SIBOS: Supply Chain Finance


By Denise Bedell

Banks are changing the way they look at their own transaction business to help companies see further into their working capital management processes.

The need for integrated trade and cash solutions was significant even before the recent financial crisis, but the crisis accelerated the demand for holistic management of the working capital process. During the crisis, companies were desperately searching for alternative sources of funding, and even large corporates had to find new funding sources and ways to make better use of cash. This meant not only cutting costs but also understanding how to generate additional funding—primarily by increasing efficiency, reducing financial terms and extending payment terms in the supply chain.

Jon Richman, global product head for trade and financial supply chain in Deutsche Bank’s global transaction banking division, notes: “Trade volumes have certainly increased, and risk premiums and margins have normalized post-crisis, though they are not at pre-crisis levels either.” Treasurers continue to focus on fine-tuning working capital and cash flow management through improved trade terms. As trade has once again picked up, the benefit is mounting.


Corporates are increasingly looking at how they can leverage bank offerings to create efficiencies within their supply chain. Within the realm of trade finance there has been growth in the use of traditional trade finance products—such as documentary credits and collections, which proved particularly useful during the crisis—but beyond that there is a continued rapid adoption of financial supply chain suites. Adnan Ghani, head of global trade finance and transaction services at RBS, says: “Supply chain finance is one type of facility to allow banks to help improve the working capital cycle either by extending days payables outstanding or reducing days sales outstanding. This way it is win-win-win because suppliers receive cash almost immediately, buyers get to extend payment terms, and the bank supports both the buyer and supplier.”
Richman adds: “This suggests that both the long-term trend toward open-account-based terms remains intact and, more importantly, that these solutions are now seen by corporates as an important component of their liquidity, cash flow and risk management tool set.”

From a bank perspective, supply chain management solutions present opportunity but also risk. Carl Stocking, head of global market management at Citi Global Transaction Services’ bank services group, notes: “These trends have a strong implication about credit risk and the need to mitigate that through proper structuring plus the use of outside risk mitigation tools.” They also have implications for the balance sheet. Stocking says: “These types of solutions are balance-sheet-heavy, especially under Basel II and Basel III. It’s also important therefore for banks to have a well thought-out asset optimization strategy, including establishing partnerships with other banks.”

Financial supply chain solutions are still relatively new to many companies and, as such, still tend to be viewed as stand-alone products, at least at first. To create the most value, automated payments and liquidity solutions traditionally seen in the cash area are being directly linked to financial supply chain solutions. This is definitely where companies are headed, but most are not there yet.

What Companies Want
From a corporate perspective, companies increasingly want to bring together the disparate elements of the physical and financial supply chain. They want a single, standardized interface to their banks with integrated reporting of activities to manage cash flows more holistically. And they want that interface to include a range of services, including cash management, trade finance and financial supply chain. However, many companies are either not yet comfortable enough with the product offerings or simply not ready to once again increase infrastructure budgets to invest in the deep-level re-engineering that is involved in internally moving to a single, fully integrated enterprise-wide cash, trade and supply chain solution. Niklas Callerström, global head of supply chain services in global transaction services, merchant banking at SEB, says: “Their interest has increased—and that came out of the crisis; however, they are still very much focused on individual products.” He says that most companies have not come so far as to increase resources toward a holistic solution. “They are more or less using the same resources as before but trying to understand the big picture.”


Ghani: “The bank supports both the buyer and supplier”

Meanwhile, companies want their banks to help them get this bigger picture without massive internal change to their own processes. Banks historically operated and thought in a cash silo and a trade silo, while corporates focused rather on payables and receivables, with a credit silo layered in—which would determine, for example, if they needed a letter of credit or other trade finance product. Callerström says, “Banks were talking one language and corporates a different language.” As companies began to recognize the benefits of looking more holistically at the physical and financial supply chains—and banks began to realize the potential benefit of inserting themselves further downstream and upstream into corporate cash and trade processes—this focus changed.

In order to help corporates have a fully integrated approach and view, many big banks have altered their internal focus to align more closely with corporate functions. The first step was the creation of global transaction banking or global transaction services divisions, which brought together—at least on paper—the trade and cash product lines of the bank. Deutsche Bank and UniCredit are prime examples of banks that chose this route.


Stocking: “These types of solutions are balance-sheet-heavy”

Some banks—such as SEB and RBS, for example—have brought these lines together under one umbrella from a product management perspective.

At some banks, however, the integration appears much deeper. Citi and J.P. Morgan have moved beyond product management to integrate these product lines on a more fundamental level. This sort of integration is essential, says Enrico Camerinelli, senior analyst at Aite Group. “The real competitive edge is to stop selling discreet products and start selling a portfolio of products.”

Most banks now assess their people’s performance in terms of how much they sell of the cash product, trade product and so on, Camerinelli says. “But the real differentiator that shows how serious banks are with converging cash, trade finance, foreign exchange, payments and so on is how much they are willing and able to internally have that change management process to build toward a single unit operationally and from a systems perspective.”

Stocking adds: “Really responding to these trends involves committing to fundamental structural changes in the way the bank thinks about its business and measures results, and a fundamental change in product offerings to leverage the best of the traditional cash and trade pieces of the organization.”