Payments supplement: Financial supply chain feature - Destroying paper

Has the recession helped or hindered progress towards the fully electronic financial supply chain and the end of paper-based transactions? It depends on who you ask, reports Graham Buck

Cutting out paperwork, its associated costs and processing times and moving to a more streamlined electronic financial supply chain has been the wish of corporate treasurers for many years, especially at multinationals. The end-to-end financial supply chain gives companies greater visibility of their cash and liquidity positions and banks gain greater insight into their corporate clients' finances and cash flows, which makes them more confident in extending credit. But the business world's quest to achieve straight through processing (STP), and more efficient practices such as e-signatures, e-invoicing, and tracking capabilities as can be found in the logistics chain, hasn't always had the full support of the banks. Or so reports and surveys have told us. Technologies such as online billing and payments, paperless direct debits and the elimination of cheques offer significant efficiencies for corporates which, in theory, they should be swift to embrace. Indeed, the Paystream Adviser consultancy reckons that electronic transactions will surpass paper in 2010. Is the theory up to the practice though?

Tom Wiles, global head for electronic channels at Standard Chartered Bank in Singapore is very optimistic. He says that rather than slowing because of the financial crisis, he detects that the pace of change is picking up. Treasurers are concerned with liquidity and control, which are dealt with far more effectively through electronic conversion. "On the cash side, while the figure varies from region to region, around 93 per cent of our global transactions are electronic," he reports. "On the trade finance side, the figure is considerably lower. There is a long history of paper here as there are more parties to the transaction and regulatory barriers. But even here the electronic volume has tripled over the past three years. And once a company makes the move to electronic there's no going back. A lot of household names now doing trade with Asia have the processes fully electronic from end-to-end."

Slow progress
Nearer to home though, a rather different picture emerges. Outside of a limited number of multinationals there is only a small take-up of existing technologies, let alone much demand for new electronic services, reports Dermot Nolan, head of business marketing at Bank of Ireland. This muted demand for e-signatures and other financial supply chain technologies isn't all due to the credit crunch. "For many organisations, embracing the new electronic technologies involves huge changes and a struggle to adjust," he says.

Yet IT service providers are still confident that the days of paper-based transactions are numbered. A recent report from vendor TietoEnator predicted steady progress towards e-invoicing and a concerted effort by banks to step up their efforts. It observes that, in the wake of the Single Euro Payments Area, banks have been forced to consider ways of recouping their SEPA spend and how to replace lost revenues from decreasing transaction fees caused by the removal of obstacles to cross-border payments. This may create extra demand but again it's slow at the moment.

SWIFT's Trade Services Utility (TSU), initiated in late 2002 as a global collaborative centralised matching utility to help banks create a global financial supply, has also had a fairly slow pick-up. "It's progressing, but not at any great speed," says Olivier Berthier, solutions director, transaction banking, at Misys. "The financial crisis hasn't helped and we've heard reports of bigger values this year under Letters of Credit (LoCs) than a year ago, thanks to the perceived higher risk of an open account-based relationship."

The setback should prove only temporary though. As Kannan Amaresh, head of the banking domain technology group at vendor Infosys, points out paper-based LoCs are inefficient; typically 60 different individuals are involved in their issue at some point. In the short term, banks that process LoCs can continue to derive revenue from this service - although he cites recent research suggesting an error rate of 70 per cent in LoC processing - and secure their continued participation in the financial supply chain once economic recovery eventually gets underway. But LoC usage will inevitably dwindle again and banks will face a renewed threat from alternative providers. This threat should not be underestimated. "While banks may have the upper hand at a time of recession, they should use it as an opportunity to plan on developing a more competitive offering when normal economic circumstances level the playing field once more," he adds. If they don't there is the threat of disintermediation, with a PayPal clone or similar, moving into the trade finance space.

Misys' Berthier agrees: "The open account-based model will become a primary requirement once the economy improves. But meanwhile, forecasts of the imminent death of the LoCs are exaggerated. It's still a useful instrument, and also acts as an envelope around many singular transactions."

Value and visibility
According to George Ravich, chief marketing officer for Fundtech, the more astute banks are already at work on their electronic service offerings and for good reason. "Financial supply chains have become 'sexy' since the downturn as the banks' only business sector that continues to grow," he explains. "Consumer banking and investment banking are both losing money, so transactions business is the only profitable part." He adds that before now, the ideal software system linked the bank's back office and its clients. Today, it is one that extends to also include their trading partners. "The relationship between corporate clients and their trading partners is one that the bank should be actively involved in." If they don't get involved someone else will and banks will lose the 'sweet spot'.

Ravich cites RBS (recently chosen as funding provider for Sainsbury's Trading Finance Platform) as one bank implementing this approach and managing the invoices coming in and going out from corporate clients and their trading partners. "The bank effectively acts as the factory that makes transactions and over the past 20 years they have steadily reduced the cost of processing them," he explains. "So it has become increasingly commoditised and also increasingly difficult to make money." He suggests that the banks can derive new revenue sources by monetising the data accompanying these transactions, using it to offer new high-value services. These should be directed at finding the company's hidden liquidity.

The lynchpin for this task is the invoice. It indicates the money coming in and going out over the next 30 to 90 days, the cash flow of their corporate clients and can be used by the bank to provide services that optimises their working capital. "For example, if significant amounts of money are coming in they can be invested to maximise returns," he adds. "And if significant amounts are going out the bank can arrange it so the client doesn't have to take out lines of credit."

As Sainsbury's Trading Finance Platform (TFP) evidences, companies in retail and IT appear to be the most proactive in embracing electronic platforms. The TFP, launched two years ago, is an internet-based payment management system developed by PrimeRevenue that enables the supermarket group's suppliers to access account information and also to benefit from early payments. Suppliers can access an online view of their trading account with Sainsbury's, including invoices, debit notes, remittance advices and payment dates, plus their expected cash flow. Suppliers have the option of receiving early cash settlement by selling their invoices to RBS at a competitive financing rate.

Limited competition
But could banks less adept at providing such services lose out as competitors from outside the sector muscle in on their territory? It has been the topic of much debate, says George Warfel, managing director for global payment solutions at Fiserv. Much of the payments business that corporates give to the banks is based on reciprocal deals. In return for providing this business they receive credit from the banks. So when the credit crisis struck, there was an implicit threat that if the banks retrenched their clients would in turn look elsewhere for their payment needs, to both bank and non-bank competitors. But Warfel thinks it unlikely that operators such as PayPal can make significant inroads into financial supply chain services. As he says, banks still have the major advantage of managing risk. Not too many companies are ready to entrust this role to an unregulated corporation. "There is the possibility that banks are 'cruising' in this knowledge, when they could and should be doing more to develop their service offerings," he adds.

His colleague Dan Nagy, Fiserv's group's senior vice president and general manager, business services, previously worked at Citibank, which he says never felt seriously threatened by competition from non-banks. "The likes of Travelex certainly nipped at our heels but didn't cause serious concerns about potential loss of business, while PayPal and others really only go after relatively small businesses," he suggests.

There are opportunities for the Automated Clearing Houses and organisations such as SWIFT, with the TSU, to get into the trade finance area, but with banks the ultimate owners they hardly count as competition. "Western Union is a possible contender, although there are doubts as to whether it has the necessary connections," says Gareth Lodge, regional research leader for European payments at the TowerGroup consultancy. "The larger telecommunications groups are wired though and can offer a global network, with BT's Radianz Ultra access service (the world's biggest IP-based secure financial extranet) a potential contender."

However, US companies are being wooed hardest by middle-ranking banks with the pitch that they are "small enough to pay attention to smaller customers", says Fiserv's Warfel. Many have stepped up their service offerings in the most sophisticated activities. So how is progress across the Atlantic in moving from paper-based transactions to electronic? The US government provides tacit support but not active promotion so it's limited. There isn't the same kind of governmental support as there is from the EU.

A similar situation exists both in Latin America and Canada, the latter recently halting a project for the image clearing of cheques after three years of work, dealing a severe blow to the drive to eliminate paper. But Elizabeth Galletly, director, transition banking at Standard Chartered, counters that the contribution of the US and the Americas shouldn't be downplayed. "American retail giants such as Wal-Mart have been the main drivers of development so far," she stresses. "They have played a huge role in bringing the industry to its present stage of evolution."

Asia's advance
Europe currently provides the most momentum, but Asia ranks a close second, says Galletly. Many of its companies, particularly in the hi-tech and retail sectors, have extended financial supply chains. Traditionally, they were obliged to use the same technology as those in Europe and North America even though these often didn't adequately meet their needs; despite this they are progressing.

In the past two years there has been much more collaboration between Asia, Europe and North America so that each region has a major say on future development. This convergence will also assist widespread uptake of these new technologies. Asia's most influential countries in the move to an electronic future are South Korea, which still stands well ahead of its neighbours, China and Taiwan. ''The Korean banks are particularly strong and you have to raise your game if you intend to compete against them,'' says Sriram Muthukrishnan, Standard Chartered's global head of supply chain finance.

Most recently, there has been a sharp increase in the volume of dollar clearing business in Asia. Many companies based there are making and receiving payments in US dollars and want to carry out these transactions via offshore dollar clearing, which is still largely the province of the major American banks. But local banks, such as the People's Bank of China and Hong Kong Monetary Authority are seeking to siphon off much of this business - a threat that US banks are responding to by setting up their own Asia-based operations.

What will the next few years bring? Future financial supply chains will have to be holistic in nature, says Standard Chartered's Galletly. "Mobile technology is likely to play a huge role as well, while the concept of cloud computing is very exciting," she adds. "There are many participants across the supply chain and the challenge is to involve all of them. Cloud computing could provide that means." Mobility would enhance convenience, so there's two technologies that could play a major part in trade finance in the near future. The days of paper chains should finally be at an end in a few years' time but whether banks seize this opportunity - and make paper as obsolete as papyrus - remains to be seen.

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