Imagine a world without banks. Or, in today’s credit crunch, a world where cash arrives quickly wherever it’s needed in the manufacturing supply chain, without bank charges.
Sounds far-fetched, but that’s what some radical thinkers in the technology and services industries are trying to whip up. It’s part of an IT-based trend called supply chain finance aimed at the seemingly impossible double act of speeding up payments and allowing manufacturers to hold onto their cash longer as goods move around the world from raw materials through production, transportation, and end-user sales.
“We call it faster cash,” says Nigel Woodward, Intel’s worldwide financial services director, based in Swindon, England. “A look at today's passage of goods from supplier to buyer in exchange for payment -‑ via the banking infrastructure -- is literally riddled with inefficiency and unnecessary cost.” As the world’s largest chip producer, Intel wants to sell the processing power that would enable this virtual, possibly bank-free money machine.
“If the banks don’t wake up and start paying attention to what the client needs, the risk is someone else will get in the game,” says Enrico Camerinelli, a Milan-based senior analyst with research and advisory group Celent. He likens supply chain finance’s future to the emergence of PayPal on the consumer Internet, where PayPal has taken over many aspects of the payment processing role while relegating banks to the very last step of simply sending money.
That “someone else” stepping in for banks could be a big company with a financing arm and close links to IT and logistics, such as IBM or UPS, Camerinelli says. Or it could be a transaction processing firm or business-to-business facilitator, such as GT Nexus or GXS.
Ashley Dowson, director of the SEPA Consultancy in London, says it could also be a company like Travelex, known for providing currency exchange but outfitted with technology it could use to manage electronic invoicing. And Sarah Jones, CEO of London-based SCF Capital, a technology and consulting firm, says that big companies at the end of the supply chain, like a BAE, might be willing to provide faster, but discounted payments to global suppliers.
Another possibility: A nascent European payment system called TWIST could begin to replace the SWIFT payment co-operative owned by banks and often criticized for inefficiencies and proprietary systems that favor banks.
What these alternative ideas have in common is the notion that banks are not well-tuned into information about goods as they move around the supply chain. Likewise, traditional banking methods for financing the supply chain, such as letters of credit, are relatively inefficient and costly. On top of that, many banks have famously run into their own financial hardship, making them unwilling or unable to front money to suppliers on affordable terms.
The alternative is to make better use of technology to move messages about the state of goods in production or transit, and to electronically transmit invoices in a standard system that automatically triggers payments rather than requiring human intervention.
For instance, using RFID chips and sensors, a container carrying waxed jackets and sitting on a ship in Singapore could transmit information via a WiMax network to the Internet. A retailer in London that has ordered the goods would receive information assuring it that the jackets aren’t melting. On the basis of that confidence, the retailer might forward payment to the jacket maker once it receives an electronic invoice from the jacket maker. No bank, but lots of technology.
This is controversial stuff, and cutting banks out of the chain altogether seems to some people about as likely as eliminating Microsoft from PCs.
“It’s not going to happen,” says John Burton, marketing director for London-based consulting and technology company Petra Financial. But, he adds, the emergence of technology that hastens the information flow between buyers and sellers is pressuring banks to deploy new financing services in the supply chain. “Banks are feeling the squeeze. I heard one bank say, ‘We used to be able to charge $20 for a letter of credit; now we’re struggling to get anything.’ Their revenue is drying up, so they’re saying, ‘How else can we help you on payments?’ It’s pressuring them to try to get to know their customers more.”
Getting to Know You
That means banks are under pressure to tie into the information networks that reveal the state of goods in a supply chain and potentially lessen the risk of the unknown. Without that information, banks can claim they’re taking a big risk and charge more for financing as a sort of FUD (fear, uncertainty, and doubt) tactic. But with technology-driven information becoming increasingly available to them and their emerging competitors, they’ll have little choice but to use it. That means they will instead have to offer slicker and faster payment services. Those services will include “factoring,” in which they buy payables and then provide immediate, but discounted payment, rather than making a small supplier wait, say, 90 days for full payment.
Some banks are indeed responding to the IT challenge. Celent’s Camerinelli points to Citigroup’s agreement in June to use technology from Ariba Inc. as an example of a bank trying to improve its supply chain services. ”Citigroup knows they’re good at selling money, but not good at managing the supply chain process, so they teamed up with Ariba,” Camerinelli says.
Likewise, Gaithersburg, MD-based e-commerce technology company GXS at press time was nearing a partnership deal with a major London bank to furnish supply chain financing. The deal would be similar to one GXS struck late last year with U.S. bank BB&T.
One bank taking a leading role using its own information technology is JP Morgan Chase, which offers a service it calls simply supply chain financing. The bank promotes this as a way to “leverage a technology-driven factoring solution that delivers mutually beneficial financing to suppliers and buyers in your global supply chain.”
Jeremy Shaw, JP Morgan’s London-based EMEA global trade services executive, says that with the enormous increase in global trade, “I would say our supply chain financing business is two to three times what it was two or three years ago. We are trying to raise more and more corporations’ awareness.” At the same time, he says, letters of credit have declined as a proportion of the bank’s overall trade.
Many payments in Europe travel through SWIFT, a payment consortium owned by various banks. SWIFT itself is attempting to modernize. Last year, it introduced a facility called trade service utility aimed at allowing banks to more efficiently move information around the world about customers’ movement of goods. Later this year, it plans to add a “notice of intent to pay” component to the system, according to Mary DeTuerk, senior product manager for SWIFT.
But by SWIFT’s own admission, there are shortcomings. “Nobody would claim right now that SWIFT is the cheapest way to get data around from A to B,” says Andrew Muir, securities initiatives manager of SWIFT. “SWIFT does not do white-hot, leading-edge technology. SWIFT does reliable technology.”
A common complaint is that SWIFT favors the bank system and does not facilitate direct company-to-company interaction.
“SWIFT is a club,” says Celent’s Camerinelli, who points out that it only recently started allowing in corporate members on a selective basis. What’s more, says Intel’s Woodward, “They let the corporates in, but they still don’t let them talk to each other.” Rather, the banks exchange information on behalf of the buyers and sellers.
Tom Buschman, CEO of TWIST, the emerging SWIFT competitor, finishes the thought. “If you were a manufacturer, why would you put that between you and your suppliers?” The idea behind London-based TWIST is to use an open source messaging technology, unlike the proprietary technology that he claims SWIFT uses. An open approach would facilitate standard messaging and invoicing around the supply chain, he says. TWIST is building its system around a protocol called AMQP, which JP Morgan also backs.
Regardless of whether banks or newfangled financial suppliers start better serving the supply chain, there’s little doubt of the need, especially as the credit crunch stresses manufacturers’ working capital. Many experts agree that while supply chain technology has improved, the cash flow that accompanies it has not. That has to change.
“Supply chains have become so optimized that you can deliver goods to the rest of the world very quickly, but the cash flow has been managed only by the CFO. It’s had little meaning to logistics,” says Pierfrancesco Manenti, Milan-based research director for IDC Manufacturing Insights. “Logistics, supply chain guys need to evolve from a cost-related role to a more business role. They need to think more about working capital.”
Analyst Mickey North Rizza with AMR Research agrees. “Companies are trying to better understand how much cash they have inside the company, so the technology and service vendors are now starting to target the CFO, and banks are starting to talk to the supply chain.”
The common thread in all of this is information. “The reason why the cost of money is so high is because there’s been a lack information on which the funding is based,” says Intel’s Woodward.
So, may the best information mover win the supply chain finance sweepstakes. Could a Google Finance & Credit Corp. be on the horizon?