GTR: The integration of physical and financial supply chains is not really happening. Is that true or false?
Betts: It is still an emerging area. We are seeing different parties collaborating more deeply in the supply chain. There’s a growing awareness and understanding of precisely what data elements can actually trigger in terms of credit decisions within banks, and that work is still ongoing with corporates.
Karako: There’s a lot of discussion about this today and corporates are interested in this, but I don’t think corporates are diving into Supply Chain Finance (SCF) as quickly as banks thought they would. Corporates are now starting to look at their alternatives. I think that as the credit crunch moves into the emerging markets and threatens their physical supply chains, this will be the impetus for corporates to move quicker on linking the physical and financial supply chains. Previously liquidity in the emerging markets was far more available than it is today.
McQuaid: I very much agree with that. The whole credit crisis and the increase in prices of materials, inventory costs is putting pressure on suppliers in terms of finance, and it is causing concern for buyers that their suppliers may disappear. In order to help alleviate that, people are talking with their banks to put in processes to integrate the physical and the financial supply chain.
Broom: From a corporate point of view, it can be viewed as a question of whether that corporate is running its treasury as a cost centre or as a profit centre. Depending on whether they’re either one or the other tends to influence the way in which they react. The ones that are moving forward perhaps more quickly on this, tend to be the profit centre treasuries, where they have been given the mandate, possibly from CFO level, to bring about substantive change within the organisation.
Jones: I think progress has been slow simply because large organisations that have the clout to drive this forward are so siloed in terms of their metrics. When you talk about financial supply chain, and especially when it involves integrating the physical supply chain, every part of the organisation is impacted, and large organisations aren’t necessarily aligned internally when it comes to their priorities.
I think the credit crunch is the catalyst which we’ve all been waiting for – it will accelerate the adoption. It always takes something, usually it is compliance or regulation, that creates the momentum but I think that this time the credit crunch is the catalyst.
Shaw: As banks, what we’ve tended to do is focus on the treasurer and the CFO as being the points of contact. They are the people with whom we have regular contact and are more familiar with.
But clearly when you look at the physical and financial supply chain, you really have to reach across different disciplines such as procurement or legal, and they’re not part of the treasury organisation. So what we try to do is empower the treasurer to take this forward and engage their colleagues in this conversation. The credit crunch is a great catalyst for that at the moment.
Hatfield: It is also about making it cost effective, it’s not just the physical and financial supply chain, it is also the documentary infrastructure such as the purchase order or the invoice etc. And it’s trying to match all those both with the physical and the financial supply chain, and at the end of it you’ve also got the actual delivery of cash, which in certain cases banks can’t really do economically.
GTR: Are corporates changing their attitudes towards SCF? Are they prepared to put in the investment?
Bothe: We certainly see that corporates are becoming interested in effective supply chain solutions and the whole integration between financial and physical supply chain is about process improvements and about provision of financial products to make those processes seamless. So the client can say I have a payment process, I can grant straight-through payments automatically and my suppliers can benefit from financing options which they didn’t have before and this is a great driver.
We see uptake particularly in the automotive industry, where corporates look strategically at their suppliers wanting to support them with financing to encourage the trend towards extended payment terms, without negatively impacting the balance sheet.
Miller: The extent of change which is required in a corporate can now be justified by the credit crunch acting as a catalyst, the costs of the change are being put into the context of the scarcity of credit and liquidity.
Corsten: I see a slow but increasing adoption. While many of the people around this table may be speaking to people from financial functions such as treasurers I talk mostly to supply chain managers. And many supply chain managers hesitate to engage in SCF because they don’t understand it. They’re used to dealing with physical flow and information flow and they’re struggling somewhat with the financial flow.
GTR: Is that because they lack a financial background?
Corsten: Many supply chain managers are engineers or have an engineering interest, that’s why they like supply chain. They chose engineering because they did not want to go into business or finance. They made a deliberate choice to do something diametrically opposed to the finance function. And during their engineering studies they did not have much exposure to finance. While these barriers to adoption are somewhat cultural, they are not insurmountable. However, it requires a lot of communication and training.
Karako: The tie-up between those two is out of necessity. I recognise though that the physical SC manager may see the linking as a possible threat. The SC manager should see that the supplier who may not be able to deliver is a very expensive scenario versus 10 years ago because organisations work on just-in-time (JIT) delivery.
Although the SC Manager may be apprehensive about SCF, he now understands that it is necessary. He understands that he has to coordinate the two. The SC Manager may have to assist a valued supplier who cannot source adequate liquidity on their own. It is no longer just about helping the supplier with their systems and making systems compatible, it’s also about ensuring the supplier has access to adequate financing. Can the supplier obtain adequate and low cost financing to deliver the product on time? If he can’t, it can be a very expensive cost for the corporate buyer.
McQuaid: We worked with one supplier who got their supply chain so efficient that they lost a whole quarter of sales because one part of that physical supply chain had broke down, and it happened to be a strategic component. They’ve now come back and said we can only push physical supply chain efficiency so far and we need something in the middle to help, and that’s a financial solution.
Broom: Coming back to Daniel’s point, as well as a cultural issue, I think that it’s a structural one too, because what a physical purchasing manager has been focused on is moving goods from A to B at the lowest possible unit cost.
They have not been taught or asked to think about what the broader costs of his supply chain are, likewise the treasurer worries about getting money in as fast as possible and money out doubtless as slowly as possible, in order to optimise working capital. You have to rationalise those quite different supply chainhools of thought and bring them together.
Betts: Putting a slightly different angle on this, having worked for DHL for several years, I would say there are examples today where international logistics and purchasing, finance, procurement, treasurers and CFOs are working together and particularly in the TMT (technology, media and telecoms) sector, and in automotive and retail. So whilst there may not yet be widespread adoption, there are examples where people are now taking a multi-disupply chainiplinary approach.
Bothe: Putting in transparency is really crucial to help with physical problems in the supply chain.
Betts: Some of these solutions around vendor-managed inventory are very complex – for example, sourcing across Asia and shipping into European markets, and can involve quite intricate transactions, such as direct distribution models, and so on. The financials around this are well worked and well known. It’s bringing different elements of functional expertise together and creating additional value for the corporate, something which I believe is the emerging area.
Bothe: But there are bottlenecks in transport, and that leads to a need to rethink stock holding and keeping stock closer to the buyer. Vendor stock management is becoming more of an issue. With the rising costs of oil and transport, just-in-time delivery is becoming more and more difficult.
Corsten: There is a new “de-globalisation” debate. Companies like Procter & Gamble admit that they have designed their supply chain around a price of US$70 per barrel of oil. Now that we are looking at US$130-140 they realise that their supply chain structure with dedicated factories and relatively long transportation lead times are not efficient anymore and they are looking to produce more locally and more flexibly.
I notice that in many debates, terms such as just-in-time are used very loosely. Just-in-time, for instance, means more than on time. Simply speaking and depending on the product, a supply chain should be either efficient or responsive but can never be both. Stockless production is a myth in many industries particularly where demand is volatile. The question is how much you can reduce stock by whilst still being resilient. Interestingly, many corporates currently increase stocks as their risk management indicates that with increasing global demand and rising commodity prices, supply becomes scarce and disruptions are more likely.
Jones: In terms of companies that we’ve spoken with, particularly what we call platform companies who outsource their manufacturing and their distribution, they have come to realise that what they’ve overlooked is that they’ve also outsourced their financing and that was never a conscious decision. You would rarely take the decision to outsource your financing to a weaker creditworthy counterparty whose financing is more expensive. There is a growing realisation, driven by the credit crunch, that a platform company’s entire business is totally dependent on these outsourced supply chain partners and their ability to access the necessary working capital.
Shaw: Then it comes back to what is the fully landed cost. You were talking about restructuring the Supply chain based upon the oil price, which is now twice as high as it was. It’s a matter of understanding that once you switch that sourcing from China to Tanzania, what is the impact on import duties? What is the impact of free trade agreements? What is the impact on compliance? All of these are costs which the Supply chain manager is not really qualified to fully assess.
Jones: And nor is the CFO necessarily because if you think about traditionally the way companies have looked at working capital management, it’s all about balance sheet metrics, ie. DSO, DPO and DIO, so again they’re not measuring the true cost of forcing , for example, a contract manufacturer to hold inventory who then charges inventory carry-costs back sometime explicitly but also sometimes in the end product price so it is not transparent, and no one is bringing that into the total equation.
Corsten: That goes back to the question of how to align the incentives along a supply chains which is a matter of great debate. There is no right or wrong, they have to be adapted to the circumstances, but often the treasurer and supply chain people do not have aligned interests.
Jones: Or awareness even. I think they’re beginning to get the awareness, but do you really know how much your sales people are giving away when they negotiate? I think that awareness is coming to the fore now and once you’ve created that, you can start to align.
Shaw: Looking at the recent credit crunch and the rise of borrowing costs in China, it went from 20 basis points over to 200 basis points in some cases, now that has an impact on the supply chain.
Karako: It’s necessary to get different parties in the company to work together, procurement, finance and sales; this can help deliver a solution more efficiently to organisations with multiple disciplines in the same room. But in many organisations, departments don’t communicate well – treasury saying they won’t give or pay for extended terms while sales say they are losing market share because they can’t meet competition on terms.
Hatfield: It applies to external companies as well, people like the logistics companies are all looking to add value to the Supply chain, and they all have resources to do it. We are talking with the big logistics companies and they’re very keen to find partners to work with them to help add value to the supply chain.
Broom: The model of the big international monolith which is going to control the supply chain, from end to end, including both physical and financial elements, is dead and buried. Whether it’s finding out about local import duties or tracking inventory, there will be experts in the field that on a collaborative basis we can all tap into and bring value to the end user.
GTR: How can deteriorating credit quality in the face of economic slow down and the credit crunch be addressed both from the supplier’s and the buyer’s side?
Broom: Going back to three years, liquidity was not as much of an issue, nor were the cost of raw materials and so at that time we were very out of vogue. Many corporates didn’t particularly want to hear about what we had to say. A company like Ford, for example, could borrow directly from its bank at 10s of basis points at most, so therefore coming to any of us in the room today for a more structured solution, which by default was going to cost them more, was not something they were even considering.
Today the financial and commodities maelstrom that we are living through, is in a perverse way actually quite good news for us. Looked at from a financial point of view, there is a perceptible flight to quality in terms of corporates wanting more structured solutions; be they around SCF solutions as we’re discussing today, or around some of the more basic good old-fashioned use of collections and LCs. I’m sure all of us have seen a tick-up in both structured and more traditional activity.
It is a double whammy of having to respond to corporate needs of reducing or managing costs; which have risen exponentially, and managing risks when in many cases these have risen exponentially. Through the silo effects that we were talking about, I think a lot of corporates were blind to the risks and costs they were running and now in no uncertain terms they’re being forced to address these issues.
Bothe: In a time of crisis, I think trade is perceived as being low risk in our business with self liquidating funds. We’ve spent a lot of time looking at the risk profile of individual transactions, and in times like this trade finance is looked at very favourably and as a safe way of lending money.
Karako: Coming back to your example of a non-investment grade company, I think as a buyer, their options are limited on what SCF solutions they can access. Most lenders’ credit appetites will limit exposure to these names. Where SCF may help is by helping speed up their cash flows.
Another area a non-investment grade company can be helped is by outsourcing services to save costs. Companies that still buy via letters of credit or that are on open account can outsource the paperwork and documentation matching to enable them to reduce their AP department staff. This type of SCF solution can bring a value to these companies.
McQuaid: We’ve looked at credit risk mitigants. A poorly rated company can get insurance. Now it’s very difficult to get 100% insurance, generally you’ll get 90-95% insurance but from a bank risk perspective, you don’t ever want to be relying on an insurance policy. So you can help generate a structure by putting in insurance.
Jones: This is where the challenge comes in with the silos within banks and the mentalities of bank’s credit committees.
Some companies don’t use credit insurance for the reason that whenever you tried to claim, you had to prove compliance with every single term and condition in the policy to get paid out. Again, there are solutions to mitigate that by tracking compliance against policies. And I think those are the sorts of solutions that can be packaged together.
GTR: What about the involvement of alternative sources of finance such as hedge funds, and eventually securitisations again?
Miller: There’s not a lot of securitisation going on at the moment. In the context of SCF, You’re basically looking at approved invoice financing.
I don’t want to digress, but the definition of SCF is now starting to change and not everybody talks about it in those terms anymore. There’s a lot more to the SCF than just invoices, and I think that’s where attention is being paid, to try and find other stages and routes to fund the supply chain.
Just to go back to your question whether that’s going to attract the non-bank investors, I don’t know, but I think with the securitisation market having virtually dried up, it’s not going to be that easy. Hedge funds may well develop more interest in Supply chainF, and in trade finance in general, for that matter, but I would expect their interest is going to be in providing risk capital rather than liquidity.
Corsten: It strikes me that a definition of supply chain finance as approved invoice finance is very limiting. From a supply chain practitioner point of view supply chain finance should be defined much broader, for instance, to include purchase order finance and inventory finance. It just happens that approved finance is what most banks currently seem to offer as SCF, but any definition should be ‘demand-based’ not ‘supply-based’. Perhaps the banks’ offering is influenced by their risk capabilities rather than a corporate’s growth agenda.
Let me give you an example. I work with fashion companies that buy their products in China and Asia. One of their problems is that their suppliers are starting late with production because they lack working capital. They produce at the very last moment, at which point the whole supply chain becomes quite stretched, the stuff may arrive too late for the campaign, so whilst the leaflets are out in the market, the merchandise is not.
What these fashion companies actually want is for their suppliers to have the money to start working when they receive the order. But apparently with some notable exceptions purchase order finance is difficult for many banks when they don’t have the tools to assess operational performance risks.
GTR: Can you give us some idea of new technology that might evolve over the next three years?
Corsten: I am not sure I am the right person to talk about technology in banking.
But clearly transparency is an important enabler in supply chain management and whatever technology helps to provide transparency will be a key driver of supply chain finance adoption. One of the technologies which I’m familiar with is radio frequency identification technology (RFID). I work with a fashion company that is implementing RFID from source to store and I have seen how RFID provides us with a facinating transparency across the whole supply chain about where the merchandise is any given point and time. This helps to generate real-time risk profiles which allow a more efficient risk management.
GTR: Do you have any thoughts about this electronic tagging and how that could enable types of financings down the supply chain?
McQuaid: If you look at large logistics companies, who’ve invested huge amounts of money on tracking this, the inventory as it flows from A to B, should be a vital part of the supply chain.
If we can work with entities like that which have the information, you’re looking at the end risk. It doesn’t solve the problem of pre-production finances, this is all post production. But it could be a series of post-production, you could have a supplier who’s delivered a semi-finished good. Yes, we could finance that, if we’re happy with the entity in the middle that is going to transform that product into something else. But it’s a whole series of credit decisions, but we need somebody or something to track where this inventory is.
GTR: How are rising commodity prices affecting the supply chain, and demand for SCF?
Corsten: Some companies are potentially reconsidering their supply chains if oil and other commodities remain high. There are some companies who are wondering whether China – is this still the ‘must-be’ place to be in future. Perhaps India – or even closer?
Karako: It’s also about getting people to look at credit risk again. In your example, you might have been very comfortable with a buyer for US$10mn exposure, but are you comfortable with US$30mn?
There are opportunities for SCF providers to come in and help corporates with these situations. In the example, if the corporate was comfortable with the 10mn of exposure, Lenders need to come up with programmes to help them manage their credit risk so that they can continue selling the same number of units but now need to manage US$30mn of exposure. A lot of energy companies face this issue today. They are saying their exposure to the given country or obligor is beyond their risk limits. How can we assist them with this issue profitably and within acceptable risk criteria?
Jones: That’s where the role of third parties becomes interesting in terms of inventory ownership, because when you’re talking about some components or products, they are effectively commodities, there are markets for those. It’s not just pure credit you’re looking at, it’s the underlying products or commodities that you’re financing.
I think that’s where you start getting a much broader view of what is the financial supply chain. It’s about understanding the underlying business models and understanding the underlying terms and conditions of trade between buyers and suppliers.
Broom: Especially at that end of the supply chain, where you’re looking at country risk potentially from a finance institution point of view, country risk ceilings suddenly become much more under pressure. We are now in a position to offer a risk management or risk transfer product that was previously deemed too expensive, with clients happy to operate on an open account basis.
Betts: I believe that if you’re an international network bank, you will have clean working capital lending on a number of suppliers. There is often a supplier finance programme in place around purchase order financing as well, sometimes involving pre-shipment finance relating to trade.
You’ve got corporates who, because of the movements in the traditional assets securitisation markets, are now selling their receivables as that becomes more attractive. And there are distributed finance programmes in place around the world, which a number of banks are participating in. Actually, linking all that together is for me what supply chain finance is about.
Add in the issues around inventory ownership, and that is the domain which is emerging in the market. All of the international banks are well placed to link those structures together, to provide credit and working capital solutions for large corporates and smaller SMEs around the world.
Jones: I think the thing that’s missing up-front is getting the corporates to really do some of that analysis themselves. There is no financial supply chain role in most corporates. Rarely do companies perform an analysis of the multiple layers in their supply chain and the relative cost of capital at each layer.
That’s the bit I think they should do first, because there are some emerging new business models, e.g consignment of inventory through certain layers of their supply chain that would make sense for some industry sectors.
Corsten: There’s another angle into the discussion. When I look at business supply chains, I see similar silos between supply chain and finance academia as I see in practice. Finance courses deal with corporate finance, stock markets, options etc. Supply chain seminars primarily deal with inventory, forecasting, or supplier management and they rarely connect. So while we have SCF emerging as a new domain at the interface of these two things, I see an astonishing lack of research on it. I also think we have an obligation to develop new programmes to train the next generation of people in supply chain and trade finance.
Miller: I think they have to understand there’s a change in the credit profile, in a sense you don’t have single corporate entities that you’re just dealing with independently in a supply chain. You have different risk profiles for each link in the chain, and that’s something that’s relatively new and it’s not that easy to assess and price. I think corporates have to recognise there is some degree in the changing nature of the credit that they’re seeking if they want to fund their supply chain network.
Corsten: The breakthrough idea about supply management was to bridge transport logistics in all these kind of things, and it has to happen in the banks and the companies internally and externally. It’s more work but it’s worth it.
GTR: Are there any supply chain finance solutions that have been aimed at mid-market providers?
Hatfield: I think the problem is that the banks around this table tend to be large banks, and their main priority is more likely to be with large buying entities. However when we work alongside banks, they vary enormously, having different strategies and different sets of objectives. However, from our point of view it doesn’t really matter whether they are a supplier-centric operation or a buyer-centric operation.
Some banks say to us we are going to target large buyers because every time a large buyer comes on board, they bring in 1000 or 2000 suppliers whom we can target. We would like to find a solution that works to the financial benefit of both buyer and supplier so that the solution can address both upstream or downstream supply chain requirements and it can grow virally.
Betts: From my perspective, the solutions are evenly balanced between SME financing and wholesale banking for large corporates. I was in India recently, and what I saw in India was essentially SME financing. They approach the whole book sales ledger with domestic factoring and it’s priced in the way that reflects the credit risk in that country.
Hatfield: I believe that factoring and invoice disupply chainounting is an expensive solution in many cases?
Betts: If you have got a borderline investment grade corporate in Europe or North America you’ll find that the supplier can sometimes raise finance more effectively locally. But definitely in my view, for the SME market, it’s credit that wins the day. The most important consideration in building an SME franchise is having credit appetite in those local markets.
Broom: I think the best placed people to provide the credit are the SME-focused bankers in those local markets. At the Bank of New York Mellon, we’re a little different to some of the others around this table, in the sense that we don’t, outside of a reasonably-sized US corporate franchise, have SME or corporate franchises elsewhere in the world.
We are almost entirely FI-focused, so the way in which we are operating is based on collaboration with regional or local banks around the world through the provision of trade services, for which there is undoubtedly demand.
The vast amount of world trade isn’t all happening at international corporate level, it’s happening between small corporates and between developed markets and developing markets across the world. There is huge demand. It may not always be demand for the more advanced solutions, but there is certainly a trickle-down effect and at SME level, anything that is going to reduce risk, reduce cost and reduce the processing burden importantly, is going to be of great benefit.
The trick is to bring some of the more international pieces of the big ticket solutions down to the SME level and to enable them to use them in a more simplistic form.
Hatfield: We’ve modelled the factoring and invoice discounting market in the UK as existing forms of trade finance, and our solution could come in at between a half and a third of the price of existing solutions, and that’s allowing banks to keep their existing margins as well.
So from a banking point of view, I think we are providing the solution that you are looking for. From a client point of view, it’s a better and more cost effective option than existing trade finance solutions.
Bothe: I think the demand from a midcap line on the supply chain solution is very much the same as from a large cap, technically there is very little difference. The decision-making cycle is potentially a bit shorter, but effectively it’s the same demand, and if you enter this market, it’s very tough.
Karako: So to recap, the issue still comes down to credit. Is there enough credit appetite to deliver the solution?
Jones: Well I think that’s the point, the local banks especially in some of the emerging markets are the right people, and then the challenge for SMEs is that they don’t typically have the expertise in-house to evaluate alternative products, or even to figure out how they can turn it into a programme for their buyers, so I think that’s where the education process needs to come in.
GTR: Can we look at global procurement practices and differences between mature and emerging markets, such as Asia and Europe for example? How does this affect supply chain finance?
McQuaid: We don’t differentiate whether they are a Mexican or Indian company, they are an international company and the people involved in the purchasing have worked all over the place.
So you don’t really see a vast difference in the approach taken. You talk to a group like Tata and they are everywhere. I’m not sure I see a difference in the market we are working in.
Broom: Certainly it’s less structured and a bit more tactical, restrictions in some markets determine the manner in which you are able to operate. Certain markets are very paper heavy, often as a result of government regulation, whilst other markets are much less paper heavy, in part because there are less onerous demands from government, but also there is greater automation of processes within the sort of companies that operate at that level.
I think that to an extent there is an issue with access to technology, certainly at the very smaller ends of the supply chain. We’ve got a number of examples of textile suppliers in certain emerging markets who from a theoretical point of view would be delighted to use a fully automated end-to-end system, but they’re lucky if they’ve got power for 24 hours a day, let alone access to the internet or to an online platform.
GTR: Look at the role of third party providers, where do you think they do fit in?
Miller: The thing about technology now is you no longer have to install software, everything can be web-based which makes it much more accessible and much easier for everybody to use.
I think the argument in favour of third party technology is simply that if that’s what the company does, that’s what they specialise in commercially then they are bound to have the best they can possibly provide and it will not be secondary to their core business.
But I think also technology has to be seen to be a solution to whatever the challenge is. I think you need to have a sort of a collection of challenges, problems or requirements which technology can come to the aid of and make progress from there.
GTR: Have banks been slow in getting their own software solutions up and running, and has this helped third parties get a foothold in the market?
Jones: Banks have traditionally not been very quick in delivering technology solutions, it’s not their business. In my previous role as a treasurer, I saw many opportunities for banks to create more automated solutions.
I think the other aspect of it we mentioned earlier is the challenge large global banks have within their own organisations – do the asset securitisation, trade finance, cash management, IT and credit teams collaborate together or, like large corporates, do they tend to be driven by siloed metrics and priorities?
It’s an investment banking type of approach that needs to be taken and I think there are roles for third parties to sit in the middle of all of these various functions and market participants, whether they be liquidity providers risk takers, credit insurers. I think that’s where the potential is for third parties. It’s beyond technology, it’s about looking at the consultative advisory-type advantages as well.
Hatfield: In most cases, they’ve liked the idea that we are an independent platform and the corporates would prefer GSN to remain independent rather than get drawn into the banks’ own payments infrastructure.
Karako: Banks, I think, would out-source from qualified third parties and have the solutions available in three months, rather than try to develop the solution themselves and wait two years.
The issue that banks face with a lot of the third party providers is that they are not financially strong companies. Most banks I’ve talked to want to utilise third parties if they have a good solution. But it’s the corporate world where we are seeing some resistance. Corporates want the banks to stand behind those providers’ performance. This can be an issue as the bank will need access to the providers’ codes, servers, etc, and this becomes a very difficult negotiation between the bank, the provider and indirectly the corporate.
GTR: Do you think we could get to the situation where the technology gets so advanced that actually banks prefer third parties to take control?
Bothe: The pure cost of technology is a big issue, so banks look at white labelling of their trade platforms as well as sharing new product solutions which are technology intensive with other banks, it’s all dynamic and there will be more inter-bank proposals in line with this trend.
Broom: I think the risk one runs with a third party provider is that there’s just too much complexity because those people are too far removed from the actual end users.
Flexibility is key, but also of note is the cost of this development. Translate this into the broader context, we have found a ready market among regional banks, but they most certainly do not have the IT spend to buy or develop the systems required on a stand alone basis.
GTR: How successful is the TSU being in bringing about standardisation in the market?
Shaw: We usually use Swift to communicate between each other to make payment messages so the trade services utility (TSU) was originally started to match purchase orders and invoices, and to link banks that wanted to become part of that network effectively and efficiently.
So what’s actually happened is that TSU was started with the support of a number of banks who were early investors in the TSU. We were one of those banks and there are other banks around the table which have all committed significant investment into it. However, we all continue to develop our own systems
as well. But at the same time we do recognise that there are thousands and thousands of banks in the world particularly in emerging markets where our customers have their suppliers, and we need to be able to effectively and efficiently link with those suppliers and the suppliers’ banks.
The TSU is a way of providing a linkage or a mechanism outside of letters of credit. So we’re looking at the open account business where traditionally we have not played a role other than effecting the payment or receipt.
Through the TSU we can process purchase orders and we can match purchase orders with invoices. Recent developments and enhancements will allow banks to provide confirmation to that and one can also provide a financing around that. This does not have to be done by the existing two banks, who are the initiator and the receiving bank, This can be done by a third party bank as well.
Overall, the take-up of the TSU has been below expectations. We have done some transactions, and our counterparts around the table have also processed some transactions. Ultimately it’s very interesting in that at least it’s an attempt by a bank-owned consortium to really bring some consistency and access to the bank community around the world to support the supply chain.
GTR: So why has take up with the TSU been so low?
Shaw: Again I think it’s because we all have our own open account solutions, we all have our own supply chain solutions and it is only now that multi bank solutions are becoming more prevalent.
Jones: And Swift was designed for banks and not for corporates. Many corporates, including the large ones, still don’t really understand Swift and all of its initiatives, and how they can benefit from it.
Broom: In a way it needs to re-brand itself. No longer as a tool, as many banks have their own tools and engines, but as a marketplace where common norms and standards are applied, enabling firms to work together. Emphasis should be on what you can potentially get out of it: namely more certainty, more comfort about the credit, and the instruments that you’re dealing.
If such a slant were to be put on it then perhaps the take-up would increase, as getting the broader banking community to understand the potential power of this market place would be valuable.