The last Sibos gathering in Boston in September 2007 was very positive for supply chain finance (SCF). Many vendors were excited about potential new business and others saw the solution moving from being a talking point to adoption. However, in the intervening period the credit crunch has deepened putting bank balance sheets under tremendous strain and commodity prices have continued to rocket. This is squeezing the profit margins of many manufacturers. Also, the US is probably now in recession or very close to it and many western economies are slowing down.
Just over six months on, GTR decided to contact a few vendors to get an idea how the market has evolved since then.
According to Adi Bachar-Reske, product marketing manager at Misys banking systems, business has not been overly affected by the financial and economic problems. “We’re still seeing big deals in Western Europe, for example,” she says. “The leading trade finance banks don’t seem to have been that affected in terms of IT investment.”
She adds that US banks are still investing aggressively in the area of trade services. “We’re seeing a lot of tier two players coming to us,” she says.
Indeed, a lot of banks are still getting by on legacy IT systems. With the growth of SCF, it’s possible that banks and some corporates are finding it harder to postpone the necessary investment, despite the economic conditions. In tough trading conditions, differentiation from the competition can be crucial.
“As corporates’s trading activity does wax and wane with the business cycle, use of SCF programmes will follow suit, but we haven’t seen any change in the level of investment by our friendly competitors,” confirms John McFadden, managing director, global trade services with Wachovia Bank.
SCF platform provider, PrimeRevenue, has reported greater interest in SCF thanks to the US slowdown. Corporates are attracted by the prospect of lowering the financing costs of their supply chains and also by securing their suppliers. If weaker suppliers can get funding at competitive rates, they are more likely to pull through during bad times.
One worry for any bank delving into a new product area is the investment in IT required to get it set up. Then it has to be scheduled along with all the other projects the bank wants to implement.
These days vendors tend to offer either hosted-applications, to licence the whole solution or offer to insource the business process side, which includes all the IT. Traditionally, smaller banks opt for the outsourced or hosted solution – less set-up costs and time, whilst the bigger players would simply licence it. However, it’s not quite so clear cut. Many of the bigger players see strong benefits in opting for the hosted approach. “They see the opportunity to get up and running relatively quickly with minimal up-front investment,” says Bachar-Reske.
She explains that often they will want to trial the solution and see if they can make any money out of it, a kind of plug and try approach. “If they’re happy with the solution they may opt for licensing it at a later date,” she says.
Wachovia, meanwhile, sees an increasing trend in the number of banks outsourcing or considering outsourcing their trade business.
“We believe this is the result of increased cost pressures that all banks face and the need to eliminate or reduce potential lines of business that are either unprofitable or non-core,” says McFadden. He adds that in many cases trade finance remains a key corporate product, which helps sustain the bank’s overall business with certain clients. However, offering trade services to those clients may not be profitable in its own right.
“One of the easiest ways to eliminate this dilemma is to outsource the business to a larger trade bank and replace fixed costs for staff and IT infrastructure with variable click charges based on transactions processed,” says McFadden.
But what of emerging markets
Previous enquiries beyond traditional western markets have revealed little interest in SCF. However, there are signs that this could be changing.
“When we tried to introduce SCF to the Middle East some years ago we were greeted with indifference,” says a salesman with a leading global bank. “Now we’re beginning to see early signs of real interest.” This is a potentially interesting development for a region traditionally faithful to letters of credit for transacting international trade.
Wachovia itself has seen universal interest ranging from banks in Japan, Australia to South Africa. However, McFadden notes: “Not many banks outside the US and Europe have fully developed or deployed ‘packaged’s SCF solutions.”
Although: “certain Australian banks seem to be moving ahead of others in their area and have a well-developed SCF approach that provides significant flexibility and options for customers,” says McFadden.
Misys, meanwhile, has seen tremendous interest in trade services solutions generally in Russia. In contrast to their western peers, Russian banks are flush with cash and are keen to invest and expand.
Nonetheless, McFadden does sound a few words of caution generally on SCF. Although interest in the topic is growing: “what we have discovered is that in the large corporate market in the US, treasurers and CFOs have developed SCF fatigue after hearing too many generic discussions of SCF concepts without solid presentations of specific SCF programmes that address their company’s issues.”
So far SCF appears to be defying the economic gloom, but whether it can run counter to the business cycle remains to be seen. Although there is increasing evidence of the benefits of SCF it remains a relatively new concept and still awaits widespread adoption.
When times are tough, firms tend to be more risk adverse. The focus turns to cost cutting and investment normally suffers, potentially affecting proposed SCF programmes. Nonetheless, there maybe a glimmer of hope from emerging markets. There are some tentative signs that some corporates and banks in those markets are starting to look at SCF, a sign that SCF could be on the verge of becoming a truly global practice in a similar way to letters of credit.