April 17, 2013: The Start of a New Era in Global Supply Chain Finance?
by Dr Sebastian Hölker, Head of Global Innovative Trade Products, UniCredit
Recently, a German newspaper published an article about innovations in payments. It started with the provocative assertion that whilst we are quite advanced when it comes to the management of transportation, warehousing and the like (RFID chips, GPS trackers, real time access on all relevant data), it seems that nothing really significant has happened in the last 30 years regarding payments. The parties are still left more or less in the dark about a payment’s status while it is being processed and have little or no influence on the exact speed and detail of execution.
One may doubt whether the world truly is so clearly divided into black and white, but it is obvious that this is only one of many recent examples that all point in the same direction if put into the wider context of international trade: The physical supply chain and its management have currently outrun the financial supply chain and the services provided therein. Outrun in this context can by all means be read in the literal sense of the word as very often, the delivery of services and goods has already taken place whilst the corresponding financial transaction is far from being completed.
But do such observations reflect the true status quo of the interaction between the physical and financial supply chain?
In the last couple of years, technology and standards have made enormous progress. Reasonably up-to-date supply chain management applications (both for the physical and the financial supply chain) as well as ERP systems have no problems understanding and processing different file formats and data structures – with the added ability to convert formats and structures and keeping data losses and truncations to a minimum. Communication standards have overcome the barriers between different industries – in particular, the SWIFT MT 789 has facilitated the corporate-to-bank and the bank-to-corporate communication quite significantly. Thanks to this recent progress both in technology and standard setting, the stage is set for the financial supply chain to catch up and match speed with the physical supply chain.
On the other hand and as a consequence of the global financial crisis in 2007/08, national and supranational regulators have tightened the regulatory framework especially for banking activities; impacting also neighbouring areas like factoring and credit insurance. So, whereas financial services could significantly pick up speed where pure technology, processing and service is concerned, activities have been slowed down especially in the international arena as soon as financing components come into play. It is no coincidence that the supply chain finance industry still lacks standardised and easy-to-use multi-entity solutions that span the world. From the corporate perspective, it is hardly acceptable that bankers become very evasive when asked about a truly harmonised, worldwide supply chain finance solution. Given the current regulatory framework, however, it becomes evident that banks will have to cope more and more with local, un-standardised laws, regulations and reporting standards – in terms of both providing liquidity and complying with KYC / sanctions requirements. Does this mean that corporates have no chance but to be locked into fully proprietary banking solutions?
Approval of the URBPO
At the ICC Banking Commission meeting held in Lisbon on April 17 this year, the URBPO (Uniform Rules for Bank Payment Obligation) were approved with no country voting against their adoption. A Bank Payment Obligation (BPO) is an irrevocable undertaking given by one bank to another bank that it will pay on a specified date after a pre-agreed event has taken place. This event is evidenced by an automated matching of data in a so-called Transaction Matching Application.
This straight forward concept can be considered as the most promising instrument to bridge the gap between the technological and regulatory momentum and give supply chain finance activities a completely new momentum.
It is undisputed that today more than ever, corporate customers are asking for cooperative supply chain finance solutions. Supply chain finance in this context is not limited to the notion of so-called reverse factoring programmes, but - in line with the BAFT-IFSA definitions on open account trade finance – as “a combination of technology and services that link buyers, sellers, and finance providers to facilitate financing during the life cycle of the Open Account trade transaction and repayment”.
“Cooperative” in this context acknowledges the fact that corporates have fully understood that they benefit most if each party in the value chain contributes what it is most suited to provide – not only in terms of the goods and services offered, but also with regard to their role in financing the whole value chain.
Thus, large and well-rated buyers no longer leave their suppliers alone in their efforts to acquire reliable and affordable funding. These companies are willing to contribute by enhancing their suppliers’ financing options. In the most typical case this happens by approving invoices, but also by giving payment commitments if certain pre-requisites are met, e.g., the production or the shipping of goods has been evidenced in a pre-agreed way.