There are many aspects to Supply Chain Finance, but no single, universally-agreed upon definition of what it actually involves. But, it is becoming more than purely a means of driving efficiencies for corporates. It can generate significant revenue in itself. In the first of a series of features, Duygu Tavan considers what should be the core elements of any SCF offering

 

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The economic crisis, and the resultant changes to regulatory and legislative frameworks, have proved just how crucial it is for corporations to have complete oversight of their transaction processes, capital flows, procurement, and manufacturing and distribution costs. 

Many suppliers have been hit hard by the financial crisis, not least because of delayed payments by their buyers. This practise is widely used by corporates to increase liquidity, but in the recent financial storm, this practise has had a negative effect on corporates themselves, as suppliers fail to meet demand.

Corporate treasurers are tasked with improving payables, receivables and inventory ratios – a burden in a volatile economy.

These concerns are central to a corporation’s flow of working capital, and as such the banks and vendors they rely upon are fast identifying supply chain finance (SFC) as an essential business tool.

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The demand from corporates creates a lucrative business case for SCF software vendors as well as banks – and relies on those parties working closely to deliver the right solutions.

As well as the core components of SCF (see box), there are a number of related areas, such as cash management, that are currently high on corporate treasurers’ agendas,

Corporate treasurers are interested in Treasury Management Networks (TMS) – but these are continuously evolving and have already deserve a new name, says Aite Group senior analyst Enrico Camerinelli.

Camerinelli coined the term Treasury Intelligence Management Systems (TIMS). He says that TMS have evolved from being treasury workstations to interconnected workstations that also handle data and information from a wide range of functions, such as cash-management, forecasting, and risk-management tools. This evolution enables corporate treasurers to take more ‘intelligent’ decisions.

“eBAM for instance, is not just an automated system that allows to open a managed bank account, but also provides necessary information to know whether on that bank account of that particular bank there are any regulations, fiscal or legal, that would not allow some cash management operations,” explains Camerinelli.

“Another example is bank relationship management. It is important for corporate treasurers to understand how banks are treating them. So these kinds of information turns into an intelligence decision making for corporate treasurers,” he says.

 

Strategic importance

SCF is changing from being considered as a set of financial instruments that provide a financial relief to a strategic sourcing component, says Camerinelli. Large corporations nurture stronger relationships with their suppliers who in turn will be confident that payments will be received on time. From the large corporate perspective, this was of looking at SCF instruments is a means to improve return on cash, Camerinelli argues.

Liquidity and cash management are indeed important. But large corporate are already rich with cash, he says.

“They have done all their due diligence, optimisation programmes – they have cash. The point is their returns on bank deposits are not attractive. By being able to negotiate with suppliers for advanced payments in return for discounts on invoices in a collaborative manner is actually a win-win situation for both sides.”

This is called an open account – the buyer pays when the goods are delivered. And this is where and when banks should be worried:

Banks are interested in SCF because 85% of trade transactions are conducted as open account transactions, according to Aite Group. Consequently, banks are losing some of their power in providing support and the strong relationship between their clients and their relationship with other banks who would represent the supplier if the bank was the buyers bank.

“Potentially, the relationship between the large buyer and supplier base may disintermediate the bank – as long as the buyer has enough cash they won’t need a bank to support them in SCF,” Camerinelli says.

The traditional way of SCF, based on documentary credits such as letters of credit business, or standby letters of business, guarantees  are provided by banks. And banks are worried of losing these business streams and have now begun to realise and carve out a role for themselves in SCF. According to Camerinalli, they are looking to provide data and information that can support them in that arena. And this is where vendors come in again: 80% of SCF technology vendors’ clients are banks.

 

Convergence to come

In the next three years, Aite Group estimates, there will be a “strong convergence” between open account software suites and documentary credit-oriented ones.

This divide between the traditional documentary credit and open account is risking to create more confusion in the industry, says Camerinelli.

The Bank Payment Obligation, introduced by SWIFT, is meant to narrow the divide and spur the conversion of these two SCF models.

Camerinelli describes the BPO as a virtual letter of credit.

“The BPO removes all the ‘evils’ of letters of credit, such as paper documentation, because all matching between purchase  orders and invoices is done through matching engines. Once that matching has occurred, everything else follows. That confirmation is a guarantee that the payment will be executed.”

In other words, BPO is an irrevocable obligation by the buyer’s bank to pay a specified amount to the supplier’s bank as soon as the matching of the required documents has occurred.

 

What constitutes SCF?

In its Top 10 Trends in Wholesale Banking 2012 report, Aite Group lists SCF automation in the top four. The applications on which are brought together to form an SCF infrastructure, and which that are currently in demand by corporates include:

  • e-invoicing,
  • purchase order invoice matching, reconciliation and approval
  • order management (sales order, purchase order issue, dispute, confirm)
  • document management,
  • payment execution, multi-bank connectivity platform
  • workflow management systems
  • accounts payable
  • accounts receivables, event management
  • securisations
  • trade service utility
  • collaboration platform (transaction portal)

These applications enable the execution of SCF Components, which include:

  • Pre-shipment finance
  • Post-shipment finance
  • Reverse factoring
  • Receivables purchase
  • Buyer finance
  • Buyer-driven payables (dynamic discounting)
  • ECA supplier financing
  • Confirming
  • Distribution finance
  • Bank payment obligation (BPO)