Financial Supply Chain: Mitigating Risk for Financial Institutions

The global economic downturn and subsequent contraction of available credit has required banks and trade finance companies to step up efforts to cope with the huge demand for supply chain finance. By extending and expanding their traditional role, these institutions have partnered with logistic companies, buying entities and suppliers to provide new levels of risk mitigation, working capital analysis and creative finance options in order to build their clients cash reserves and shore up bottom lines.

Even despite the welcome signs that the global economy is slowly dragging itself out of recession, the use of supply chain financing will continue. However, as refinancing costs are expected to increase, the refinancing spread will also increase in line with the risk driven component of overall refinancing costs.

Based on our discussions with financial institutions the world over, there has never been a better time for companies to address some of the larger issues of financial management – and turn to technology to introduce innovative programmes that will improve working capital management. This can be done by reducing operating costs and streamlining processes to further ease the constricting effects of credit tightening.

Electronic Billing

A good example of a most effective way to improve cash flow is to increase the level of electronic billing (e-billing) – regardless of whether the customer base is consumer or business. Electronic transactions result in more predictable cash flow and broader acceptance of direct debit options by consumers and businesses. Such benefits can be achieved from focused promotions that highlight the end-to-end efficiency gains.

A component of e-billing is electronic invoicing (e-invoicing). About 35% of all invoices are sent electronically. The remainder are received as paper and processed manually at a cost estimated to be in excess of US$50 per invoice (versus less than US$3 for fully automated processing).

Again, in addition to significantly reducing processing costs, e-invoicing results in greater predictability to cash. It sounds simple on the surface, but here’s the rub: building the primary ingredient for supply chain efficiency and liquidity, an electronic invoice presentment and payment solution demands a relatively large financial commitment and time to plan and implement.

The implementation is also not complete until the solution integrates with an organisation’s existing systems to automate planning and reconciliation processes throughout the organisation. What can technology do in the meantime? What steps are being taken to leverage technology to enable banks, financial institutions, logistic companies, buying entities and suppliers to work more closely together to mitigate risk, improve cash visibility and improve cost efficiency now?


The EU’s new single euro payment area (SEPA) Direct Debit (SDD) scheme will make it easier to bill and collect funds electronically in Europe. The extended reference field will, in a small way, aid with reconciliation processes, but further extension of the character reference field will be required over time to achieve additional benefits from the scheme. The expanding use of remittance data in transactions is moving ahead and this will have a significant impact for all participants on the entire financial supply chain.

A corporate today is able to send and receive payments that include key remittance data such as an invoice number. This is far from the ultimate solution between trading partners, but being able to connect a payment to its underlying invoice will reduce the amount of internal and external research needed for full reconciliation. This will, in turn, reduce processing costs.

North America

The US Federal Reserve recently mandated that all wire transfers have the capability to include remittance data with each transaction. The timeline for this mandate was recently extended from 4Q10 to November 2011 (the implementation date for new business remittance information message formats). To support this mandate the Fedwire Funds Service (FFS) and the Clearing House Inter-bank Payment System (CHIPS) will introduce new message formats that pave the way for business to move to straight through processing.

Compatible with both ISO 20022 and ANSI 820 STP business remittance data elements, the new formats will include sufficient structured remittance information so that the information can flow efficiently from payment origination to posting in an accounts receivable (A/R) system. This section of the payment message will be quite large: 9,000 characters. As a result, corporations using the system can include detailed information on about 30 invoices with each wire transfer.

Both organisations believe that the new format provides an opportunity for all corporations, banks and their technology partners to work together to reap the benefits of the valuable change. Other payment wire networks have been offering this capability for corporates without the large extended character capability, with minimal take-up to date but other dislocations mentioned above – linked with the global financial crisis – are now driving corporates to look at all opportunities to improve processes, however small. The FFS and CHIPS also expect other networks to work with them and to take advantage of information on their websites and online training opportunities.

Global Outlook

Significantly, new technology is available that removes any need for extended character message formats. The technology is designed to integrate with all known electronic commerce and wire networks and it can be imbedded in existing message formats without the need to change standards. Any amount of information or machine readable data (compatible with ISO 20022 and ANSI 820STP) can be linked to a payment to enable corporations of any scale to transition to straight-through processing (STP), the ultimate level of business and process efficiency, when they are ready.

This technology enables the flow of data and transactions in a constant, seamless and visible stream that can be accessible to any and/or all participants in the supply chain including banks and other lenders that have traditionally been stuck at the end of the chain financing loans or processing transactions to either send or receive a payment. This technology will also allow banks and other lending institutions to tap into their clients trading partners to extend their loan businesses. Customers of the bank’s corporate clients will be able to finance their purchases with credit from the supplier’s bank. This type of reverse factoring allows a corporate’s customers to leverage their good credit rating to get better finance.

The Future

The financial crisis has brought about change and greater pressure to improve working capital and mitigate risk. Banks, other lenders, logistic companies, buying entities and suppliers are partnering in order to work more closely to improve liquidity and cost efficiencies. Technology-driven initiatives are available that can be leveraged to interlinking the whole end-to-end supply chain to provide the transparency and visibility to reduce costs, such as capital, materials and logistics, in order to have a positive impact on the balance sheet. Looking further ahead, developments in technology will enable banks and financial institutions to analyse and profile the needs of individual clients to then customise according to their balance sheet objective, risk and financial needs.


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