The evolution of digitisation and simplification driven by technology is firmly underway in supply chain finance, with significant strides taken towards the acceptance of digital documents. Yet, while ongoing digitalisation is slowly taking hold of the industry, there are still significant barriers to wide-scale adoption. Parvaiz Dalal, global head of payables finance at Citi, examines the industry and explains how a digital ecosystem approach can transform working capital optimisation for buyers and suppliers alike.
The need for the global trade industry to digitalise and move away from slow, error-prone manual processes is undeniable. Supply chain finance (SCF) is a complicated business – and the process of digitalising it even more so. With countless moving parts and the sheer number of ingrained, convoluted processes, combined with the multiple stakeholders, logistics and jurisdictions involved in each and every transaction, it can make implementing end-to-end digitalisation no mean feat.
Encouraging tech developments in the documentation space marks a significant milestone on the digitalisation journey. But there are still many barriers to overcome – like common data standards and consistent international trade laws – before full digitalisation can be achieved.
In order to service a dynamic and deep-tier trade finance industry, banks are increasingly focusing on technology, building sustainability-compliant features that meet client objectives, expanding their global reach, and tailoring it to meet compliance. By embracing digital technology, banks are able to give both suppliers and buyers access to transparent data, extensive financing capabilities and much-valued expertise. This is exactly what Citi is offering and achieving for its clients.
Digital trade documents: the state of play
A fundamental component of digitalising trade is legal acceptance of the use of electronic documents. First-party documentation, such as bills of exchange, has seen good progress, most notably with the passing of the Electronic Trade Documents Act (ETDA) into law in the UK. With a large percentage of global trade falling under English law, this is a milestone moment which aims to remove some legal hurdles through digitisation. The UK is setting an example globally and countries across the world, such as India, UAE and Singapore, are aiming to implement or are exploring similar legislation that recognises digital forms of negotiable trade instruments.
Nonetheless, interoperability and enforceability risks from a global perspective remain a challenge. Overcoming this will likely require a conglomerate of certain jurisdictions that have offshore booking centres, such as the Abu Dhabi Global Market (ADGM), Singapore and the UK, to come together to recognise the enforceability of digital documents and mitigate interoperable risks.
The digital momentum that the industry is experiencing with first-party documents is very encouraging. But, for SCF to be digitalised in its entirety, there needs to be legal and digital acceptance of third-party documentation, such as bills of lading, insurance certificates, certificates of origin and quality assurance certificates.
Third parties, such as insurers and shipping companies, have fewer incentives to transition. The costs associated with investing in the relevant technologies may not have the same direct benefits as ‘first parties’ in the chain. Hence, there is far less appetite for them to go digital. This is creating a barrier to digitalising a host of fundamental transaction documents and is potentially the biggest challenge the SCF industry faces when it comes to complete end-to-end digitalisation.
Still, there are more documentation requirements in an international trade industry apart from first- and third-party documents. There are regulatory documentation requirements in several countries. In cross-border trade, for instance, exchanges, control documentation and customs declaration forms need to be produced to evidence the import and export of goods and services. With different countries at different stages of digitalising, this documentation can lead to fragmentation and delays, making cross-border trade even more complex.
So, although the industry participants have seen some significant strides on the digital documentation front, a lot of hard work lies ahead. The industry needs to continue to build upon the recent, positive momentum.
Transforming processes
Documentation transformation is just one part of the story. Many important operational and compliance processes – from client onboarding to anti-money laundering (AML), sanctions screening and shipping companies/vessel screening – require manual input and are inefficient without significant digital enhancements and investment.
Financial institutions (FIs) have far greater control of their digital journey and are actively advancing their own SCF operations and delivering enhancements to clients by leveraging technology and automation.
One of the primary benefits of digitalising SCF is that it offers tools and opportunities that financial institutions primarily offer to large corporates with big balance sheets and strong credit ratings. Small- to medium-sized companies are also vital components of any supply chain, making their financial health paramount for a healthy end-to-end chain and the successful operation of corporate buyers. But, due to risk-reward considerations for lenders, the smaller the supplier, the harder it is to access finance. Moreover, these businesses are less likely to have access to the relevant technology and systems.
Looking to bridge this gap and in turn, support buyers and suppliers alike, banks are extracting data from multiple, reliable sources to validate the credibility of suppliers, rather than waiting for suppliers to submit the necessary information. FIs have, therefore, been able to reduce end-to-end onboarding from around 30-35 days to just seven days. Also, the widespread implementation of electronic signatures, in combination with the recent acceptance of digital negotiable instruments, has helped to streamline onboarding and the efficiency of accessing finance for those suppliers more broadly. This makes financing tools and opportunities available to the last mile supplier in a transparent, efficient, and compliant environment globally.
An all-encompassing working capital digital ecosystem
Delivering enhanced offerings and efficiencies requires a very large, digital target operating model. Citi has developed an industry-leading, end-to-end SCF and working capital platform that directly integrates with clients’ ERPs. Citi clients can access a full suite of SCF and cash management solutions plus dynamic discounting tools that aim to help clients improve their cash-conversion cycle or deploy their own cash to pay suppliers early via a single platform. Citi’s global footprint and asset distribution network enable Citi to deliver a large-scale global programme for its clients through its supplier finance platform. Additionally, Citi’s supplier finance platform offers a single-click pivot tool option between dynamic discounting and supplier finance, making it easy to use.
Specifically, the suppler finance solution allows both parties to explore and improve payment terms, helping buyers improve liquidity management while allowing suppliers to receive the benefits of early payment options. As such, this typically strengthens buyer-supplier relationships, and buyers can focus on scaling up their programmes much faster and reap the benefits much earlier in the cash conversion cycle. When a bank releases early supplier payments, businesses along the entire chain can optimise their working capital.
The recent integration of a new FX tool into the platform also allows suppliers to receive payments in over 50 currencies, including G10 currencies of their choice, with real-time FX rates. Citi offers competitive, online FX rates with an option for suppliers to convert their payments in just two clicks.
The Citi Supplier Financing platform is extremely powerful from a data gathering and analytics perspective, providing valuable inputs that help clients make decisions when selecting the right trade finance solution for them. For example, the online supplier analysis tool generates a supplier priority list to efficiently help clients visualise the potential payment cycle benefits for suppliers and Citi’s SCF digital operations. With exclusive access to this platform, a supplier has transaction visibility across all their SCF buyer programmes, and buyers have oversight over the suppliers joining their programme in a single window with proprietary tools and graph features to improve liquidity management.
Citi’s combination of digital efficiencies, transparency, accessibility, data insights and global payment capabilities, plus its global asset-distribution network of investors, is critical to optimising the end-to-end SCF ecosystem and providing a one-stop-shop global working capital solution for buyers and suppliers alike.
The positive effects of digitalising SCF are being felt across the value chain. Perhaps most importantly, banks are already leveraging digital technologies to provide SMEs with much-needed financing to help support entire supply chains. But for Citi, that is just the start. Citi aims to extend access to this all-encompassing platform to parties beyond its own current credit client roster – allowing greater connectivity and interoperability across the wider industry.
If that were to happen, it could positively impact the global SCF ecosystem as we know it.
