Kumar said that during the crisis “there was a complete realisation that you need to manage your supply chain much more efficiently,” even at small companies. As a result, buyers and suppliers and banks – and even tier two suppliers – in Asia all discussed how to manage the supply chain better for specific transactions. However, as he said, “you can’t have that discussion every time for every transaction” because: “it’s not structured, it’s not organised, it’s more reactive.” The need for that discussion, though, is what caused both banks and corporates to realise the importance of data. They are thus now looking at how to exchange data more effectively.
For example, Kumar said, when the bank evaluates a transaction it looks at the performance of a particular supplier for a particular company. With better information, the bank can make a better decision about the financing and pricing. “The best source for that information is the company” he added, since the buyer knows what they are buying, if there have been rejections, what the rejection rate is. “If the information about the supplier that resides in the company becomes available to the bank, the decision becomes much easier.” The bank can then decide, for example, that it can finance to ‘x’ million dollars, reduce the pricing or increase the pricing depending on its risk appetite. If the performance risk is low, the bank can finance much more and charge much lower prices. Buyers and suppliers thus have a stronger incentive than before for providing better information.
An important part of this information exchange, Kumar said, is standardisation. When a company tries to link its system with its bans and its suppliers, which often have different systems, efficient information flow can be a challenge. Companies, their suppliers, banks, SWIFT and software companies have all taken initiatives toward standardisation and need to continue to do so.
In addition to exchanging information, said Kumar, corporates and banks in Asia are working towards automation. While banks and corporates have not reached the point where they can actually pull all the information automatically, Kumar said, they realise there is a need for more effective exchange of information. While many corporates currently have to “pull out a report and give it to the bank, the next step is to work towards automation.”
Along with receiving the data, he said, “the bank always worries about whether the information from the supplier is correct and authenticating it outside an automated system means you will lose a lot of time.” The bank is thus trying to automate the flow of information and is seeing a good uptake as “people are moving onto platforms where information is exchanged faster.” Especially when it’s open account and it’s difficult to verify the shipments – suppliers are much more eager to participate in a discussion about automation because they see the benefit more clearly.
More Focus on the Supply Chain
What suppliers have come to realise, Kumar said, is that an effective supply chain ensures the stability of financing and in a great many cases can “actually reduce the cost of financing.” While most suppliers in small and medium size corporates are very good at their business, he said, “they may not be very balance-sheet savvy.” Suppliers now realise that if they help the bank to evaluate their ability to supply the goods and the buyer’s ability to pay, and if the payment risk of the buyer is very low, the bank “can actually factor that into the pricing of the supplier.” Since they directly see the benefits of better information, “large companies are linking their ERPs to the banks” to provide information faster and even small companies that use local ERP suppliers are coming back to ask for integration.
While it is “still quite early to have a good assessment” of the impact of Japan on the supply chain, said Kumar, “there is an increased awareness to spread your supplier base.” And it is not only about Japan. “Crises have increased in North Africa, Japan, and other parts of the world,” he said, so companies in many locations are asking how to increase from one or two suppliers to many more. The result, he said, is that companies then need to look at the financial supply chain “to see who would support the increased requirement from a particular supplier.”
Kumar said that even though there are uncertainties which may impact the growth of global trade, “there is also a lot of excitement that we’re out of the crisis.” While “the liquidity scenario in the market is better than it was during the crisis and the pricing has gone down,” Kumar said a key question is whether liquidity would be sufficient to cope with rapid growth.
Kumar also said that, in the current environment, companies are increasingly looking at two different aspects of liquidity. One is US dollar liquidity, and the other is local currency liquidity. “A lot of markets are still having US dollar liquidity challenges simply because the demand for US dollar liquidity is very high,” he noted. Whereas companies used to borrow in the local market before the financial crisis, he said, they now want to borrow in US dollars because “US dollar interest rates are very low.”
As one example, he said a company in India that would borrow at 10% in Indian rupees could borrow at a fraction of that percentage in US dollars. As a result, the firm “would want to move all its local currency borrowing into US dollar borrowing.” And that’s what’s putting pressure on US dollar liquidity.
The bank has responded to this need and has automated supplier financing in US dollars. “The buyer provides the payment information to the bank in an automated fashion,” said Kumar, and the supplier comes to the bank to request financing using information on all the payments. “Financing is done in US dollar terms,” he said, and “the supplier gets money earlier at a lower benchmark” with greater efficiency, since it is all online.
Along with looking for financing in dollars, Kumar said, “a lot of buyers are extending the payment period because of the lower US dollar benchmark rate.” While buyers are often asking for 60 days, for example, he said “we’ve see terms go to 120 days” or even longer. Buyers want the supplier to borrow in US dollars, and they’re even willing to fund it rather than borrowing in local currency at a higher rate. “When you are importing, it is difficult to borrow in US dollars, but the exporter can borrow in US dollars. The receivables go down, but the importer is borrowing less and is bearing the cost of financing.”
Another key need of the corporates, Kumar said, is to have “their cash to become more effective.” One aspect of more effective cash management, he said, is that companies “want to pay just in time and collect as early as possible.” They also want to unlock working capital that is trapped in the supply chain. The problem, he said, is that payment is sometimes delayed. If a buyer processes payments in weekly batches, for example, payment can be delayed significantly. Or if a company takes seven days after goods are shipped to submit documentation to its bank, an extra seven days of working capital is trapped. Suppliers are asking how the bank can make can make it easier for buyers to pay. One action the bank has taken relates back to information. The bank is working together with the companies to increase information transparency and integrateERP systems so that documentation can flow faster and the company can unlock that working capital. Another solution has been the use of direct debits.
Another aspect of effective cash management is that “companies want help with the reconciliation of receivables.” The reason, he said, is that when companies receive payment there is a lot of work because the company “needs to reconcile and release the limit” for the buyer. Moreover, when the payment comes in from the buyer there is a challenge in reconciliation, because the information is not complete. To solve this problem, the bank offers virtual accounts whereby “the company has one account and there are virtual accounts tagged to the buyer.” The moment the payment comes in, then, it is placed in a virtual account tied to a specific company and reconciliation becomes much easier.
The Holistic Supply Chain
Over the past years, the bank has come to view the supply chain quite differently. Kumar said that the bank now looks at it “from a very holistic perspective, and does not focus solely on the balance sheet of the parties involved,” including the physical and financial as well as the information supply chain.” Suppliers and buyers, too, are placing greater emphasis on making the supply chain work better. The net result is a more efficient trading system, to the benefit of all the parties involved.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.