Various technology and regulatory initiatives have reduced the cost of processing payments. Banks have tried to extend their services to value-added services such as electronic invoicing (e-invoicing). But is this the right bet for banks and for corporates? What does the future hold in this area?
There are various definitions for e-invoicing, such as: “E-invoicing is the exchange of electronic invoice data from the supplier’s computer to the buyer’s computer – with no requirement for supporting paper documentation and no need for manual intervention. The e-invoice acts as the VAT, tax and accounting document as well as the request for payment.”
This definition reflects the fact that historically, e-invoicing has been viewed more as an IT service with great emphasis on workflow management and back-office processes. This fact is also reflected in today’s market situation where the majority of e-invoicing service providers – big or small – are not from the banking industry, but more logistics based. In countries where banks have been involved in e-invoicing (for example, Finland, US and Brazil), the starting point for many has been on the information exchange between the trading parties and the transported data has not been suited to facilitate other, even more established banking services. But this is changing.
For large corporates, e-invoicing is a business as usual practice, and an efficiency opportunity to grasp. Increased efficiencies and improved processes are immediate benefits from the adoption of e-invoicing, such as accelerated collection process. Therefore the pressure to move into e-invoicing is evident among business partners.
Public sector authorities are also gearing up their initiatives. They can adopt the large corporate mind-set and, with business rationale, move their suppliers into e-invoicing, encouraging uptake. They can also opt for legislative changes. As an example, the European Commission (EC) promotes e-invoicing as a way to improve the efficiency of European businesses and in this way make them more competitive.
For all such reasons, declining to accept paper and PDF invoices is already a reality in some countries. Large buyers around the world no longer accept paper from their suppliers. E-invoicing has proven its value but only represents a first step to link up the financial supply chain with the physical supply chain. When intermediated via banks, e-invoices enable financing opportunities on both sides of the supply chain – the buyer and its suppliers.
As reported in the ‘2012 E-invoicing Market Guide’ published by The Paypers:
- Traditionally, e-invoicing has largely been the prerogative of large enterprises which receive and issue large volumes of invoices and for which the use of e-invoicing boosts operational efficiencies in an immediate and visible manner. The traditional e-invoicing ecosystem is essentially buyer-driven, and that is a fact. However, new models are beginning to emerge, putting pressure on what could be referred to as the traditional corporate invoicing paradigm. And at the core of this shift is one particular category of companies: the small and medium-sized enterprises (SMEs).
- As far as e-invoicing adoption is concerned, the rules of the game are quite different for small enterprises. For a company which manages only small amounts of invoices, achieving higher operational efficiency, via e-invoicing, means little unless it comes together with other benefits attached. Combining e-invoicing with working capital management services is such an added benefit, one which allows SMEs to tap into one by use of the other. The more the use of e-invoices can be attached to financing, the more obviously beneficial it becomes for SMEs. Having a large buyer finance (some of) its working capital also boosts a small company’s credibility, making it more creditworthy and mitigating crediting risks in the eyes of a bank.
As the benefits of e-invoicing have been demonstrated for and accepted by both the private and public sectors, we can expect this market to further grow despite some obstacles on the way – for example, a lack of standardisation, dominance of large players, closed ecosystems, etc. This is clearly demonstrated today by the overall market statistics and the growth of the large e-invoicing operators, such as Ariba, OB10, etc. However, banks active in this space seem to be rare species. Notwithstanding a few exceptions, banks seem quite reluctant to enter the e-invoicing space given the limited margins that can be generated on such flows. This is quite unexpected as e-invoicing feeds into banking services such as payments and financing. So where is the real opportunity for banks, and how does it benefit corporate treasurers?
Where is the Opportunity?
A 2010 study initiated by the Bank of England (BoE) and published by the Association of Corporate Treasurers (ACT) concluded that supply chain finance (SCF), in particular buyer-driven receivables programmes, offer opportunities to expand lending to smaller and mid-tier companies and the larger companies – the buyers – which can play a significant role to the benefit of their supply chains. In this case, the funding is based on the credit standing of the buyer and not the supplier. As a result a buyer-driven receivable programme is less complex than other structures and funding is likely to be less expensive for suppliers where the buyer’s credit is stronger than those of its suppliers. The benefits to suppliers also feedback as a benefit to buyers, in terms of better relationships with suppliers and a reduction in possible financial weakness/instability of suppliers.
SCF refers to all financing techniques used in the supply chain. However, in many banks, SCF has become synonymous to supplier financing or reversed factoring, which is the narrowest definition. In this typical setup, when the big creditworthy buyers confirm invoices, they more or less guarantee to pay the invoice towards banks who can then offer suppliers pre-payment of their invoices at favourable conditions. The buyer benefits through longer payment terms, the supplier gets cheaper and alternative sources of financing and the bank earns a nice margin on the advance payment.
In contrast to e-invoicing, SCF represents an attractive opportunity for banks to generate revenue and increase liquidity in the market. SCF finance represents the most prominent example of open account services directly linked to the merger between cash and trade. With close to 90% of global trade being transacted on an open account, banks have had an increased focus on how to intermediate and finance such transactions. In order to deploy such services globally though, banks need a cost-effective network and a legally binding collaborative model, such as the ones existing for documentary trade, in order to engage with dozens, if not hundreds, of correspondent banks at an acceptable cost.
Although SCF solutions are widely available from large banks and from some third-party vendors, such as Ariba, Prime Revenue, etc, most are limited to the last mile of the transaction – for example, using the invoice approved by the buyer to finance the supplier’s receivables. While addressing suppliers’ working capital issues, this type of offering only represents a small, yet relevant, step when considering the real potential of SCF across the full transaction lifecycle.
Thanks to industry-wide rules and standards offered by the International Chamber of Commerce (ICC) and SWIFT, banks can get involved from the very early stage of the trade transaction; for example, the raising of the purchase order, and at every stage of the transaction lifecycle. This is a key difference for banks that wish to provide payment risk mitigation and/or pre-shipment finance in a secure, efficient and collaborative way. Such services represent much higher value for corporates than last-mile, low-risk discounting. Both large and mid-cap sellers will enjoy secure and timely payments when dealing on open account terms since payment will be done by their own bank independently of effective payment by the buyers. When needed, buyers with strong credit ratings will be able to facilitate pre-shipment finance to support their critical suppliers, while not using their own capital as it is often the case toda, for example with advance payments.
Contrary to today’s reverse factoring services which are driven by large buyers, the ICC bank payment obligation (BPO) provides the legal scheme and technology standards in support of an industry-wide data-driven multibank instrument relevant to any type of corporate in any industry. The new instrument, which is supported by ISO 20022 messaging standards, enables banks to leverage electronic transaction data available from the business-to-business (B2B) world. Figure 1 shows how using data representing the purchase order, the invoice, the certificates and the transport documents offers banks the ability to accelerate global SCF processes, as well as increase visibility on transaction details such as line items, in order to better mitigate risk and finance transactions.
The physical supply chain has significantly increased efficiency via the use of new technologies and business models. By using various technologies, trading counterparties have accelerated their industry-specific processes, reduced handling costs and inventories, increased visibility and improved forecasting and planning. E-invoicing is a great example of such efficiency improvement in the corporate-to-corporate (C2C) space.
The emergence of national trading hubs in South Korea, Taiwan and Hong Kong, and B2B e-commerce/e-invoicing platforms, such as Ariba, GXS, PayModeX, Peppol and Tradeshift, among others, has significantly increased the dematerialisation of B2B processes such as sourcing, negotiation, quotation, ordering, shipping and invoicing. Such new electronic B2B processes have created a new paperless world where efficiency gains and cost reduction are achieved to the benefit of both buyers and sellers. Buyers and sellers now expect their banking partners to follow suit.
However on the financing side, most of the supporting processes have not benefited sufficiently from technologies and are still governed by complex paper-based practices, slowing down key processes such as the handling of document discrepancies. The dematerialised B2B processes offer banks the opportunity to extend today’s paper-based banking services to new services based on electronic transaction data, leveraging the progress of the e-procurement and e-invoicing spaces.
The time has now come for the banking industry to link the delivery of risk mitigation and financing services to what is actually happening in the physical supply chain in a more efficient way, using electronic transaction data. The ICC BPO rules enable this linking alongside the full trade transaction cycle in support of risk mitigation and financing services (see Figure 2).
Figure 2: The ICC BPO Extends Banks’ Data-driven SCF Services
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