Published: July 01, 2013
Recently, a German newspaper published an article about innovations in payments. It started with the provocative assertion that whilst we are quite advanced when it comes to the management of transportation, warehousing and the like (RFID chips, GPS trackers, real time access on all relevant data), it seems that nothing really significant has happened in the last 30 years regarding payments. The parties are still left more or less in the dark about a payment’s status while it is being processed and have little or no influence on the exact speed and detail of execution.
One may doubt whether the world truly is so clearly divided into black and white, but it is obvious that this is only one of many recent examples that all point in the same direction if put into the wider context of international trade: The physical supply chain and its management have currently outrun the financial supply chain and the services provided therein. Outrun in this context can by all means be read in the literal sense of the word as very often, the delivery of services and goods has already taken place whilst the corresponding financial transaction is far from being completed.
But do such observations reflect the true status quo of the interaction between the physical and financial supply chain?
In the last couple of years, technology and standards have made enormous progress. Reasonably up-to-date supply chain management applications (both for the physical and the financial supply chain) as well as ERP systems have no problems understanding and processing different file formats and data structures – with the added ability to convert formats and structures and keeping data losses and truncations to a minimum. Communication standards have overcome the barriers between different industries – in particular, the SWIFT MT 789 has facilitated the corporate-to-bank and the bank-to-corporate communication quite significantly. Thanks to this recent progress both in technology and standard setting, the stage is set for the financial supply chain to catch up and match speed with the physical supply chain.
On the other hand and as a consequence of the global financial crisis in 2007/08, national and supranational regulators have tightened the regulatory framework especially for banking activities; impacting also neighbouring areas like factoring and credit insurance. So, whereas financial services could significantly pick up speed where pure technology, processing and service is concerned, activities have been slowed down especially in the international arena as soon as financing components come into play. It is no coincidence that the supply chain finance industry still lacks standardised and easy-to-use multi-entity solutions that span the world. From the corporate perspective, it is hardly acceptable that bankers become very evasive when asked about a truly harmonised, worldwide supply chain finance solution. Given the current regulatory framework, however, it becomes evident that banks will have to cope more and more with local, un-standardised laws, regulations and reporting standards – in terms of both providing liquidity and complying with KYC / sanctions requirements. Does this mean that corporates have no chance but to be locked into fully proprietary banking solutions?
At the ICC Banking Commission meeting held in Lisbon on April 17 this year, the URBPO (Uniform Rules for Bank Payment Obligation) were approved with no country voting against their adoption. A Bank Payment Obligation (BPO) is an irrevocable undertaking given by one bank to another bank that it will pay on a specified date after a pre-agreed event has taken place. This event is evidenced by an automated matching of data in a so-called Transaction Matching Application.
This straight forward concept can be considered as the most promising instrument to bridge the gap between the technological and regulatory momentum and give supply chain finance activities a completely new momentum.
How so?
It is undisputed that today more than ever, corporate customers are asking for cooperative supply chain finance solutions. Supply chain finance in this context is not limited to the notion of so-called reverse factoring programmes, but - in line with the BAFT-IFSA definitions on open account trade finance – as “a combination of technology and services that link buyers, sellers, and finance providers to facilitate financing during the life cycle of the Open Account trade transaction and repayment”.
“Cooperative” in this context acknowledges the fact that corporates have fully understood that they benefit most if each party in the value chain contributes what it is most suited to provide – not only in terms of the goods and services offered, but also with regard to their role in financing the whole value chain.
Thus, large and well-rated buyers no longer leave their suppliers alone in their efforts to acquire reliable and affordable funding. These companies are willing to contribute by enhancing their suppliers’ financing options. In the most typical case this happens by approving invoices, but also by giving payment commitments if certain pre-requisites are met, e.g., the production or the shipping of goods has been evidenced in a pre-agreed way.[[[PAGE]]]
The BPO kicks in
Instead of letting one bank or financial institution take care of a complex, multi-party international supply chain end-to-end, the BPO enables banks to cooperate in a way that each party of the supply chain can be serviced by the bank that is suited best for this task: Its local bank – ideally equipped with a longstanding track record and deep knowledge of its local client’s business needs.
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And this is how it works in practice: So far, a supplier who wishes to join a supply chain finance programme will conclude an agreement with the buyer’s bank. The buyer’s bank typically is located in a country foreign to the supplier. He thus has no choice but to use the terms and conditions, the technical infrastructure, sometimes the language of a foreign bank. He will also have to comply with the foreign bank’s KYC - and other regulatory requirements that in many cases significantly differ from the standards he is familiar with.
Also the buyer’s bank has many challenges to overcome with the foreign supplier: Not only has it to make sure that it complies with compulsive laws and regulations of the supplier’s country, but – and that is even more of an impediment – it has to provide complete customer service to a typically small corporate that is not located anywhere in the buyer’s bank’s network. Many large multinational supply chain programmes that have started promisingly have failed because of these seemingly trivial aspects.
With the BPO, however, the buyer can agree with his local bank at what stage in the value chain he is willing and ready to undertake payment. This can – as in the traditional approach – be after approval of the supplier’s invoice, but it can also be much earlier as the examples of evidencing production start, production end, dispatch and the like show. In this context, the BPO offers great flexibility; the parties can agree quite freely upon which event the BPO shall switch from a conditional to an unconditional obligation to pay.
Equipped with this knowledge, the supplier can agree with his local bank on various financing options: Either he uses the BPO as a credit enhancement for simple working capital lines or he sells his BPO-supported trade receivables to his local bank – enabling it to offer attractive pricing as the BPO completely eliminates any supplier-related risk:
Whilst not far away from traditional supply chain finance offers, the beauty of this concept is that each party (both corporate and bank) acts locally- profiting from its local footprint and experience in regulatory and legal, but also service-related matters.
In this so-called four-corner interoperable model, the cross-border part of the supply chain finance programme takes place exclusively between the banks. Neither of the corporates is concerned with the implications of cross-border finance activities that I described earlier.[[[PAGE]]]
The advent of the BPO could be the long-desired missing link that enables true multi-party supply chain finance solutions in which every player – regardless of whether it’s a bank or a corporate – can contribute by concentrating on its local, well-established strengths. Still, important questions remain unanswered (especially the acceptance of a risk-adequate capital treatment of the BPO by the regulators). Given the current activity on these matters and the attention the BPO has in the finance industry, though, chances are good that answers to the open questions will be found quickly.
So, it is not unlikely that April 17, 2013 will be remembered as the dawn of a new era in global supply chain finance.
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