1. finance

GTR SUPPLY CHAIN
SCF SOLUTIONS
Banks look set to meet growing demand for even earlier access
to supply chain finance by adopting new tools and solutions that
leverage on the latest technologies. Liz Salecka reports.
s suppliers’ demand for both
pre-shipment and post-shipment
finance grows, both global banks
and large corporate buyers are
exploring new ways of securing
its provision and speeding up
its release.
Many of them are considering new
solutions such as the bank payment
obligation (BPO) to provide suppliers
with new opportunities to access finance
at earlier stages in their supply chain
cycles, such as the pre-shipment phase.
“Global demand for supply chain finance
continues to evolve across both developed
and emerging markets and it is now
firmly entrenched as a mainstream trade
financing solution among corporates and
international banks,” says Kuresh Sarjan,
managing director and head of global trade
and supply chain, Asia Pacific at Bank
of America Merrill Lynch (BofAML),
pointing out that demand for supply
chain finance has now moved beyond
industries such as retailing to encompass
commodities, pharmaceuticals and the
Fast-Moving Consumers Goods (FMCG)
sectors. “This is where post-shipment
financing opportunities with suppliers,
regardless of size, have expanded
52 | GLOBAL TRADE REVIEW
materially,” he says.
“Post-shipment and post-acceptance
financing should continue to dominate
the market for some time, but pre-trade
financing facilitates trade and supports
growth and supply chain stability as well,”
adds Daniel Schmand, head of trade
finance and cash management corporates
Emea at Deutsche Bank.
He notes that while awareness of
supply chain finance solutions has
“rocketed” in recent years, the focus has
always been on the later part of the supply
chain. “Demand for earlier solutions is
growing as they become better-known,
but there is still a trade financing gap
in various regions,” he says.
Banking on the BPO
One tool that is expected to play a key role
in facilitating the early provision of finance to
suppliers is the BPO, an electronic payment
guarantee and risk mitigation instrument
that is transmitted from a buyer’s bank to a
supplier’s bank, providing the latter with
the security it needs to release funds.
At Swift, André Casterman, managing
director and global head of corporate and
supply chain markets, explains that use of
the BPO enables finance to be offered to
suppliers much earlier than in traditional
supply chain finance programmes.
“Whereas finance has been typically
offered once an invoice is approved, it
can now be offered at the purchase order
stage,” he says.
“When offering financing against
approved invoices, banks are helping
suppliers to access working capital facilities
sooner, but they are financing transactions
that are already complete – the physical
transaction is over. The BPO is positioned
as a tool that will extend opportunities for
banks by enabling them to offer financing
at the purchase order stage so that the
supplier can receive pre-shipment or postshipment (pre-invoice approval) finance.”
Schmand at Deutsche Bank also
believes that the BPO is the most likely
instrument to fill in the gaps when it
comes to early financing.
“It is certainly one of the best options,”
he says. “The BPO combines the
advantages of automation and digital
processing with the security of letters of
credit, and it is the combination of both
that allows for more flexible financing,
including pre-trade finance.”
Although other instruments, most
notably letters of credit, have enabled
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GTR SUPPLY CHAIN
SCF SOLUTIONS
“THE BPO DOES IMPROVE DATA SHARING
AMONG BANKS BUT AS OF YET WE ARE
NOT SEEING MANY CLIENTS DEMANDING
SOLUTIONS BASED ON IT.”
Bertrand de Comminges, HSBC
André Casterman, Swift
Ray Zabarte, RBS
the provision of pre-shipment finance to
suppliers to fund production in the past,
the BPO offers a number of advantages
over these traditional tools.
As Casterman explains: the BPO does
exactly the same as letters of credit – but
much faster.
“The BPO is most relevant to those
corporates that want to accelerate
processing,” he says. “Also, it does not
require the extensive trade expertise that is
needed to prepare traditional letter of credit
documentation. It relies on the transmission
of electronic data between two banks and
this takes away the requirement placed on
corporates to prepare trade documents.
The complexity is on the bank side.”
Sarjan at BofAML agrees that the
BPO will support suppliers’ requirements
for purchase order-based pre-shipment
financing because it offers increased
visibility into the purchase order and
other relevant data, thereby providing
additional comfort to the financing bank.
Because the BPO flow can cover the
end-to-end supply chain process from
purchase order to settlement, “over
time, banks will be better positioned to
understand the suppliers’ relationship
with the buyer and ensure that their
‘informed risk decisions’ are not based
purely on supplier credit standing when
extending pre-shipment finance”, he says.
However, some banks believe that a
number of issues must still be considered
when securing the provision of early
finance to suppliers using the BPO.
At RBS, Ray Zabarte, head of trade
services, global transaction services,
acknowledges that there is an opportunity
for banks to create new solutions around
the BPO, but adds: “At the end of the
day, banks still need to follow the basic
rules of lending – they are taking a risk on
a transaction and they need to look at who
is ‘going to make good’ the debt created.
The commitment of the buyer’s bank may
be enough for a seller’s bank to release
early finance, but it is still not clear at
what stage in the cycle this will happen.”
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Buyers too must be certain they will
receive the goods from their suppliers
when arranging a BPO with their bank.
“Before a bank issues a BPO for its
client (the buyer), the bank would normally
require the buyer’s indemnity so the buyer
too must be certain that the seller will meet
its obligations,” Zabarte explains.
There are also some concerns over the
relatively slow take-up of the BPO.
“The BPO does improve data sharing
among banks but as of yet we are not
seeing many clients demanding solutions
based on it,” says Bertrand de Comminges,
global product head of structured solutions
at HSBC. “What we are waiting for now
with the BPO is demand from our client
base. As a bank we are ready to adjust our
operational model with new solutions that
are centred on our clients’ needs.”
E-bills of lading add speed
While the BPO, once it becomes widely
adopted, should help to secure time and
cost savings over the use of traditional trade
finance instruments, while also offering risk
mitigation, another instrument that offers
opportunities to improve efficiencies is
the e-bill of lading.
Casterman notes that it offers both
speed and simplicity. “The e-bill of lading
is all about accelerating the processing
and dispatch of the documentation
needed to enable banks to offer early
finance to suppliers,” he says.
However, while an e-bill of lading
can help to mitigate risks, it does not
eliminate them.
“The e-bill of lading is considered as
collateral by banks and can mitigate the
risk involved when offering early financing.
It serves as a document of title and, when
held by a bank, is a proof of ownership –
the bank owns the goods that are being
shipped,” says Casterman. “However,
while it serves as title documentation, it
does not serve as assurance that the goods
will be paid for, so a payment guarantee
instrument, such as a letter of credit or
the BPO, is still needed.”
However, this does not mean that the
e-bill of lading will not play a future role
in the provision of finance.
At Bolero, Paul Mallon, director of
legal and regulatory affairs, believes that
e-bills of lading can help to secure the
financing offered to shipping companies.
“Shippers with a steady and predictable
flow of e-bills of lading could use those
bills as collateral for a general facility,”
he says. “This is, in part, because e-bills
of lading are capable of being transferred
very quickly. If a bank holds e-bills of
lading covering sufficient value, it would
then be able to enforce in the event of a
shipper’s default.”
He notes that, theoretically, the same
result could be achieved using traditional
paper bills of lading. “However, the
slow movement of paper bills leads to
inefficiencies, which could result in a
negative operational impact,” he says.
“The use of e-bills of lading allows for
shippers (as beneficiaries) to get paid more
quickly because the necessary documents
are received sooner and payment can
be processed at an earlier stage when
compared with paper bills of lading.”
Meanwhile, Zabarte believes that the
issue of e-bills of lading could serve as
security for a BPO.
“Once an e-bill of lading, which serves
as evidence of the goods having been
loaded, is issued, then there should be no
problems in enabling the data match under
a BPO. Any earlier than that, the buyer
must be satisfied with the various stages
of the production process that have taken
place to ascertain that the goods are on
their way,” he says, pointing out that there
is more scope for BPOs to be used to offer
earlier finance to suppliers where a buyer
has very tight control over its supply chain.
“There will be product development
by banks in this space [BPO] at some
time in the future. I believe that the date
on which an e-bill of lading is issued
could serve as a hook or a point in time
at which BPO data can be matched and
early finance released.”
MARCH/APRIL 2015 | 53
GTR SUPPLY CHAIN
SCF SOLUTIONS
EXTENDED SCF
OPPORTUNITY
SCF PROCESSES EXPLAINED
PURCHASE ORDER
PRODUCTION
CERTIFICATES
DELIVERY
TRANSPORT DOCUMENTS
INVOICE
INVOICE ISSUANCE
GOODS ACCEPTANCE
INVOICE APPROVAL
PAYMENT INITIATION
PAYMENT
Daniel Schmand, Deutsche Bank
The role of electronic
presentation
The growing use of electronic platforms
to transmit not only e-bills of lading but
a range of trade documentation including
letters of credit is expected to play a key
role in speeding up the processes involved
in securing the provision of early finance
to suppliers.
Schmand points out that, by enabling
corporates and banks to dematerialise their
workflow and send a set of documentation
electronically, solutions such as Bolero’s
document presentation application
(e-Presentation) are facilitating the use of
tools, which enable early access to financing.
“Many of these tools work in tandem
and all bring us closer to a more
automated environment with optimum
security and transparency,” he says.
“In Asia, and other regions, we are
increasingly seeing e-bills of lading used
where all the parties – the buyer, suppliers
and carrier – have access to an electronic
platform for presenting documents
electronically,” adds Sarjan. “In our
experience, such arrangements are extremely
beneficial for corporates in industries where
just-in-time delivery of goods is imperative
due to storage space constraints or the
inherent nature of the goods traded.”
However, there are still cost
considerations when it comes to the use
of electronic trade platforms.
Sarjan believes that the entry/
subscription costs for platforms such as
Bolero and essDOCS are a barrier for
wider adoption by SME suppliers.
“To date, electronic platforms
continue to be most used by the largest
54 | GLOBAL TRADE REVIEW
HIGHER RISK
PAYMENT
ASSURANCE
& FINANCING
SERVICES
LOW RISK
CURRENT
SCF SCOPE
“MANY OF THESE TOOLS WORK
IN TANDEM AND BRING US
CLOSER TO AN AUTOMATED
ENVIRONMENT.”
ORDERING
(EARLY)
PAYMENT
SERVICES
NO RISK
Today’s SCF offerings start when invoices are approved whereas buyers
and sellers need risk and financing services as soon as the PO is agreed
corporates,” adds Casterman. “However,
e-presentation as a solution is increasingly
now being adopted by mid-caps too.”
He acknowledges that all electronic
platforms which enable the e-presentation
of trade documents, including letters of
credit, help corporates to accelerate the
exchange of information, and work in a
better way with their banks. “However,
the BPO, which digitises information
flows in the bank-to-bank space, offers
a speed element. Where electronic
platforms are used, they still need to be
supported by a paper processes where a
letter of credit is used.”
Direct debit mandates
When it comes to the provision of early
access to finance for suppliers, there have
also been suggestions that where buyers
have set up direct debit mandates to pay
their suppliers, this too could mitigate the
risks banks face in making such funding
available.
This is particularly relevant today
given the introduction of the Single Euro
Payments Area (SEPA), which has led to the
use of a standardised direct debit instrument
– SEPA Direct Debit (SDD) – for crossborder payments across the euro area.
The new payment instrument is
expected to find increased traction in the
business-to-business space, with some
buyers opting to use it to make regular
payments to their suppliers.
Schmand points out that SEPA’s
standardisation of formats has enabled
various kinds of payments to be ‘bundled’
together, streamlining corporates’
workflows. “This enhanced integration
reduces costs and possibilities for error for
financing on both sides of the equation.
SEPA harmonisation has given corporates
improved access to lower cost financing
– and further innovation may yet follow,”
he says.
“A SEPA Direct Debit Mandate is seen
as part of an overall transaction,” adds
de Comminges, noting that the existence
of direct debit mandates has been taken
into account by banks when rolling out
receivables-based programmes. “SEPA
has a real part to play in facilitating
greater standardisation in the way
payment data is shared between buyers,
sellers and their banks.”
Meanwhile, Casterman acknowledges
that the direct debit instrument does
ensure that payment will be made on a
certain date, providing security to those
suppliers that have agreements as longterm suppliers to buyers. However, it is
unlikely to become a key payment tool that
smaller SME suppliers will benefit from.
“Direct debit mandates are most likely to
be used where the supplier is the dominant
party and the buyer has strong trust in the
supplier – the buyer has no choice other
than to accept the supplier’s terms for a
direct debit mandate to be set up,” he says.
“SMEs, which need early access to finance,
do not have the force required to ask their
clients to set up direct debit mandates.”
For these reasons, he believes that direct
debit mandates are most likely to be the
preserve of very large utilities organisations
and service providers such as insurance
companies. “It is also very unlikely that
these types of organisation will require
early access to funds,” he explains.
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