Shaking up the supply chain

Feature | 5 May 2017

Enrico Camerinelli and Mike Walker look at what emerging technologies, digitisation and changing demands from banks and corporates are doing to refresh the dated supply chain finance ecosystem



The modern supply chain is a tangled web of interconnected paths seamlessly crossing international borders. Upstream and downstream dependencies are such that companies no longer identify themselves as either 'buyers' or 'suppliers' - they are merely participants in the ecosystem.

The Aite Group report, 'The Killer Fintech Use Cases for Corporate Banking: Problems Waiting for Solutions,' highlights that, contrary to a general market consensus that banks are falling short when it comes to knowing what their corporate customers want, it is corporate behaviour that creates lines of separation. It is common for companies to have internal silos with lines of business such as sales, procurement, logistics, treasury, and IT, all of which have conflicting goals that make it extremely challenging for a bank to provide holistic working capital solutions.

The upcoming changes from SWIFT in 2018/19 to its messaging standards is having a positive effect and is causing many banks and corporates to review their current infrastructure and embrace digitalisation at the same time. However, the breadth of the changes may have the opposite effect and drive more manual workarounds, if not addressed through a holistic digital trade strategy.

What corporate treasurers really want

Corporate treasurers are demanding efficient cash flow management, requesting financing much earlier in the lifecycle of a contract and asking for bank assistance at the purchase order stage before expecting a further change once the invoice is available.

There is no doubt that all participants in the ecosystem understand the benefits of digitising. However, competing solutions requiring bespoke integration, coupled with the associated high costs and fragmented user experience, are proving to be barriers to adoption. Technology vendors are waking up to this as well, shifting their mindset to focus on collaboration over competition. Rather than developing products to compete with more established rivals, companies are focusing on strategic partnerships with complementary solutions, allowing them to satisfy the clients' wider ecosystem of requirements.

Figure 1: Buyers and suppliers

Source: Misys

Going paperless

One such use case is the provision of a scalable paperless trade solution for banks and corporates. Currently, corporates will typically use their bank's own proprietary portal to manage their transactions, or they will use one of a number of multi-bank solutions available on the market to communicate with their bank of choice. Management of transaction documents will either be done through couriers or through a standalone electronic documentation solution.

The challenge here is that the bank and the corporate are subjected to a disparate, fragmented user experience that reduces efficiency of service, and increases the turnaround time for transactions and likelihood of errors. The inefficiency of running separate transaction and document management solutions means that only those parties who experience high transaction volumes can benefit without bespoke integration being put in place.

The limited take-up for paperless trade solutions means costs remain high, proving a barrier to the SME market and ultimately driving down documentary trade volumes as a whole. The cost of supporting traditional trade transactions has seen a shift towards open account and a plateauing of documentary trade finance.

The answer is a pre-integrated, paperless trade system that supports document and transaction management through a single user experience. The combined workflow and data sharing means operational risk is reduced, along with faster turnaround times for transactions and reduced days sales outstanding (DSO) for the corporate customer.

We have seen DSO reduced from as much as 11 to four days simply through the provision of electronic trade documentation. This gives the corporate the chance to perform more business for the same cost of finance. The removal of courier charges and efficiency gains on the bank side allow transaction costs to be reduced, resulting in improved client attraction and retention rates. A unified solution for paperless trade will also remove the barrier for adoption of digital trade in the SME market.

Figure 2: Fragmented user experience with current paperless trade

Source: Misys

Unifying the customer experience

On the theme of unified client experiences, another opportunity for technology and the industry to revolutionise trade financing lies in the possibility of a financial services platform, either initiated by a bank, a consortium, or a bank-agnostic platform that could deliver on the bold vision of a 'platform of platforms.' One platform to rule them all could provide a single web services layer, and a functionally rich portal to aggregate information from multiple banks, non-bank financing solutions, marketplace lenders, e-document platforms, watch lists, regulators, and other third-party data providers.

In this model, corporate subscribers would only need to supply their information once (for example KYC), making it available to all authorised parties through a single platform. This would link the various marketplaces, financiers, distributors, and business partners in the supply chain network, alongside valuable market data.

The shift to a service-based economy means trade finance is evolving to better serve these businesses, and this is shown with the increase in guarantees volumes that are mooted for the coming years. For corporations in the service industry, for example, the portal mentioned above could provide online metrics and behavioral information to support trade finance decisions where there are no physical goods (such as online reputation extracted from social media metadata as a driver of credit decisions).

Other information provided in such a platform could include average day sales/payables outstanding against industry-sector average, offering the corporate treasurer an overall view
of the company's purchase and sales order positions, invoices and assets, and helping him
or her to decide the optimal configuration to access finance.

Real-time monitoring

It is no longer enough for corporates to rely on their bank to know the status of their transaction or goods; they require this information on demand and in real-time. Corporates are also more focused than ever on the security of their data and the efficiencies that could be gained through utilisation of that data to automate processes.

There have been a number of high profile proofs of concept within trade and supply chain finance that utilise distributed ledger technology, but so far these have not moved to a position where they can start to influence mass market adoption. As this technology continues to emerge, it is feasible that smart contracts could be executed based on real-time information, to deliver unprecedented automation in powerful new trust networks. Vessel tracking technology could be used as the trigger for payments under transactions, for example.

This would help to address the challenges of managing, tracking, and securing domestic and international trade transactions, connecting all of the parties involved (buyer, buyer's bank, seller, seller's bank and transporter). Maintaining secure records on a distributed ledger could accelerate the order-to-settlement process and decrease administrative paperwork significantly for banks, buyers, and suppliers.

While this promises to be a future force for change, there is much to be done to harmonise standards, consensus and technology across the diverse players that make up the nodes in the complex ecosystem of world trade.

The behaviours and expectations of banks and corporates are changing, and this is prompting fintechs to collaborate with complementary solutions to deliver a service right across the trade and supply chain ecosystem. The barriers to adoption of digital processes and emerging technologies can be removed through vendors offering a unified digital experience, reducing transaction cost and ultimately increasing the volume of trade finance transactions being undertaken.

Enrico Camerinelli is a senior analyst at Aite Group and Mike Walker is a senior product manager for supply chain finance at Misys

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