Disruption and change in SCF

Feature | 26 June 2017
Dockyard

Panellists at the ICC Academy Supply Chain Finance Summit look at where the barriers to collaboration lie and what a truly integrated supply chain finance ecosystem could achieve

Katharine Morton: The evolution of supply chain finance is something that has been closely watched and it's safe to say that in the trade finance space, it's something that's evolving very fast and there are certain hurdles and opportunities. There's been more disruption than in Peter's shoes (see below), which are the most disruptive in supply chain finance I've seen! Enrico, can you just paint a picture of where we are at the moment?

Enrico Camerinelli: In terms of innovation, it's good to think about the physical supply chain. I have a supply chain background and when I was learning to do supply chain finance, I learned the importance and impact of trigger points in the physical supply chain, and the triggers necessary to financial instruments. So, I would say in terms of innovation, it might not be so innovative, but now companies, especially banks, are not only understanding the importance of commanding the physical and financial supply chain, but they are also defining those trigger points. That is an innovative element by itself.

The second element of self-innovation is credit-scoring mechanisms. The ability to actually use the information you can gather from analysing the physical conception of a supply chain - is this a product delivered on time in quantity, quality, do you have disputes with buyers, is there a healthy relationship? This is something that adds to how banks should analyse and assess credit ratings. Especially when you go into the long-term - how can you assess the credit rating of a small company? The third element is this notion of supply chain collaboration and why is it so important and so difficult to make it work, and what are the potential solutions to this?

Lionel can you follow up with some of the models that are available and where the limitations are?

Lionel Taylor: With 85% of world trade operating on an open account basis, true innovation will for me be the development of an integrated pre- and post-shipment financing solution that operates on a flow basis covering an open account environment. Technology with the adoption of both cloud and distributed ledger technology is not an obstacle - how the different contributors into a supply chain collaborate and become more inclusive is the challenge.

Global banks who often see themselves as the leaders in the development of supply chain finance are focused on their own compliance and regulatory issues, and on supporting the needs of their major corporate customer segment, while many of the major logistic companies are treading their own paths, unwilling to collaborate with each other to create a more industry integrated solution. Sitting in the shadows are regional and local banks who primarily service the SMEs and who can bring a wealth of support and knowledge, if only they were included.

So for me, the real innovation is how do you bring all these parts together? Bringing banks together, logistics, and the other services within the supply chain and create that community which allows real end-to-end supply chain financing. One step I would welcome in the short term is for the ICC to step in and help create the standards and framework covering an open account financing environment. I think that this would help galvanise the efforts being made across the sector to collaborate and reduce the high levels of confusion that we have today.

Christophe can you bring in a bit of what you're seeing at Euler Hermes?

Christophe Spoerry: As I've been sitting here I asked myself, why is this industry innovating so slowly? This is a major conference and by a show of hands from the audience, how many start-ups are here? Four - normally when you have a conference in another industry, half the room is start-ups. As an industry we are innovative but it takes a lot of time. I don't yet understand why there is not more cooperation between our world and the world of innovators.

In terms of the way we've innovated, we look at what the supply chain is all about. When we started, it was just 1% of the team looking at credit insurance history and we started to ask, what can we do with the Euler Hermes assessments and the data that is available? It was the innovators who took the driver's seat and took it forward. They asked to have access to the data and tried to make sense of it. We realised that everyone needs this data, whether coming from Euler Hermes or coming from the corporates within the supply chain. And we started asking corporates benefiting from supply chain finance programmes, would you be willing to let others access your data?

And this stretches something that is still very conceptual where there's a first layer of many companies collaborating. A second layer is where there is crunching of this data and making sense of it. And a third layer is where it's a more classical job of a bank or an insurance company to do the product out of the two first layers, because it's regulated and it's needed, and so on. A bank or an insurance company in the future, if this dream comes true, will not necessarily utilise only its own data and its own models, and then get the right programme, the right product and then deliver into the market, originating it, but will count on others through things like ledger data, in order to do this.

Ian, could you tell us about some of the things you're seeing at Bolero and the business need for products?

Ian Kerr: In terms of innovation, we were very much a pioneer in supply chain finance, digitisation and our story goes back to the mid 1990s. As we developed we evolved from supporting multi-bank trade finance applications for LCs, guarantees, through electronic presentation of trade documents utilising e-bills of lading, also leveraging our services around the matching of online trade documents so we can reach further into supply chain. There is a lot of focus on this industry at the moment as a very under-digitised industry, and there is a long way to go.

There are other companies involved in parallel activities and we've only really scratched the surface in terms of what can be done and there's a huge amount of opportunity, and the focus of going into some of these blockchain initiatives has shone that spotlight. And even though we've got a small amount of proofs of concept transactions, generally single transactions with lots of manual intervention which hasn't really proven its capability yet, but that's now starting to change. We are seeing some real credible consortia emerging with real capabilities and that opens up a huge opportunity. The industry as a whole needs to find more creative solutions to reach into other sectors that are being underserved. So there are number of things coming together simultaneously that makes this a better time for trade finance and supply chain finance than the late 1990s.

Peter Hazou: Historically there's been a lot of innovation in this space, but it's been innovation without technology. I joined Microsoft two years ago, I'm basically a career banker in transaction banking and trading. So for me innovation was something like when reverse factoring came along, I thought that's creative, that's a completely different way of looking at a problem, but what's not come yet is the advent of technology - and it's not about just blockchain. With the cloud, that's very new technology, it's hardly even begun. Cloud-based computing has opened up a completely different world because of the massive, hyper scale data sets that have been made available. Analytics is no longer just a spreadsheet, it is an entire world of rich, advanced analytics. Machine learning and predictive analytics - just think about predictive cash flow. You'll know when a client needs something without even going through the calculations, the machine will figure this out, it will present it to your sales people, it will figure out the flows, it'll figure out the risks, it'll figure out what's happening with logistics, and that's just the beginning.

One of the interesting things, just to come back to the fintechs now, it is no longer a level playing field, we're not in Kansas anymore and there are a lot of new players. With the banks, it's always been a level playing field. The logistics companies are highly innovative because that's their core business. In banking, there are so many other things, but in logistics, this is the core stuff - tracking, where are things, RFID, where's the box, and all of this generates huge amounts of data that's insightful that now because of the way technology is done it's natural language, you can actually do something with it. So without mentioning the 'B' word, there's so much going on in this space and it's hugely exciting.

Audience member: I can only add to what Peter said, I'm completely aligned with him. We did a contract with a tobacco company for their vending machine parts and we had financed this machine with what we call an added service programme. One of the things embedded into it is also a programme to raise the level of this vending machine over the next five years into the pure internet of things, so basically, an indicator to recognise the vending machine user is over 18 years old, plus another one to accept the bank card, and another to recognise when the levels of cigarettes gets low. The saving from applying this to all 7,000 vending machines is phenomenal and all of this is a combination between logistics, finance and technology.

Peter Hazou: And, it's here and now. This technology is out there, a lot of people are getting to play with it and figure out the use cases and do the proofs of concept stages - don't think this is futuristic, this is very much here and now.

Let's come back to the finance side of it. In terms of supply chain finance and the pricing of risk, are there any step changes that you can see Enrico, that could come through?

Enrico Camerinelli: The fintechs, the emerging vendors, they are important, but when it comes to supply chain finance, the part you have to remember is the supply chain part. Even in flow vs transaction, you have to know how many parties are in the game. When it comes to SMEs, that's even worse because they're small, they have many different competitors but also many different counterparts, and this is why the notion of supply chain collaboration is so important, and it's going back to the basics.

Why is supply chain collaboration not working today? Well, in my analysis, there are four major causes. The first is that each different company has a different system. So it can't be integrated. The second that is even if you try to integrate these systems you have a privacy issue. You can exchange data, you can exchange a purchase order but in either case you don't want people to see how much you've paid for it. So how do you handle integration of privacy? And then you have the standards, and the fourth thing is, 'I want to be the first to do things'. So, this is what makes supply chain collaboration so difficult and therefore if you want to finance it, you have to solve it. So, in my opinion, this is where the 'magic B' comes out, not because I'm a strong proponent or leader of blockchain, but because as an analyst, I'm seeing that it's happening and I'm looking at it from a supply chain perspective.

Coming back to the difficulty in integrating systems, you can take your data and hash it, put it on the blockchain, whether it's the bitcoin blockchain or a private one, it doesn't matter. The fact is that could be an integration maker, the blockchain. Second is privacy, we know we can resolve the issue of privacy because it's encrypted. When it comes to standards, the beauty of standards is that you have so many that you can choose. But in reality, when it comes to supply chain management, one standard really takes precedent and that is GS1, global standard one. Barcodes - this is GS1 - so anything that captures RFIDs (redio-frequency identifiers) are all standardised with GS1. And fourth is, 'I don't want to be the first to do it'. This is where organisations like the ICC or any association of companies or banks can actually take the sides of the different members and work it out together, because when it comes to blockchain or any initiative, you'd certainly have issues.

In terms of things like the Global Legal Entity Identifier (GLEI) and all these things that don't really need blockchain to happen, what's your views on blockchain and where we're at?

Ian Kerr: A lot of focus has been around the technology and the technology becomes the story, but it's actually about the business process, that's what we're seeing. We absolutely see added value use cases for distributed ledger applications, absolutely. But, what's now emerging as we go from the proof of concept world into people trying to drive this to industrial-scale capability is people are waking up to the issues that we face on a day-to-day basis at Bolero, which is around on-boarding of counterparties, authenticity of those counterparties, putting in place a legal framework around the transaction that operates on a cost basis - that's the hardest part, the underlying technology and its interesting attributes is only there as an enabler.

So from a Bolero point of view, we're engaged with the number of these organisations, looking at how we might extend some of the components that we've proven on our platform over the years and into the legal framework around the transaction, albeit maybe executed in a distributed ledger environment, but actually would give that level of confidence and surety of completion.

Lionel Taylor: In terms of drivers, the various bank initiatives where more serious investment is being spent is in those areas of banks where efficiency and cost cutting will enable the bank to remain competitive in areas of its business under threat. Payments in this regard are a prime example. Within trade there are a variety of proof of concepts running to replicate the features and characteristics of an LC on a digital basis using smart contracts and this is very welcome.

However, as mentioned previously using this technology to develop new and enhanced financing solutions covering all client segments involved in a supply chain will be the truly innovative development. And it's not just technology, it's having a real interest in servicing the needs of the mass of businesses who are not major corporates, it's about educating the compliance and credit functions to better understand the trade and SCF solutions offered today and of the data and controls that will be brought by the adoption of new technologies.

So the banks will move and in fairness banks do move, but at a slower pace than we would want. It's about opening minds to a new way of thinking and here I believe that the non-banks and the fintechs play such an important part.

Peter Hazou: There's been a general shift. Who'd have thought that with these devices that old-fashioned banking would have shifted power to the consumer so profoundly, which it has? There's a whole shift in the centre of gravity. So, has that reached supply chain finance and the SMEs? Maybe not yet. Maybe we're looking just at the precipice of a tsunami of change. But I can't see why this particular corner of the industry is different from the rest of the industry. The business leaders at the top of the pack are feeling a lot more urgency around transformation of a business model that at its core, technology is a facilitator. But there are so many tools in technology out there out there that the banks haven't yet started to tap, that there's a lot more pushing on an open door than one would imagine around change and innovation. And so there's really a lot to hope for and be optimistic about but it's a matter of getting involved and figuring out what that is, particularly when it comes to data and the power there. Look at lending clubs. How are they doing this without going to the core of credit processors? Because they rely on data and insight to really figure out what the risks are. The tools are out there to be fresh-thinking. Banks probably want to do this.

One of the implications of these changes is that everyone needs to partner with others, perhaps technology companies or partner with fintechs. The reason the fintechs have not been successful is the never effect, the scale effect, but also because the banks haven't wanted to let them in. Guess what, we now have PSD2, thou shalt open APIs, gee, why is that there? Because the banks have been reluctant traditionally. So there's a lot of policy changes coming from, being expressed through the regulators, but really coming from the changing economy. It's about partnering, it's about how to really figure out how to do this sort of thing.

Ian Kerr: There's a good analogy in broadcasting and the BBC, a large regulated organisation run by government money, but they can't reach into every sector people want to develop programming for. That's why the likes of Amazon and Netflix can come in with different content, so there's an opportunity then to work together. Also it's about interoperability as well, not necessarily around standards, this getting one standard or one size to fit all in an industry as complex and diverse as this is going to be very challenging. But, certainly, interoperability around the exchange of data and there's a responsibility within the fintech community to work together. As an example, we're in conversations with an invoice presentation platform about how bringing together supporting shipping documentation can provide a more holistic, 360° view of that live transaction. And that's down to the fintechs working together as well as the partners in the banks in the right way, to reach the sectors that need to be serviced.

I'd like to come back a little bit then to the step changes you see going forward.

Enrico Camerinelli: I have this concept that I call a supply chain bank, so starting to assess the creditworthiness of counterparties using supply chain information and as I said before, delivery on time in quantity, quality, also supply chain performance.

If you look at Alibaba, for example, they're using the same structure data to add on to the financial information of the company, something that relates to their supply chain performance. There's another great example - there's a fund management company that has its own supply chain finance platform. They are financing, so it's a non-bank, it's a fund manager, and they are using their own funds to finance. And the interesting thing is that the platform has been built by a joint venture between a company that builds software for track and trace, so courier supply chain management and the other company is a financer. So they get together. So the point is, the step change, if there is to be one, is for banks to start finding ways of how to build this credit profile of the companies that want to finance. And if there is a problem, that shouldn't be showstopper - find out how to use that data that you can use for your supply chain finance programmes. You also have to start thinking that supply chain finance might not be a revenue generator, it could be a door opener. So it's not necessarily something that needs to generate profit, but it's a way to establish a relationship.

Peter, what's next from your perspective?

Peter Hazou: If we're talking about blockchain, supply chain plays a role here but this is very nascent technology so it hasn't really gotten its grip in depth. The smart contracts and trigger events can play a very big role. When we talk about the internet of things, that's going to be huge for data generation, but there's also a lot about artificial intelligence that's going to reduce the costs structure for banks - bots - and so as banks lower their costs, they'll have more room for innovations, that's one thing. The banks are changing their business models. There are a lot of tools out there, we're doing a lot of proofs of concept at Microsoft, we offer blockchain as a service. I personally think that process improvement is not really what blockchain is all about. It's about the processes, it's not a solution in and of itself. There's a lot that's going to reshape the industry based on that. The technology is going to come, the tools are there and people need time to play with them, so that's what's going to reshape the industry.

Do you have any last thoughts Christophe, on how the risk element is going to be priced effectively?

Christophe Spoerry: So the vision with blockchain is a bit like the autonomous car arriving in supply chain finance. It's a bit like each SME will have a tool provided by its ledger, by its bank, or someone else, and this will help them do their business a lot more safely than before.

And the analogy with the self-driving car is basically there is enough data now and it's being sufficiently shared, there is intelligence as well around crunching this data to inform the business maker, the CEO, the director, whoever it is, of the right credit terms to choose whenever he's doing a deal. And this will change the dynamics fundamentally. If we then zoom out, we see connections between companies and each of those connections is a risk - if they're delayed then the next connection is delayed as well. And so every company has this autonomous car when doing trade so everyone is going to be safer and this is very promising as a future.

Peter Hazou: In certain respects, things move slowly. On the other hand, there's the sneaking-up of things moving quite quickly maybe, and it's blockchain, maybe it's something else. So on the one hand, the mind-set may be quite similar, it's the same, it's about real people and real customers, but a lot of factors that are going to be driving it are quite different - data and all the technology that goes with it. So it'll be quite a change even though the perception might be that it's a slow change.

Audience question: We've heard a lot about SMEs today but I'd like to get the panel's view on expanding supply chain finance solutions to midmarket corporates?

Enrico Camerinelli: If you really want to start servicing the midmarket, the real inflection point or the step change will be stop using the approved invoice as a security for the repayment, and start using something else. Which could be, again, the supply chain focus of the company. That really is the big differentiator otherwise it will be very difficult to find SMEs just using the big anchor buyer as security for the repayment if you are far away from the anchor buyer. So, automation is going to change the structure entirely.

Peter Hazou: It's going to automate a lot of the sales process because it's going to know and understand who's got money, who needs money, the machine learning is going to understand that from a massive data set globally. Just to conceive of trade as a big old fashioned supply chain is wrong. Trade is anytime - Alibaba sells anything on the internet, it's covering everything all the way down and people need money to be able to do that, they need to borrow, so don't think of trade as just the old fashioned supply chain. Think of it more broadly because automation will make all that possible.

This panel session was held at the ICC Academy 6th Supply Chain Finance Summit on 2 May

Box-out 1

The panel

Enrico Camerinelli

Senior analyst, Aite Group

Peter J. Hazou

Director, business development banking and capital markets, Microsoft

Ian Kerr

CEO, Bolero

Christophe Spoerry

Co-founder, Euler Hermes Digital Agency

Lionel Taylor

Managing director, Trade Advisory Network

Chair - Katharine Morton

Editor-in-chief, TFR

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