As we enter into the fourth industrial revolution, powered primarily by data and connectivity, new possibilities are emerging in the age-old world of transaction banking, writes Ashutosh Kumar, global head, banking the ecosystem and regional head, ASEAN & South Asia, transaction banking at Standard Chartered.
Standard Chartered is pioneering the use of the Internet of Things (IoT) to bring about a revolutionary change in transaction banking. Its roll-out is imminent and will potentially lead to multi-million-dollar savings for the automotive, manufacturing and retail industries, and a significant reduction in risks associated with these businesses.
Limitations in the historical approach adopted by banks
A business ecosystem comprises a large entity, called an “anchor”, and its counterparties – including its suppliers, buyers, logistics providers and other business enablers – termed “spokes”. The success of any anchor depends on the level of financing and the banking support available across its ecosystem. A well-supported ecosystem improves the reliability across the supply chains and keeps the overall cost of delivering value low.
In the past, banks’ coverage has been restricted to having a direct relationship with the anchor or, in the best case, a small portion of the anchor’s ecosystem.
The root cause of this limitation lies in the approach adopted by the banks in assessing the creditworthiness of the spokes, wherein, due to the absence of any other reliable sources of information, banks have primarily relied on the strength of the balance sheet of the counterparties across the ecosystem to assess funding limits.
This leads to the exclusion of a big portion of the ecosystem as many small counterparties fall short of banks’ benchmark funding criteria. Even if the financing is granted, banks tend to be conservative, giving shorter tenors and partial funding to the spokes. Additionally, the cost of servicing these smaller entities has been prohibitive due to paper-based processes which are time and cost-intensive.
Coverage of the entire ecosystem also needs the interested bank to have the matching geographical footprint and the ability to bank across the spectrum of entities in the ecosystem, and most banks are limited in this respect.
The missing secret sauce
We believe that working capital funding risks across an ecosystem can be better assessed by understanding the underlying physical and informational flows between the ecosystem players rather than relying solely on balance sheet strength.
As an argument, a bank can develop a better understanding of these flows through the information held by the anchors on their spokes, such as transaction history, behavioural patterns, reasons to delay payments, seasonal stock up, etc. However, given that all this information is historical, it may not materially enhance the risk appetite of the bank.
Getting real-time visibility into the physical and informational flows across an ecosystem to enable financial flows has remained the missing magic sauce for banks to transcend their conservatism, develop a more practical approach and deliver the value in the process through customised solutions.
Banking the ecosystem – the Standard Chartered approach
Banking the ecosystem is a value proposition for our clients where we connect our clients with their buyers and suppliers – our clients’ ecosystems – by integrating financial, informational and physical flows, including financing the supply chain but also operating cash, receivables reconciliation, risk management and FX.
With this commitment, our geographic reach and our ability to bank businesses of all sizes, we are well poised to deliver the envisioned value by riding on the state-of-the-art technology enablers, of which IoT-led smart financing is pivotal.
IoT-led smart financing
IoT is the network of physical devices with sensors and network connectivity which enable these objects to collect and exchange data. With the help of IoT sensors, one can turn every event in the physical supply chain into a real-time data point which can be shared with all stakeholders, including banks.
Just like the internet of computers (the ‘internet’ in common parlance) has revolutionised the way business is done over the last two decades, IoT is set to further transform the business in years to come.
Transaction banking can become re-powered through IoT by enabling banks to obtain real-time information on physical flows across the ecosystems. Banks can use this information to enhance their risk appetite and deliver ‘more’ to the client ecosystem in the form of customised offerings.
Standard Chartered’s pilot aimed at driving efficiencies in the US$1.7tn automotive industry
Standard Chartered has identified the automobile industry as a pilot sector for IoT-enabled smart distributor financing. We are working with a few large auto manufacturers (Anchor) in Asia to pilot this idea.
Most of the cars sold these days have an IoT sensor attached to them. The IoT sensor can beam its presence to the stakeholders (Anchor, the Bank and Distributor) when it is either at the Anchor’s warehouse or the Distributor’s warehouse (within the marked areas called Geo Fences). Thus, one can obtain real-time information on 1. When the car moves from the anchor’s warehouse to the distributor’s warehouse and can finance the distributor to make payment to the anchor, and 2. When the car leaves the distributor’s warehouse upon sale to the end-customer, triggering a loan repayment call to the distributor.
Given the financing is done on real-time and not historical information, we will be able to extend appropriate tenors and limits to the distributor. The process will be paperless, which enhances efficiency and reduces associated costs. The data obtained by IoT sensors can be used for auxiliary use – such as dealer performance assessment, marketing efficiency and stock management.
We will also be able to leverage the superior insights into the anchor ecosystem to facilitate growth through financing, working capital and cash management solutions and will be well-placed to identify ‘early warnings’ of potential issues that could affect the ecosystem.
This solution will be a testimonial to Standard Chartered’s commitment to deliver value to our clients and their ecosystem by harnessing state-of-the-art technology to structure more flexible, valuable and cost-effective banking solutions.