The Dematerialisation of Supply Chain Finance

The dematerialisation of supply chain finance (SCF), or business-to-business (B2B) finance is driven by strong macro factors and the benefits are obvious. However, adoption leaves a lot to be desired, particularly in the developing/emerging markets. This could be due to certain hindrances related to industry, legal and compliance factors. Nonetheless, corporate treasurers should optimistically watch the development of several initiatives, which are focused on addressing these obstacles and leveraging collaboration across the industry. The International Chamber of Commerce’s (ICC) bank payment obligation (BPO) is one such initiative which might be the sweet spot between the traditional documentary based reliance in facilitating ‘safer’ documentary trade and the apparent higher risk of open account trade.

What is the Dematerialisation of SCF?

The dematerialisation of SCF, sometimes known as B2B electronification, consists of automation in the financial supply chain; that is automation of payment process (procure-to-pay (P2P)) and invoice process (order-to-cash (O2C)) across the entire supply chain, and if possible, on a standardised single platform. In some scenarios there is also automation in the financing of events using appropriate triggers in the supply chain.

Driven by process automation and easy access to information, the electronification of purchase orders, electronic invoicing (e-invoicing), invoice matching services, open account payments etc, helps realise material administrative productivity efficiencies in addition to allowing downstream optimisation efforts, such as centralised invoicing, if the corporate follows the path of a re-invoicing centre.

Macro Trends/Drivers

Globalisation in manufacturing, services and consumption has led to an increase in the turnaround time of activities, from a couple of days to much longer. Furthermore, in certain categories of economic goods, such as services, the goods move faster than the paper trail. Hence the need to improve cost efficiency and the time taken in moving paper documents around the world gives impetus to dematerialisation efforts.

Emerging market supply chains
While faster growth in international trade with emerging markets is apparent, how certain end-to-end supply chains are increasingly entirely located in emerging markets is of particular interest. Giving impetus to this trend is the confluence of growing domestic markets and efforts to leverage cost synergies of locating production, sourcing in emerging markets. Notably this differs from the traditional supply chain model of the buyer being in the developed market and the supplier located in emerging markets.

The inefficiencies inherent in the emerging markets, be they in moving documents between borders or in in-country technology/transportation infrastructure, has meant that corporates and corporate treasurers are increasingly focusing on dematerialisation in the B2B space.

Diversification of participants in global trade

Coupled with the change in supply chain markets, there has also been an expansion of participants in global trade. Small and medium-sized enterprises (SMEs) have jumped onto the bandwagon of easily accessible traditional documentary trade. This has led to a reduction in the average transaction value and an increase in the volumes, implying increased paperwork for the same quantum of international trade. Dematerialisation has become a key agenda for all participants as a result, particularly for the trade service providers.

The Benefits of Dematerialisation are Obvious, But…

Every player in the supply chain benefits from better risk management and the reduction in high transaction costs associated with processing paper invoices and payments. E-invoicing could result in savings from delays in couriering the document across locations/countries, potentially running into days. B2B electronification not only allows corporates to realise benefits from avoiding the costs of delayed/incorrect and missing documentation, but alsoto realise benefits from avoiding duplication (i.e. avoiding having to duplicate data entry at multiple points in the supply chain), in addition to downstream optimisation efforts.

These benefits can be realised, pretty much equally, by all participants in the supply chain space – from buyers to suppliers and banking service providers.

However, its adoption has not lived up to the promise. Most of the uptake has been in the Organisation for Economic Co-operation and Development (OECD) developed markets rather than the emerging markets where the benefits can yield higher returns.

Some of the reasons for the low adoption in emerging markets include:

Lack of common standards
Lack of common standards, be it in terms of network, electronic file or messaging standards, has been impeding the adoption of dematerialisation. This has been further compounded by the change in the geographic spread of international trade, particularly in the emerging markets.

Legal precedence
Lack of legal precedence in the electronification of documents in emerging markets is a major hindrance. In a number of developing markets, archaic procedures that include licensing, reporting and legalisation, make the transition to electronic documents very difficult. In most situations, there is a need to continue with processing paper, be it in an off-line mode, with the aim of de-linking the financial transaction flow from the paper flow.

Perfection of assignment of receivables
Nuances of ‘perfection of assignment’, as per local jurisdiction, need to be taken into consideration, particularly where the suppliers are in the SME segment or in emerging markets. This is particularly so in the interesting times and credit environment in which we now live.

Perfection of assignment is critical to ensure that the assignee has the legal rights to the receivable inflows in the event of a court-directed liquidation of the supplier, rather than the cash going into the liquidator’s pool in the event of a supplier going under.

Regulatory complexity
Along with the evolution of international trade, the regulatory requirements for banks and corporates have also become more complex. Know Your Customer (KYC) requirements have increased, and counterparty risks need to be actively managed, monitored, and in certain instances reported upon. The complexity of tax regulations, particularly in emerging markets, further complicates matters.

Future Developments

There has always been, and will continue to be a multitude of players in this space. Even in the fairly mature OECD markets, there are a multiple of providers/vendors offering various solutions. Some focus on procurement and logistics, some on invoice electronification/management services, and others on the financial aspects, i.e. facilitating suppliers to find low-cost financing. However, the lack of common standards handicaps true integration within the supply chain network.

As expected, the roles and strengths of the various players in the emerging markets space are even more varied and will evolve slowly. The open questions around a lack of common standards, legal precedence and the perfection of assignment means that corporates and banking service providers need to adopt strong risk management frameworks as they look to expand their geographic remit.

A clear emerging trend is how various players are collaborating to build and evolve standards and solutions that work across borders and are bank-agnostic. As such, they benefit from lower entry and exit barriers for corporates, as the integration efforts between the corporate and bank are minimal.

One such recent effort that has shown good traction is the ICC Banking Commission’s BPO initiative that leverages SWIFT’s Trade Service Utility (TSU).

ICC and SWIFT are co-operating to deliver a complete package of new rules for BPO, new messaging standards (ISO 20022 standards) and a cloud application (SWIFT’s TSU). The new rules and messaging standards enable banks to leverage electronic transaction data, such as electronified purchase order, invoice and transport documents, to offer corporates the benefits of better risk mitigation, increased visibility and quicker turn-around-times. It is important to note that the rules and messaging standards are system independent, meaning that banks could initiate BPOs on applications of other service providers too.

The BPO is able to provide the benefits of letters of credit (L/Cs) such as payment, country, counterparty risk mitigation, coupled with the efficiencies and timeliness of open account trade.

BPO is an exciting development, which may be able to offer some initial solutions to the blockages mentioned above. The Uniform Rules for BPO (URBPO) offers a common standard of interface within banking industry (leveraging ISO 20022 standards) that is application/vendor agnostic. Also, BPO’s operations within TSU are governed by TSU’s operational guideline which is known to all participating banks.

BPO is likely to have a strong legal footing as the ICC will develop industry standards that will apply to a BPO transaction, irrespective of the platform and bank that is creating and transacting the BPO, thereby forming a robust foundation.After the rollout of URBPO (expected in the spring of 2013), banks will have a legal framework to rely on in the event of disputes between banks, akin to Uniform Customs and Practice (UCP)-600, which is a uniform set of rules governing documentary trade. In that sense, URBPO is likely to benefit from ‘grand-fathered legal precedence’ from the aegis of ICC and UCP, which started in 1933.

Finally, financing solutions that will be offered around the BPO, ranging from pre-shipment financing to ‘post-shipment post acceptance’ financing, will be governed by the terms and conditions between the bank and the corporate. It is expected that the bank will address potential issues around ‘perfection of assignment’ and ensure compliance with local regulatory requirements.

It’s apparent that BPO’s success is predicated on increased adoption by the industry. Since banks will also benefit, one can expect them to push and educate the various industry participants. It’s also interesting to note that it is the bank/financial services provider that has the strongest ties with the diverse set of players in the supply chain, straddling SME and large corporates, will be best placed to facilitate financing under BPO, by adopting an appropriate risk management framework that further emphasises the need for corporate treasurers to build strong relationships within their supply chain network.


The macro trends will continue unabated, albeit slowly, in the near term, due to the global financial situation, making the march of dematerialisation of SCF and supply chain management unstoppable.

These trends will drive the financial industry to find solutions to the hindrances of legal precedence, regulatory complexity, perfection of assignment. Consequently, the industry will evolve towards a common industry standard, particularly in emerging markets.

Corporate treasurers should expect traction, as evident from progress in several initiatives in this space. SWIFT and other bank-agnostic providers are involved in a few initiatives towards the same. BPO, a joint SWIFT/ICC effort, is one such initiative that looks set to take off.

The convergence of a number of the above initiatives will be the prerequisite to the holy grail of supply chain management, i.e. an integrated end-to-end solution/operating model, fully automating the buyers’ P2P and suppliers’ O2C cycles, and allowing both buyers and suppliers to focus on leveraging the macro-trend of growth of international trade.