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| Shivkumar Seerapu, global product head, financial supply chain, Deutsche Bank |
The financial supply chain (FSC) management landscape is changing. This has always been a dynamic discipline that has constantly evolved to reflect changing market circumstances. We are now seeing that technology is becoming the main driver pushing the growth and spread of this discipline. While the conventional drivers of innovation in this space – managing corporates’ working capital, liquidity and risk management needs – remain at its heart, technology is shaping its future. Of course, technology has always played a role in FSC management, but it is only recently that we have seen it emerge as a key differentiator between providers. While, especially in emerging market economies, many of the processes pertaining to FSC management could previously be completed manually – thus removing the need for significant investment in technological infrastructure – several aspects of how this area has developed now make such an approach difficult.
Indeed, technology is now playing a three-fold role in the evolution and spread of FSC management through:
1) enabling greater visibility and real-time access to information; 2) expanding the scope of FSC along the corporate value chain; 3) encompassing multiple geographies and regions within a single programme.
Visibility and information management
Straight-through processing (STP), automation and real-time access to information are now key aspects of most FSC structures and increasingly demanded by corporates. Delivering such functionality requires the efficient linkage of bank and corporate systems, as well as online platforms that allow information to be viewed and shared by all interested parties. It also requires common data standards that permit several different institutions to exchange information quickly and easily.
Enterprise resource planning (ERP) systems have long been useful tools for integrating and managing information within a corporate. While integration of corporate ERP with bank systems is nothing new, FSC has added a new imperative to making such linkages as efficient and automated as possible. And one key aspect of increasing automation is, of course, the removal of paper chains wherever possible and the electronification of all available information.
The electronic delivery and sharing of information clearly requires common formats to avoid inefficiencies caused by corporate and financial institutions having constantly to convert data. One key initiative that is delivering benefits in this area is the SWIFT Trade Services Utility (TSU). While SWIFT itself goes some way to removing the cost and complexity of working with multiple bank channels, the TSU goes further by providing common standards for the exchange of trade- and supply chain-related data. Indeed, the advent of the TSU has facilitated automated data matching at a much reduced cost and is certainly contributing to the growing uptake of FSC solutions.
Improved real-time access to information is also driving the development of more flexible FSC financing. For example, corporates that have improved access to up-to-date information pertaining to cash flows and balances are more able to make informed decisions regarding the utility of taking early and discounted payment on invoices. This is driving the development of flexible – or "dynamic" discounting – solutions where suppliers have more control over the timing of incoming payments.
Expanding along the value chain
A second aspect of how technology is driving change in the FSC space is with the expansion of its scope into areas such as, among others, procurement, invoicing and account receivable management. These new types of solutions require more comprehensive platforms and portals from providers, as well as the enhanced integration with corporate ERP systems described above. For example, while FSC programmes would previously focus on the timing and delivery of finance, this is now likely to be integrated with aspects such e-procurement, e-invoicing and cash flow forecasting.
The enhanced information flows afforded by the latest technology can give corporates the opportunity to forecast demand more accurately and therefore reduce levels of stock. E-procurement aims to deliver efficiencies by eliminating paper-based inventory management systems and is closely related to another key area of contemporary FSC management: e-invoicing.
While e-invoicing has been around for some time, its development was previously hampered by several structural and cost-related obstacles. Large corporates often operate complex legacy systems to manage invoices, while smaller players have been put off by the complexities and costs involved in putting in place a system to manage invoicing with a relatively small number of counterparties. However, the advent of web-based systems for managing e-invoices – such as Deutsche Bank’s ebills tool and eSupplyChainHub clearing facility – have greatly reduced the cost of implementing and maintaining such systems. Indeed, with the cost of manually processing paper invoices estimated to be between $5 and $25 per invoice, the economic rationale is now too significant to ignore for all but the smallest corporates.
Global reach
A final consequence of technological development in the FSC space has been the broadening of the geographic scope of such solutions. In the early days of FSC, it was the norm for solutions to be structured so that suppliers in different countries were dealt with separately. Now, thanks to a number of separate developments, integration across many markets and regions is completely feasible.
A supplier financing deal recently put in place by Deutsche Bank for Henkel, the German-based manufacturer of well-known international brands, such as Schwarzkopf, Loctite and Persil, demonstrates this. The first stage in the program supported German and Indian suppliers, while the second stage currently being assayed will cover suppliers in the rest of Western Europe. The simultaneous launching of the program in Germany and India highlights how geography is no longer a real impediment to the scope of such structures. And the interface built for the automatic uploading of supplier data was based on Henkel’s existing technology – thus making significant cost savings and showing the adaptability of the technology used by Deutsche Bank.
Many bank systems now offer the ability to bring together data and transaction flows across multiple legal jurisdictions, regardless of differences in currency and regulatory regimes. Alongside this, banks are also developing platforms – such as Deutsche Bank’s FX4Cash – that bring transparency and efficiency to the management of large numbers of cross-currency payments, thus multiplying the benefits of centrally managing supplier relationships. And a further driver of the internationalization of FSC has been harmonization initiatives such as the Single Euro Payments Area (SEPA). SEPA’s creation of a standardized payments environment is driving the development and utility of value-adding services – such as e-invoicing – that form a key aspect of many FSC solutions.
A key consequence of the sum of these developments is that technological capability is now a prerequisite for the leading providers in this market. However, those that rely solely on technology do so at their peril – this is a specialized business that also requires expertise, geographic reach and high levels of client servicing, often in multiple languages. Indeed, it is the combination of qualities needed to make a credible FSC offering that make the leading transaction banks best placed to structure and implement these types of solutions.