The issue banks face to either package products vertically in product silos or in integrated solutions was recently discussed in Enrico’s Camerinelli’s gtnews blog post Banks and the Financial Product Management Dilemma: Package or Keep Separate? The possibilities to offer solutions within transaction banking have been discussed in the industry for quite some time and have arguably gained ground the past few years due to a number of trends, including:
- Treasury’s expanded mandate related to working capital management.
- Development of open account and banks’ lost visibility into trade flows.
- The commoditisation of products and subsequent price focus.
In this article, we will describe potential benefits and outline the principal challenges coupled with providing and packaging solutions rather than separate products from the perspective of a bank.
SCF Services : A Definition
Many terms and definitions of ‘supply chain finance’ (SCF) exist. For the purpose of this article, SCF is defined as ‘the set of financial instruments that optimise the working capital of supply chain management processes’. Camerinelli’s blog post provides more detail on this definition.
This definition is not only feasible but also pragmatic, as banks today offers all necessary products to finance the customers’ entire supply chain. However, these products are often not conceptualised as being a part of a SCF service offering, but have been packaged, sold and distributed in isolation to solve a specific customer need in one part of the supply chain. For instance, a discounting of a deferred letter of credit (LC) supports the liquidity flow after production and shipping of goods. Hence, the product only covers an isolated liquidity need after shipment without any links or comparisons to overlapping or alternative products available.
While individual products can heavily contribute to facilitate working capital management and improve various financial ratios, a SCf service offering gains leverage and added value for corporates when products and services become intrinsically linked to support their entire financial value chain.
Opportunities for Corporates and Banks
If all of the banks’ products for SCF are put into a holistic service offering context, many opportunities arise for the customer. Corporates would be able to focus on their end-to-end need for SCF services, instead of dealing with an array of different bank’s sales representatives focusing on selling separate products.
In addition, corporates would also benefit from a complete overview of their needs and opportunities from an end-to-end perspective. Solutions sourced from a holistic financial supply chain perspective have the potential to improve internal process efficiency and various financial ratios. The best products for the entire chain would be used rather than the best products for an isolated link in the chain.
In practice, a corporate should be able to ask questions such as: “If I need 10 million for a month to bridge my liquidity, what are my options?” The customer would then receive an answer suggesting different alternatives addressing the core need: “You can discount your four Chinese export LCs increase your factoring to 75% or use your overdraft facility”. The price for these alternatives should also be available from the same source.
With a complete overview of their financial supply chain, corporates can also take a better position on their total risk position against currencies, countries and foreign banks. There might also be cases where the customer will identify opportunities of eliminating excess use of products. In essence, a holistic SCF service offering is needed to provide the corporate customer with a possibility to optimise their use of financial products across their supply chain.
For banks, several benefits exist by creating SCF finance service solutions. An increasing amount of trade is conducted over open account, which means that banks have lost visibility of the information flow related to trades. This visibility can be recaptured with a holistic SCF service offering approach and also provides possibilities to finance a larger deal of the customers’ transactions by the creation of new financing solutions. Additionally, a holistic approach enables banks to differentiate on competence rather than product pricing. Furthermore, it facilitates for banks to build closer customer relationships by achieving better knowledge and understanding of their clients’ businesses and financial ambitions.
As viewed above, many drivers exist to offer solutions rather than separate products. The reason that products in many cases are packaged and distributed in silos is due to banks’ internal organisations. Economy of scale benefits lead to banks organising themselves in product silos to produce products efficiently. The logic of this organisation was extended to the way products were sold, often with separate sales forces. Subsequently, the clients today encounter a wide variety of touch points from their bank and have often adapted their own organisation managing financial processes accordingly.
From the banks’ perspective, this has lead to inefficient resource allocation in the front line and generated challenges related to spur cross-selling of products and creating solutions – thus hampering the main drivers of profitability in times where products becomes increasingly commoditised. A solution to the cross-selling challenge can be to consolidate sales forces that solve the same customer need. In the case of transaction banking, all products solve the core customer need to pay and get paid in time, as a payment is a payment, regardless of financing and risk mitigation measures required to handle the transaction or transaction bulk.
A consolidated sales force, in combination with a solution approach focusing on core customer needs, might lead to a greater focus on providing SCF service solutions to the customers rather than a number of separate products. However, challenges related to enhance the cross-product competence of the individual sales representatives needs to be managed. Moreover, appropriate key performance indicators (KPIs) across the organisation need to be set to support a holistic approach. Once these challenges have been managed, there are many benefits to reap. Within SEB, for example, the re-organisation of product specific sales forces into customer segments corporate, financial institutions and banks, have enhanced the customer and internal dialogue, as well as provided enhanced conditions for creating new SCF service offerings.
Technological and Digital Challenges
A customer-centric financial supply chain approach gives rise to several challenges for a bank’s digital channels. The legacy focus on cost-efficiency for producing products efficiently in the back end has in many cases led to products being distributed in product silos to the customer. This has lead to the client needing several different channels and log-ins to make business with their bank(s). However, financial supply chain offerings do not gain leverage until products supporting different parts of the supply chain can be linked to each other for distribution and information services purposes.
The journey of enabling linking products to each other and distribute products based on the core customer need might be cumbersome to undertake if the bank organisation is based on product silos. In many banks, this is due to the challenges with efficiently gaining funding and commitment to successfully sustain the journey of consolidating products and channels across organisational lines.
Many banks have focused on consolidating products and services in one front. However, the system silos in the back-end are often still apparent within the digital channels. One solution to enable linking products is to build an additional application above the current applications, with a modular structure. This might enable banks to link products to each other and base navigation in the digital channels on customer needs, as well as continuously create new solutions based on existing products and product components. Important to note from an organisational perspective is that beginning with the front end is key, as it drives the journey of consolidating middleware and systems in the back end, which enables banks to unleash new report and product development capabilities.
Technology is not a restricting factor for banks to create a complete financial supply chain services. The challenge is rather to take advantage of current systems, while simultaneously create the organisational capabilities necessary to match technological possibilities with business opportunities.
Many benefits exist for SCF service offerings, both from a corporate and bank perspective. In order for banks to efficiently develop and offer holistic SCF services solutions, organisational and technological challenges, that are interlinked, need to be managed. One way to begin the journey of managing this journey is to align the organisation and the digital front solutions with the core customer need. This facilitates the development of SCF services solutions in the short term and strengthens the further development of these solutions in the long term.
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