Moderated by Joseph Giarraputo
At a roundtable in London, Global Finance brought together leading figures in the supply chain finance field to discuss key developments in the industry.
Thomas Dunn is the chairman of Orbian, a leading supply chain finance company. He is also the chairman of Raglan Capital, a privately held company focused on investment opportunities in, and related to, credit markets. Prior to the establishment of Raglan Capital, Tom worked from 1987-2003 at JPMorgan in London, Melbourne, Sydney and Tokyo, ultimately being responsible for all of JPMorgan's credit businesses in the Asia Pacific region. Tom has an MA in economics from Cambridge University.
As head of trade products and services, global transaction banking, corporate & investment banking at UniCredit, Wolfgang Friedinger's responsibilities include all traditional commercial trade finance products (e.g. LCs, cross border guarantees, documentary collections, etc.) as well as all new (electronic) products and services related to global trade/supply chain management. Before taking over this function, he held various senior positions in the foreign trade business within UniCredit Bank AG (HypoVereinsbank), Dresdner Bank and Bayerische Landesbank. He is a well experienced practitioner for all trade finance related products, trade operations and process management issues. He is also member of the International Chamber of Commerce (ICC) Banking Commission.
As head of global trade finance for RBS, Adnan Ghani is responsible for the bank's range of trade financing solutions and services for corporate and financial institution clients worldwide. In this position, Ghani has developed a series of programs to enhance the quality of products and services that RBS delivers to its clients. These programs leverage the bank's global network, industry expertise and online technologies to provide trade and supply chain finance solutions that help companies gain control over their working capital, strengthen trading partner relationships, and mitigate the cost and risk of trade transactions.
Craig C. Weeks
Craig Weeks is a managing director in the global transaction services division of Citibank in New York. He is currently responsible for global trade finance sales. Previous work experience includes J.P. Morgan where he was a managing director in the global trade finance division in New York, and Continental Grain Company where he served as assistant treasurer in New York and director of trade finance in Geneva, Switzerland. Weeks began his banking career at Marine Midland Bank in New York, where he served as vice president of correspondent banking covering parts of Latin America and the Iberian Peninsula. He has a masters' in international management from the Thunderbird School of Global Management and a BA degree from Dickinson College. He also studied at La Universidad Pontificia Bolivariana, in Medellin, Colombia. Weeks is a former chairman of the Bankers' Association for Finance and Trade and a trustee of Dickinson College.
"The UK government wants to see what rolesupply chain finance can play"
Global Finance: It's two years since the peak of the financial crisis. What, if any, lingering effects are there in supply chain finance?
Adnan Ghani, head of global trade finance, RBS: Because of the contraction of liquidity during the crisis, working capital
management became an area of
renewed focus for corporates. Consequently, we are seeing a continued increase in the demand for supply chain finance. We're also seeing the coming together of trade and cash, so our supply chain finance capability is now much more aligned with some of our liquidity solutions and payment solutions, so it's a more integrated process than previously. Lastly, there is more collaboration in the supply chain space between technology providers, banks, clients' banks and other third-party providers.
Wolfgang Friedinger, head of trade products and services, UniCredit: The crisis caused previous financing opportunities such as credit and traditional working capital to become less available, which explains the growth, over the past 15 months, in demand for supply chain management solutions, both on the buyer- and the seller-centric side. Besides the mentioned increased interest in "integrated treasury products," there's a growing awareness of the need for collaboration between technology providers and banks. Solutions that meet the needs of our customers along their value chain have to be flexible and easy to use by as many participants in the supply chain as possible.
Craig Weeks, global head trade of trade product sales, Citi: Even though rates are down a little, they're still high relative to '07, so the need for this product is still very, very high. There are still a lot of non-investment grade companies that are struggling to get access to their banks' balance sheets so, even though interest in supply chain finance may have cooled a little, it's still the main topic of conversation in our client calls.
Tom Dunn, chairman, Orbian: I would echo that sentiment. In many sectors, as a result of the crisis, supply chain finance suddenly became a serious product that was given serious consideration. Large corporations are particularly interested because for the first time they felt that their physical supply chains were being threatened by lack of liquidity. They could then see that SCF was a product available to make sure that risk was mitigated. I think that is a permanent shift.
GF: Do you see this more from the supplier's side or from the buyer's side?
Ghani: In the larger client segments, a lot of the demand is coming from the buyer's side. At mid-market level, it's more suppliers who are interested.
Dunn: We're seeing this from the buyer's side, as they look to support key suppliers, not only in the post-shipment phase, but in the pre-shipment phase to enable key suppliers to deliver.
Weeks: It's more than a working capital issue now—it's become part of your strategic approach to securing your supply chain. Companies want to make sure they're not, say, stopping an assembly line because they're missing a specialized lug nut.
GF: How will new financial sector regulations affect supply chain finance?
Ghani: Applying the regulations to supply chain finance is tricky, because it's relatively new compared to traditional trade finance. There are also issues relating to the liquidity ratios and the leverage ratios in the regulations. The regulators, understandably, want to limit the amount of exposure a bank has relative to its capital, but by lumping trade finance into the overall equation, what you may end up doing is limiting the amount of trade finance available for the clients. There should be some allowance built in for different types of risk.
Friedinger: the regulations currently don't reflect the status or structure of the trade and supply chain finance business. Products in trade finance are typically transaction-driven and self-liquidating, which reduces significantly the declared risk. However, the regulatory framework does not adequately allow adjustment—i.e. lowering—of the RWA. The banks should work together to decide what can be done about this.
Weeks: The increase in credit cost will reduce banks' willingness to stay in the business. A huge number of trade banks, over the past two years, have disappeared, and if that contraction continues, clients will start to face very critical questions about managing their relationship with their trade banks.
Dunn: As important as the absolute level of capital that's required to support trade products is the relative amount of capital that needs to be held against trade products, and against other products. I'm more encouraged by the fact that a very appropriate amount of attention is being paid now to the capital that needs to be held against structured, triple-A rated investments, which did more damage to the financial system than traders ever did in terms of the losses. Secondly, we should address the actual regulations around doing business in the supply chain finance space—particularly in different jurisdictions. That's an area that is increasingly reliant on detailed, technical expertise around the execution of these programs, which is going to have a further impact on the development of the product.
GF: The UK government wants to see what role supply chain finance can play in making financing available to corporates. What impact will this have in the UK and possibly as an example for other countries?
Dunn: The government says it wants to see what role the supply chain finance is playing, but they're actually doing nothing about it whatsoever—perhaps because they're distracted by all the other challenges they're facing.
Ghani: One of the initiatives that RBS is sponsoring together with the UK government is the promotion of exports from the UK to Asia, through our partnership with UK Trade and Industry (UKTI). We're really trying to help the SME sector, as well as the larger corporates, to export more into Asia's emerging markets. We're working with UKTI, running clinics for suppliers to answer questions about those markets, but also to support them, should they require facilities in those markets. We've also been involved in the government-sponsored report on the benefits of supply chain finance.
Friedinger: Our understanding is that the UK government wants to find out if it can influence the provision of liquidity, and also risk mitigation, to SME customers, through supply chain management solutions, and perhaps to establish some regulations and definitions covering this kind of finance. This, of course, is not a bad approach, and if the market participants step into this discussion, we have the chance to give the government a better understanding, which could lead to better solutions and better rules for our products in the long term, not only in UK.
GF: Have other governments taken steps like this?
Weeks : US Ex-Im has put in place a supplier finance program that is linked to a company's overall export volume. You have to have a client that's interested in supplier finance to begin with, and then take it from there. It is a great credit multiplier for the companies that can use it.
Friedlinger : During the crisis Germany's state governments did provide some guarantees to back up supply chain finance packages and solutions, especially for industries that were suffering then. But there has been no regulation for such solutions.
GF: Technology is a collective area of activity for supply chain finance providers. Is it possible for banks to cooperate with each other to lead to a better value proposition? Is it possible to have a bank-agnostic market?
Dunn: Of course it's possible to have a bank-agnostic market. The key is that this is a collaborative problem. The essence of supply chain finance is that it's a collaboration between buyers and suppliers. It's a collaboration between lenders, be they banks or institutions. Developing that collaboration is the key to success. Over time there will be increasing focus on bank agnosticism, particularly as new investors are drawn into these products. A money market investor doesn't want to know how to originate supplier finance in a conforming fashion out of Poland, for example—that's what a supply chain finance expert is going to do. But that investor still wants to be able to put money to work into what is a very attractive asset class. That's the way the marketplace is going to go, but in the meantime, there is a lot of debate—and competition—about what format that is going to take.
Friedinger: As soon as liquidity or risk mitigation is needed, you will need financial institutions to step in. Often, anti-money-laundering and know-your-customer duties can be performed better if they are not only handled by network banks that are close to both buyers and suppliers. Technology vendors or other market participants such as insurers are not prepared or able to cover all these needs. However, solutions that allow the customer only to deal with one single bank often do not fully meet our customers' needs. When we talk about global solutions across various continents, most of the market participants can't cover both the buyer and the supplier's side in all countries. In such cases, banks should align their initiatives and technologies.
Ghani: At the very large end, multinational clients operating in multiple countries will typically hold multiple bank relationships. And it is inefficient for them to log into 10 different proprietary systems to be able to process transactions, so there is a push from multinationals toward bank-agnostic systems. In the SME segment, typically the requirement is for a single combined solution. They only want one system that would be simple enough to log into for all their transactions. So I believe there will be a niche for bank-agnostic systems and a niche for propriety systems, dependent upon the type of client.
Weeks: I agree wholeheartedly. I don't think there'll ever be a time when it's solely bank-agnostic—and we have to distinguish between bank-agnostic and banks cooperating with each other. Supply chain products require banks to cooperate more fully than traditional trade products did, not only in on-boarding a client that may be using two or three banks to get their system up, but also on secondary market. When the program is too big for one bank to handle, they need to go to another bank. And then you really have to open your kimono a little bit, to let other banks in. That's new, to the degree that it's happening now, perhaps over the past year.
GF: Of the two elements of supply chain finance—receivables finance and supplier financing—have the supplier financing programs been oversold internally and externally? Can these programs be the multimillion-dollar revenue producers many banks have been anticipating?
Weeks: Banks need to be able to offer both, and they need to be able to add and swing resources on either the payable side or the receivable side, depending on what's happening in the market. We thought there would have been a major move over the past nine months, from seller-centric to buyer-centric, and that hasn't happened. In fact, we've been on-boarding more programs on the seller-centric side. I don't think the seller-centric side has been oversold, but if you're going to achieve multimillion dollar, ongoing, sustainable annuity revenue streams, it absolutely requires scale. You can't do this with three customers and keep it going. You've got to be able to have the client base that will allow it to grow.
Friedinger: We see a growing demand from both sides. The market potential is so huge that we are far from having convinced all stakeholders about the opportunities such solutions have. We also believe there are many more possible solutions available: Today we are mostly thinking about supplier finance and buyer finance, but there are so many niches, such as warehouse and inventory finance, and so on. Currently these are single, customized solutions for special customers, but developing them into scalable solutions for easy sale and easy use would be one way to go. Very important as well will be changing the mindset of regulators and credit people away from balance sheets to transaction-driven analysis, in order to limit down the equity absorption. Another important aspect to remember is that the implementation period for buyer-centric programs can last between six to even 18 months, which in today's world is a long time to get a solution up and running. So while the expectations of revenue generation are very high, it will take time until the expectations are met.
Ghani: At a recent conference we were discussing trade finance, and I was surprised to hear that a large number of participants considered supply chain finance to be very paper-intensive and cumbersome, and that once you're on it, it takes a long time to get onto the system. They were also concerned that once you've set up a program, what if the bank decides to reduce their exposure on supply chain finance—would the bank walk away? It showed me how important client education and communication is. We have invested heavily in creating solutions that reduce paper and digitize trade; in addition, banks like us have bought billions and billions of sterling exposure in supply chain finance, and we continue to add more every year, but there is still this perception that banks may walk away. We as an industry need to continuously educate and develop, firstly to ensure all our clients know about the benefits of trade finance, and secondly, to continue to improve our provision of these facilities to clients.
GF: The client is concerned about investing 18 months of time in effort to get to a point where the program is working. What kind of comfort can you give him that the bank wouldn't walk away?
Ghani: RBS has been in supply chain finance now for almost seven years, and every single year we have substantially increased the amount of facilities that we offer to our clients. We are closing one supply chain finance implementation every week.
Weeks: The client really has to investigate their banks really well. Who is committed to this business? You need a track record, and a serious commitment to the technology and the spend. It's a smaller world than most people think.
Friedinger: It is key in the future to rely on satisfactory technology. But on the other hand technology is becoming, more or less, a commodity. So the market participants will differentiate themselves by, say, a slim legal framework and how quickly and smoothly they can on-board, close and realize these deals. That's why we put a lot of effort in providing dedicated implementation teams that focus on speedy on-boarding. We at UniCredit are convinced that this will make or break deals in the future.
Dunn: The underpinning technology is completely commoditized now. People are buying trade technology off the shelf in a shrink-wrapped pack. That can give you a supply chain finance business. For the providers, this is something that requires scale. You've got to have the resources to be able to dedicate—from the very first session with a client who has said, "Yes. We want to go." From that point forward, it's a campaign to get this thing implemented. You have to have procurement people educated as to what the benefits are, how they're going to position it with suppliers, and then going out to the suppliers and working through it. In some jurisdictions, it's quite straightforward—much of the EU and the US, for example. But working through the details until you end up, 18 months later, with a fully ramped program that has several hundred million dollars of funding outstanding—that's a dedicated piece of planning and project management that only a handful of firms right now have the expertise to be able to handle.
GF: How did the sovereign debt crisis affect supply chain finance?
Ghani: In the midst of the sovereign debt crisis, one of the worst effects was a tremendous rise in the cost of borrowing for our customers—even from the capital markets. That forced a lot of corporates to look internally for additional forms of financing for liquidity and for funding, which brought them back to thinking about basic forms of financing—using the working capital cycle and generating cash from their operations. Demand for supply chain finance increased substantially during that period, and the margins also increased relatively for supply chain finance. Since the crisis abated, though, there's been a major contraction of margins.
GF: Is it better for corporates to deal with a global supply chain finance player or with a local player?
Dunn: Where corporations operate on a global basis, in most circumstances, they need to work with a dedicated team of specialists who know how to meet their needs on a global basis and provide them global solutions. Further down the pyramid toward the SME market a global solution is probably inappropriate because, say, 95% of their business is in one jurisdiction. What they need is the best solution in that jurisdiction. The local bank is the right place for them to be.
Ghani: Global banks have the capability to provide global solutions. If clients only want to deal with one bank, for whatever reason, RBS can do that. Realistically and pragmatically, though, the banks often want to share things around, but the client wants one set of terms and conditions—they don't want different terms and conditions with each bank and different sets of documentations. This trend is happening more and more, so we are arranging club supply chain facility financing, arranging partnerships with other banks to offer the same terms and conditions, all with one set of documentation. From a client's perspective, it's almost like dealing with one bank—they get a global solution, while behind the scenes the banks and providers create a seamless solution.
Weeks: The goal is to be able to offer global solutions, regional solutions and local solutions if you have the network and the footprint to be able to do that. Then, depending on what your clients are looking for, you'll be able to customize it or help their banks provide them the solution. What's critically important is meeting with the customer—especially those that have global operations or needs—to help them understand what their strategy is. Do they really want a global solution or a regional solution, a local solution or some kind of mix? Or are they going to do RFP's in 60 different countries and end up with a hodgepodge of solutions that will be a nightmare to administer? Sitting with them early in the process and helping them understand what their long-term strategy is on this product, and then fine-tuning what you can offer either locally, regionally or globally, is the best approach.
Friedinger: It is critical for customers to work with banking partners that can reach multiple suppliers in multiple countries. They should cooperate with banks that are based in each specific market because it's essential that they know about the market, that they speak the language there, and that they are familiar with the jurisdiction and the culture. Supply chain finance programs run smoothly only if the participants or suppliers play the same game. We recommend, even to really global clients, not to try to eat the elephant in one piece, but to run the implementation project step by step. Based on our presence in 22 countries we can provide pure local solutions that can go cross-country
GF: Where do you see the new areas of growth for supply chain finance? Who will be the players: corporates, platform providers, financiers?
Ghani: There are a couple of trends that stand out. The first area where we see growth is a growing secondary market for supply chain finance, which basically refers to the ability of market providers to partner to provide a bigger and deeper solution to the client. Second, we're noticing a move away from paper into digital trade, particularly through the use of technology to simplify and reduce the number of steps in trade finance, as well as to improve the data available for our clients. Also, third-party platform providers are taking an active role in joint ventures with banks, so we see that as a developing trend. We're seeing a second interesting market in receiver purchase programs being used for capex financing. Corporates sometimes lead the collaboration processes and at other times, they expect their banks to lead it for them.
Friedinger: We don't expect to see real innovation in the next few years, like an iPhone or an iPad for example. Nevertheless, there are already a lot of new ideas and concepts available for supply chain finance solutions, for example a combination of electronic invoice presentment and discounting. The challenge now for all participants—banks, regulators, governments and so on—is to implement them in a proper and lucrative way for the different customer segments. We all have to keep in mind that there's huge market potential. This cake is big enough for all participants that want to get served.
Weeks: Everybody's been focused on the opportunities with the largest corporates, especially in those cases where there's no major difference between the creditworthiness of the buyer and the creditworthiness of the suppliers. At some point, that market's going to get saturated, and people are going to have to start moving down into the situations where the buyers are smaller companies—Fortune 1,000-2,000-size companies—and also into situations where the buyer's credit is not as good as the seller's. How you attack that part of the market will be a challenge. Secondly, there's an opportunity in sustainability. We need to look at how banks can help companies that want to develop sustainable supply chains and what the bank's role can be in helping that occur, even so far as how we would work with micro finance organizations and so on. Thirdly, pre-shipment is an area where banks haven't strongly focused, perhaps because they've found the path of least resistance is to do post-shipment. Moving into pre-shipment will be a challenge for us.
Dunn: The principles of supply chain finance are now broadly accepted and the awareness of the product amongst the Fortune 1,000 is now reasonably substantial. The key now is going to be all about growth within programs that get established, which will be dependent on making this a material part of the corporate treasury and risk management liquidity management processes. In order to meet the needs of such companies and to be material in their procurement needs, whether that's on a regional basis or on a global basis, is going to require ever greater degrees of collaboration and cooperation amongst the financing sources. Almost by definition, to be a material part of the procurement base of a Fortune 1,000 manufacturing or retail company is going to be beyond the credit capacity of any individual organization as they are allocating credit exposure as a scarce resource across the organization. The future lies in collaboration and cooperation.