chain. In hard percentage terms, probably no more than 20% to 30% of the opportunities across the corporate market have been capitalised on to-date. But whose fault is that? I think the responsibility lies on both the corporate and bank sides. It is only by building that collective understanding and helping corporates to identify areas that they can manipulate, that the banks can help to add value by providing either cash flow acceleration or risk elimination/ mitigation solutions – depending on what is driving the corporate agenda.

Bugeja (RBS): That would certainly be an interesting direction for the bank to head towards, but it will be a long journey, looking at the supply chain on an end-to-end basis. The Holy Grail is that we have a basis for capturing data from the physical supply chain, which demonstrates that corporate performance risk is being progressively reduced up to the point when an approved payable lands on the desk. Therefore our ability to finance prior to the approved payable should be modelled on the degree to which that performance risk is being mitigated. But this has to be automated and I don’t think anyone can do that – or not very effectively at the moment. Perhaps the TSU and the BPO have a part to play in making that happen.

Hemsley (Lloyds): There is just one last thing that I would encourage corporates to do and that is to not eliminate products or solutions from consideration without having a conversation with their bank, exploring the possibilities. I’ve often met with corporates saying, ‘So and so talked to us about supplier financing and we’ve decided that it is not for us’. Even today, there are perceptions around supplier finance and supply chain solutions that are still quite narrow.

Make sure you explore all the options fully and don’t eliminate possibilities based on a perception of what a particular product is, but explore the wider interpretations. When we’re talking about supply chain, we are talking about receivables as well as payables and there are many opportunities available.

Greensill (Citi): Another key trend is that the role of the corporate treasurer is still evolving. One example of that is that the corporate treasurer is taking on a role to defend and protect the company’s supply chain. But I think there’s an extension beyond that – we are moving away from a high growth environment to an environment where we’re experiencing lower growth for a longer period of time. As a result, the focus is perhaps less on driving increased sales, because those opportunities don’t exist anymore, the question is now more about achieving an extra few basis points of margin.

In the past, treasury was not really considered as a potential profit centre for organisations. But when the initial focus on cost-cutting began as a reaction to the crisis, treasury became more heavily involved in protecting the supply chain. I think you’re going to see that extend to a point where the procurement manager is saying, ‘I want you to help me squeeze more savings, not just squeezing cash out of the supply chain, but actually helping us to take cost out of the way that our whole supply chain does business.’

Our clients are really focused on margin at the moment and talking to the bank about these issues is a key conversation. I agree with Colin’s point that you shouldn’t be closed- minded. The supply chain landscape is evolving all the time and I think it’s about trying to pick the best practice that’s going on in the market today.

Proctor (Bank of America Merrill Lynch): Lex has a very good argument. My suggestion would be that corporates need to continue to focus on the synergies within their own companies. As banks, we are always accused of being very siloed and I think we are. It must be very frustrating for our corporate clients to have to keep re-educating us and telling their story over again. But I have been surprised at how many corporate conversations we have where we speak to the finance people and the logistics people and yet the two teams have never spoken to each other.

The opportunity within the corporation itself to look for cost savings or efficiencies, or just better co-ordination, is certainly something that the banks could help with. I think we should be looking for ways to partner and deliver more along those lines. I could for instance call up the treasurer or the CFO of a company and say, ‘Would you be interested if I could put $10m into your P&L this year?’ Of course, the answer is going to be yes; I then say, ‘Well you should make sure you get to know your logistics manager. He can do this for you, he can help you create some of these savings.’ So, to some extent, perhaps our role is still as intermediaries, if we are getting smarter as providers in terms of taking a broader view and looking through the supply chain and understanding how our clients look at their own conversion cycles. That then opens up a much more interesting set of conversations around working together to unlock some of those significant inefficiencies that still sit inside the corporate structure.