EBSI Tradebrief - Benefits and risks for banks in
Supply Chain Finance
Article published in: http://www.ebsi.ie/eBSI_Tradebrief_Issue_9.pdf
I have a Labrador dog, Andy whose
breed originated in Greenland. I buy its food online in a store
located in Germany whose product of Canadian origin is delivered directly to my house in Madrid
thanks
to TNT, a transport company of Australian foundation whose majority shareholder
is the Dutch KPN; now that's globalization!
To survive in a so competitive world companies need to buy and sell goods in a very efficient way. Traditional systems – to buy raw materials using either the company’s own funds or borrowed funds from a bank, process, sell and wait for the buyer’s funds – are not suitable any more. Today’s companies need a financing system nimble and flexible, adapted to their needs since, for international trade transactions, money is as vital as blood for life. One of these systems is the Supply Chain Financing (SCF) scheme.
SCF it’s a wide-ranging term that can be considered from
several points of view:
From a management point of view, SCF means that the
company receives the raw materials needed for its production in time and at the
lower cost possible; arrange payments to its suppliers in a way that allows
them to obtain the price easily and speedily but without being debited immediately
into the company’s bank account; and, convert into cash its receivables as soon
as possible. An accurate SCF management allows the company to optimize its
inventory, to prevent outages and to maximize its payment terms.
From a transactional point of view, SCF implies the
use of an IT platform capable to interconnect buyers, sellers, the logistic
company and the bank. Such platform may be provided by the bank, either using
its own in-house developed software, purchasing any software license or through
an agreement with a third-party provider.
From a banking point of view, SCF represent for the
banks an ideal opportunity to evolve from the role of a financial services provider
to a non-replaceable business partner directly involved in the commercial and
productive process of the company.
By participating in a SCF structure, a bank obtains a
series of benefits:
- Hold
the different accounts necessary for a fast and efficient flow of payments;
- Benefits
from the use of funds deposited in such accounts and obtain fees for the
payments between the participants;
- Fees
received for the use of the IT platform helps the bank to compensate the loss
of revenues coming from traditional trade instruments (e.g. letter of credit)
which the clients have substituted by an Open Account scheme;
- The
bank may charge fees to the participants as a provider of the IT platform;
- Once
the IT platform is available, the Bank can offer this service to different
customers, making such an investment into a clear competitive advantage;
- Has a
complete knowledge of the full operation of its clients, what implies a better
understanding of their business;
- If
necessary, the bank can grant funding to buyer or seller, depending on the
case, enjoying the most accurate information about the operation he is funding
and with the possibility of controlling the flow of funds;
- The
bank has an excellent opportunity to attract the sellers as new customers and to
make a cross-selling of its services; and,
- Through
participation in a structure of SCF, the Bank demonstrates to markets its
determined commitment by international trade, its capacity to adapt to new
technologies and becomes a major player in this kind of activity within the
reach of a small number of entities.
However, banks must take into account that any SCF
scheme involves also a number of risks:
- In any
SCF structure, the bank usually concentrates its risk on the buyer (who
approves the invoices); therefore, it should be a creditable corporation
enjoying a sound financial position;
SCF
structures are suitable for high volume transactions held by trustworthy companies
in developed countries;
- Usually,
the discount of approved invoices to the seller is on a non-recourse basis;
- Companies
are willing to participate in a SCF structure when the payment terms are medium
and/or long term;
- Cost of
providing the IT platform can be high and, unless a wide-scope agreement is
previously reached with one or more highly reliable companies willing to
participate in a SCF structure, it could be an unproductive investment;
- Access
of the companies’ staff to the IT platform implies to design an appropriated
authorization process in order to guarantee the safety of the whole operation;
- SCF
involves not only financial transactions (discount of invoices, cash advances,
loans, etc.) but commercial transactions as well (input of purchase orders,
invoices approval, logistic documents, etc) which are not always well-known for
the bank’s staff;
In summary, we could say that SCF it’s a modern
structure that uses the advantages of new technologies and allows banks to
participate directly in the day-to-day operations of their clients, adapting to
the new challenges of the globalization.
C. Bacigalupe
May, 2012
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