The influx of new banks and businesses offering supply chain finance (SCF) has pushed prices down to the point where they no longer accurately reflect the work and benefits involved. Service providers are practically giving clients a straight liquidity source rather than a structured one.
If too many players enter the fray a shake-up will become inevitable and force those who can’t provide the full package to stop providing SCF services. Treasurers should, of course, seek attractive terms and rates but companies that choose the cheapest – but ultimately weakest – will suffer.
Companies should also seek out a partner that can provide strong structuring capabilities and scalability. For example, they might need a provider that can help them expand their supply chains in the developed economies but also the emerging countries, where SCF is expected to grow by 20% over the next three years according to research and consulting firm Celent.
Treasurers should look at each provider’s track record and be comfortable they have sufficient commitment and resources. They should investigate how a provider can deliver the required interface between buyer and bank and smoothly transfer funds.
More than Liquidity
The flood of new service providers is a clear signal of just how important SCF has become. Treasurers’ day jobs have grown beyond looking after liquidity. Their ability to improve working capital and manage risk is equally important in the wake of the global financial crisis.
Part of this involves widening their risk remit. Treasury traditionally only looked at liquidity risk. Now it needs to consider counterparty, geographical and foreign exchange (FX) risk far more.
Geographical risk is particularly tricky because it is not just about global operations but regional set-ups. For example, in Asia, regulatory regimes are not as well defined in some countries as in others. Around 55% of Asian trade is within the region, according to the World Trade Organisation (WTO), and there are different laws and cultural issues in each country. Setting up an SCF programme across Asia is as complex as setting one up globally.
SCF helps treasurers manage their new, wider range of challenges. To really make it work, they must take a more holistic view of the company’s operations. There is no longer any room for silos.
For example, SCF benefits the treasury department in terms of efficient working capital management but only if suppliers sign up to it – and that relationship is usually managed by procurement.
Treasury seeks to increase liquidity and working capital, while the procurement department wants to increase payment terms or reduce the cost of purchasing. These goals can conflict with each other but it’s important that the teams involved work together to ensure SCF delivers maximum benefits for the company. More and more banks are now consulting with companies on the best way to do that.
Organisational silos arguably caused trade payables and receivables to remain untapped as potential sources of liquidity for many years. Treasurers would instead borrow from banks and the financial markets, exposing themselves to the global economic climate.
Some think trade payables were a poor second source of liquidity because they were expensive. Even if that was true, the global liquidity crunch means it is no longer the case. SCF has taken its rightful place as a solution to the treasurer’s quest for liquidity and risk management.
Companies are now able to consider a number of new techniques and services thanks to the rise of SCF. These include dynamic discounting, which gives companies with cash to spare the chance to create self funded supplier financing programmes and generate big returns on those cash reserves.
Buyers offer early payments to suppliers for cash discounts. The rate of those discounts is calculated dynamically – the earlier the supplier requests the payment the greater the discount. It gives the buyer a chance to optimise their funds because it usually offers the best return on cash reserves.
Another trend with a future for companies is the integration of electronic invoicing (e-invoicing) services into SCF. This can lead to end-to-end financing solutions for their buying and selling activities.
It is not just about the electronic transmission of a paper invoice as an email attachment. It involves the generation, transmission, receipt and archiving of invoices in a secure environment, so they can be processed by and exchanged between existing systems regardless of format.
E-invoicing can reduce costs for buyer and seller by wiping out manual processes. According to electronic banking provider Billentis, the average cost of receiving and processing a conventional paper invoice is €17.60. Billentis reports that e-invoicing cuts this immediately by up to 62%. Savings for senders can be up to 57%.
SCF is far from the solution to all treasurers’ challenges, but it is clearly a big help to them as they navigate their expanded roles in the post-financial crisis world. When you have so many new players that prices sink to incredibly low levels, you know you are dealing with something that’s here to stay.
Treasurers that choose the right provider and right techniques, and who successfully team up with their colleagues across the business, will find themselves meeting their objectives surprisingly quickly.
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.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
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.