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As the use of letters of credit declines worldwide, banks are devising other ways to help companies manage their financial supply chains
With global trade ballooning and companies looking for ever more efficient ways to fund and manage that trade, the world’s biggest banks are falling over themselves to find ways to help. Early last year, for example, Bank of America announced that it had integrated its supply chain financing technology with its “supplier outreach” services to enhance its trade payables discounting program, which helps customers finance payables throughout their supply chain and reduce demands on their working capital.
Citigroup has pinpointed “end-to-end treasury financial supply chain management” as an area where it can help companies develop a more “holistic picture” around the information, such as purchase orders and invoices, pertaining to movement and receipt of goods across borders. At Deutsche Bank, Marilyn Spearing, the newly appointed global head of trade finance and cash management, announced that as part of her new role she would focus on financial supply chain management and facilitating the flow of credit between importers and exporters, as well as enhanced risk management.
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Fritz Philipps:
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Jeremy Shaw:
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Shaw of JPMorgan believes there is an opportunity for the banks to add value by helping companies realize working capital gains earlier, which directly affects their cash balances. “If buyers are pushing out DPO, how can banks respond to that? Can we develop solutions that will allow customers to push out DPO but allow suppliers to get paid on time if not earlier?” he asks.
Philipps believes a number of supplier financing scenarios could emerge. One scenario is funding suppliers on the back of purchase orders. So, for example, if an Asian sneaker manufacturer gets a commitment from a top sporting goods manufacturer for an order in 2007, and that sporting goods provider is a customer of Deutsche Bank, the bank may be comfortable extending financing to the sneaker manufacturer to cover their receivables. “The risk for us to fund such a company is much lower knowing that they have this order,” Philipps explains.
Entering the Digital Age
Before banks or other financial services providers can determine whether a supplier requires financing to cover DPO, or a distributor needs working capital in order to buy more product, information pertaining to a particular trade needs to be “digitized” and “standardized,” says Jones. As a former treasury director for EMEA at Hewlett-Packard, Jones knows only too well the problems companies encounter when they are presented with incomplete information in their financial supply chain. While at HP she often received phone calls from regional shared service centers demanding more information from the banks so they could reconcile their bank statements. Jones believes digitizing and standardizing trade documentation, such as invoices, would lead to not only greater cost savings and efficiencies but also enhanced visibility into the complex web of relationships companies maintain with their suppliers.
Some progress is being made in this area, albeit at an individual bank and industry level. In conjunction with the Brussels-based banking co-operative SWIFT, major trade services banks have established the Trade Services Utility (TSU), which provides a central matching engine for standardizing the electronic exchange of information pertaining to purchase orders and invoices between banks. With the exception of the chemical and automotive industries, more than 75% of purchase orders in most industries are still paper-based. Shaw believes the TSU has a better chance of success than previous bank-led efforts at automating trade documentation, as it is focused just on the purchase order and the invoice, not a host of underlying trade documents.
Philipps says the TSU is a good way of facilitating the financing component in companies’ supply chains as well as the provision of information corporates need to better manage their receivables. Given that some supply chains are more complex than others, though, he says the TSU’s benefits may not extend to all industry sectors. Shaw acknowledges that the relationship between buyers and suppliers is complex and says that is why JPMorgan Chase has linked more products, including the Vastera acquisition, into its overall trade services solution so that it can help companies achieve greater visibility.
The banks may be convinced they are adding value, but some corporates are not so sure. “I think the banks understand the financing piece very well,” states Jones. “However, traditional banks have tried to sell financing products without understanding the real corporate drivers and objectives.”
In order to succeed in the corporate supply chain, Shaw says banks need to move out of their historical trade finance and cash management operational silos. “LCs are still going to be around, but there is a whole new market we are targeting,” he explains. “Some banks are looking at that market from a payment and settlement perspective, but there is a lot more than the payment here.”
Anita hawser