Electronic commerce, initially a consumer market phenomenon, is becoming firmly entrenched in the corporate space. The emergence of cloud-based treasury solutions and the digitisation of trade flows represent step changes in treasury and trade finance. Combined, digitisation and cloud technology have the potential to transform the way market participants communicate and transact with each other.
Business is happening between corporates in an increasingly digital way, says André Casterman, Head of Corporates and Supply Chain, SWIFT. “The digitisation of corporate trade flows has come a very long way and now even the most difficult to digitise processes are being transformed.”
Cloud-based treasury solutions are transforming corporate treasuries. The amount of treasury time and effort required to manage a cloud-based solution is lower and implementation timelines are shorter. Corporates that previously could not afford standalone solutions from the main treasury systems vendors now find new capabilities have opened up to them. The subscription based pricing of cloud solutions also offers significant cash flow advantages for these corporates when compared with the large up-front capital cost of a software licence for a standalone system. As a result, a new segment of corporates can afford to improve their treasury processes by using purpose-built treasury management solutions.
At the same time, ecommerce and electronic invoice hubs, which enable businesses to communicate with each other digitally, have proliferated. Such platforms connect buyers and suppliers around the world, enabling manufacturers, wholesalers and exporters to discover trade opportunities. At present the market is diverse, ranging from very large business-to-business hubs through to hundreds of smaller, country-specific or niche industry hubs. Many of these hubs are also based on cloud applications and services.
The digital supply chain
The combination of cloud technology and hubs has set the scene for a new, digital era of the supply chain. The supply chain finance (SCF) market – the term used by banks to refer to approved payables financing or early payment services – has grown significantly during the past five years. The now widely available SCF solutions offered by banks and non-bank technology providers have been built on the fact that buyers and sellers wish to work collaboratively, where both parties gain advantage, as large buyers aim to support their suppliers’ working capital needs.
“Accelerating the lifecycle of trade transactions enhances the attractiveness of both the buyer and seller as it mitigates risk in international trade while also enabling improvements in payment terms. Banks also stand to benefit from lower costs and reduced operational risks associated with the manual processing of LCs,” André Casterman adds.
“We have seen a trend lately that banks and corporates are beginning to adopt trade finance messages to communicate with each other and further automate their trade finance activities,” notes Yves Smeyers, Principal Consultant, SWIFT.
Typically buyers facilitate early payments to their suppliers via one of their banking partners. Buyers therefore approve invoices as early as possible in the process in order to maximise the financing opportunity for suppliers in need of working capital.
SCF services also validate the fact that banks are ready to extend financing to their clients using electronic and automated transaction flows as they have done in payments and cash management services for more than 20 years.
The digitisation of the supply chain is well illustrated by the transformation of one of the most manual processes in world trade – the bill of lading. The document, issued by a carrier, contains details of a shipment of merchandise and gives title of that shipment to a specified party. Bills of lading are important documents used in international trade to help guarantee that exporters receive payment and importers receive merchandise.
Organisations such as essDOCS and Dubai Trade have been involved in the digitisation of bills of lading, working with the freight forwarders that issue them. Because electronic bills of lading are legally and functionally the same as paper bills of lading, they are ideally suited for automated handling by bank systems.
The automated handling is made possible via another new digital trade instrument, the Bank Payment Obligation (BPO). An alternative means of settlement in international trade, the BPO provides the benefits of a letter of credit (LC) in an automated environment. Importantly for banks, it offers the possibility of intermediation earlier in the supply chain by offering risk mitigation and financing services.
A BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a specified event (such as delivery of goods) has taken place. The specified event is evidenced by a match report that is generated by transaction matching applications (such as SWIFT’s Trade Services Utility). BPOs can be incorporated into matching applications through a buyer’s bank or a third party bank. The BPO is due when data is accurately matched or when all financial institutions involved in the transaction have accepted any mismatches or discrepancies.
This process results in a fully electronic alternative to the letter of credit (LC), which will enable efficiency gains, working capital reduction and cost saving. This electronic alternative can be processed in a much shorter time than traditional, paper-based LCs – estimates are as low as 10-15 days. Reduced processing times result in significant cost savings: Brazilian mining company Vale estimates that a combination of electronic bills of lading and BPOs is saving it $37 million per year on its exports of iron ore to China alone.
Accelerated cash flow through the faster collections made possible by the BPO can reduce days sales outstanding (DSO) by 50-65%. Furthermore, operational costs can be reduced from 10-30% as fewer full time staff are involved in the preparation of paper documents. Finally, liquidity can be more rapidly released from the financial supply chain to boost working capital and banking fees can be reduced by up to a half as handling fees are reduced.
Risk management benefits of automation
The cost savings that result from combining electronic bills of lading with the BPO are attractive, but Casterman adds there is an even greater benefit: “Accelerating the lifecycle of trade transactions enhances the attractiveness of both the buyer and seller as it mitigates risk in international trade while also enabling improvements in payment terms. Banks also stand to benefit from lower costs and reduced operational risks associated with the manual processing of LCs,” he says.
The adoption rate of BPOs is steadily increasing, but it is likely use will be predominantly for ongoing and recurring trade flows where some level of trust has been already established between the counterparties. Industries such as commodities, electronics and retail, which have established trade flows between suppliers and buyers, will represent the greatest opportunity for growth. Cloud solutions and digitised trade flows require economies of scale to really flourish – the more banks that issue BPOs, the more correspondent trade relationships will become electronic and therefore the more trade transactions can become electronic.
“The automation of the supply chain is not solely about technology; it is an area that also requires collaboration between all of the parties involved in trade,” says Casterman. “The development of the BPO has proved that the industry can come together to solve a problem and that as a result, everyone stands to gain.”
Standards have played an important role in this collaboration as they facilitate competition between commercial offerings while enabling those offerings to interoperate.
In supply chain finance, banks have developed new legal and technology standards to address interoperability challenges and to grow the size of this emerging market. Another automation trend, based on standards, is emerging in the corporate-to-bank space, says Yves Smeyers. Increasingly, corporates and banks are adopting the trade finance messages to communicate with each other. “Most of the message flows between corporates and banks are payments and cash management series,” he says. “However, we have seen a trend lately that banks and corporates are beginning to adopt trade finance messages as well to communicate with each other and further automate their trade finance activities.”