Extract from Financial i Supply Chain Handbook 2008

“We see technology as both a disruptive force of old processes and an enabler for new innovation. Mobile technologies will extend the reach of compute power to new functions as far as the imagination can envisage, and as the cost of CPUs and data management tumbles, massive information services on a global scale come into reach, perhaps delivered by names not yet on the corporate radar,” says Nigel Woodward, worldwide director, Financial Services, Intel. Europe’s new SEPA regulations will be a catalyst for banks to invest in technology to stay in the business at low cost or to get out of direct payments, partner with a larger bank that boasts greater economies of scale and look for new sources of revenue.

Ashley Dowson, chairman of the SEPA Consultancy, says many banks have spent the last two years coming to terms with the SEPA requirements. Since SEPA-ready payment infrastructure can cost between EUR 100 million to EUR 200 million, Dowson expects that only a handful of major European (“factory”) banks will make the investment to handle payments directly.

Dowson recalled one bank that wanted to become a more significant player in payments. After a few workshops with the bank and some of its clients, the consultants said its limited scale in just a few countries and shortcomings such as not having a multi-lingual help desk, indicated the bank should partner with a larger bank for European payments and focus on providing deeper services around supply chain finance.

Scale counts in a SEPA world

To be a player in payments in the SEPA age, a bank needs scale. Europe has 65 billion electronic transactions a year, and a bank needs approximately a 10% share of that business to thrive. Scale is extremely important for SEPA Direct Debits. Discussing SEPA as purely a payments issue underplays its impact, Dowson adds. “It is not really about payments, but about the delivery of more effective business and how to execute business in Europe to compete on the global stage. This requires STP end-to-end. In Europe, STP has meant bank-to-bank. But now public authorities want STP to include them and corporates.” Following the lead of the Scandinavian countries, Europe will move from paper to a secure electronic environment for business. Big players will scale up and smaller banks will retire legacy systems. “Whether you are a builder, developer, or dismantler of technology solutions, you will be (should be) busy,” says Dowson. Sarah Jones CEO SCFC says “Today there is a real threat that supply chain partners will not have access to financing at any cost.”

While the typical old-style approach was to beat down suppliers on price, taking 60 to 90 days to pay them while pushing customers to pay quickly, platform companies realise they should play a more supportive role towards their suppliers. Typically, the platform company has better finances and a stronger credit rating than its suppliers, at the same time it is symbiotically dependent on suppliers for its product.

“In the past, sourcing from and distributing through SMEs in developing markets and squeezing suppliers to longer terms or forcing distributors to pay early, may have just resulted in higher costs as suppliers and distributors raised their prices to compensate,” says Sarah Jones, CEO, SCF Capital. “Today there is a real threat that those supply chain partners will not have access to financing at any cost. This puts the overall supply chain at much greater risk than a year or two ago.”

Opportunities for innovative approaches to “global cash” abound for banks. Jones, who used to run treasury operations for Hewlett- Packard in EMEA, says that even the largest corporations will begin to look at their balance sheets for assets that are underleveraged. While treasurers focus on using every last bit of cash on an overnight basis, accounts receivable (AR) often sit more or less ignored for 30, 60 or 90 days until they are collected. Jones believes this is an opportunity in the waiting. She adds that trade credit insurance, usually seen as protection against bad debt writeoffs is used by 35% of companies in Europe, but only 5% then leverage a credit-enhanced portfolio of assets by financing them.

Read the entire Supply Chain Technology article (from i Supply Chain Handbook 2008)

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Filed under: Issue 6 - Autumn 08, Supply Chain