Chain reaction
David Bannister
1 April 2008
Banking Technology
Integrating the physical and financial supply chains will have benefits for both.
Over the past few years, no self-respecting conference in the payments world would be without some focus on the topic of the “financial supply chain”. Yet for all the delegate-hours expended on the topic, the industry often seems no nearer to defining what this supply chain is, let alone how banks can match their services to it.
There is a consensus, however, that it is important, and that if banks don’t get to grips with it they will lose out in a world that is moving quickly and in which new payment methods are appearing all the time.
So what is this “financial supply chain”? Surely it must have a beginning and an end? Even there, there is debate: does it begin with a request for proposal? An invitation to tender? An order?
Some even argue that there is no such thing as a financial supply chain –“there is just a supply chain that needs financing at various points”, in the words of one conference delegate.
This view has some merit, if only as a starting point. “I tend to agree with it to some extent,” says Richard Spong, financial solutions manager at Sterling Commerce, a provider of business process services. “The ‘financial supply chain’ is a phrase that has been lifted out of the corporate banking dialogue and is used to summarise something that doesn’t really exist as an isolated concept. Our view is, roughly, that in the course of supply chain activity there are activities and events that have financial consequences from time to time. These are not necessarily linear, in the sense that they are not always sequential and can’t always be linked right through, but what is emerging in the financial services sector is an interest in being able to push additional services into that interactivity, where it is appropriate and where it is profitable.”
But banks have not yet been all that successful in determining where those profitable opportunities are. “It is a very inexact science,” says Spong. “So much of the process happens on the wrong side of the corporate firewall. Banks have enough problems as it is providing electronic connectivity for customers.”
George Ravich, vice president of marketing at Fundtech, takes a slightly different view. “We do think there is such a thing as the financial supply chain, and we’ve been very active in it for a couple of years now,”he says. “The bottom line is that that yes there is a physical supply chain, but in the physical world it is all about just-intime inventory, to have all the right components on the factory floor at the right time. The parallel to that in the financial world is that it is really about just-in-time cash, so that you don’t have too much sitting around not making interest, or not taking out loans for too long.”
Ravich says that bringing these parallel streams together is the real goal of the debate, and that it will be profitable for both sides “Our vision is to expand the role of the banks. Their boundary has traditionally been with some sort of cash management and payment processing. We think that the opportunity for the banks is to extend their boundary to include e-invoicing.”
“There is a long way to go in providing the interactivity that some banks would like to push, and some, but not all, corporates would like to buy,”says Spong. Part of the issue is that large corporates tend to have multiple banking partners and not all the services from one bank are going to satisfy their needs. “The large UK supermarkets, for instance, may like the interactivity they get from HSBC, but also want to use a specific service from Barclays, say. When they are multi-banked, they can’t always get apples or pears from one supplier to compare.
“There is clearly a benefit in providing electronic interactivity between financial services and supply chain events, to both the consumer and the banks. But the technology bridges that are needed to manage that on the corporate side are quite fragmented – or don’t exist.”
And where things don’t exist, opportunities do. Spong says that Sterling will shortly announce a product development in the e-invoicing area, intended to support pan-European commercial activity, including things like multiple VAT regimes and auditing. “This is an area where there is emerging interest in dematerialising commercial paper across the European Union. E-invoicing is one example of this, but it is only one piece: what’s the next step in the chain? Providing a continuous service around this is trickier.”
A striking characteristic about this market is the role of the vendors, who are increasingly introducing generic products for both banks and their customers. “Banks have enough trouble trying to manage their internal technology without having to worry about something that is speculative and might not get any take-up. We play both sides of the fence; we sell e-invoicing directly to corporates with no financial services involvement at all. On the other hand, if banks want to provide clients with a service direct, perhaps as a hosted service, then they are able to add other services like factoring and discounts.”
Ifor Williams, director of sales and marketing at Accountis, recently acquired by Fundtech, says that invoices are just part of the paper chase. “It depends on your perspective as a buyer or as a seller, but you could start with the raising of a purchase order, purchase order acquisition, and all the way through to goods delivered and e-invoicing. It’s also things like the actual contract – the terms and conditions, facilitating agreement on the exchange of contract and things like that; all the business processes that go to make up a transaction.
“Obviously there is a focus on e-invoicing at the moment, because it’s easier to pick one of the transaction types and focus on it, but the proposition actually encompasses all of the elements of the business transaction.”
On top of that, there are the idiosyncrasies of different industries to contend with. “How a particular process tends to occur will vary in different verticals,” says Williams. “Another aspect is the issue of body-shopping, where basically you’ll get a timesheet back with the invoice. It does vary from industry to industry, so you need to have flexible management for the document workflow.
“It is about getting rid of any paperwork in any business transaction: in an ideal world, business would be transacted without any paper whatsoever.”
Simon Bailey, director of payments at Logica, says:“There is a supply chain, but it is a chimera, made up of different parts. The real point of integrating financial services into the supply chain is to reduce the cost to corporates, and that comes down to the dematerialisation of paper-based processes, and a lot of those processes have a financial element, like invoices. That’s what it is really about.”
We’ve been here before, of course: standardising the paperwork and processes pre-dates the electronic processing part – IBM has its very roots in automating the paperwork for a US census. The 1980s saw considerable efforts going into developing Electronic Document Interchange standards, with governments and their activities – tax, healthcare and social security spending departments to the fore – attempting to kick-start a revolution through their purchasing power.
These efforts met with limited success, so what’s different now? Williams thinks a number of things have changed, not least the ubiquity of computing and communications power. “EDI has worked well for very large companies, but every connection is a bespoke project, and it’s point-to-point. Where it falls down is when you have large numbers of small companies – and some of our customers have 40,000 suppliers,” he says. “One of the drivers now is widespread broadband internet connectivity, the mass adoption of ERP financial systems – and increasing numbers of people like ourselves providing ERP connectivity over the internet for corporates. There is also an increasing number of legislative changes that are allowing people to conduct business electronically.”
This has created something of a shift in power. Where once it was the purchasing power of large government departments that could drive change, the past few years have increasingly seen the power of the large corporates, which are now allowed access to the Swift network through assorted mechanisms. Thus far, such connectivity has largely been the preserve of the global mega corporations, and this has attracted criticism, particularly in the US where there are a number of consultants saying that the message needs to be spread among the smaller companies too.
This may be happening without outside help. The widespread interconnectivity that Williams points to is pushing this further into the SME business world, where some in the banking world argue that the industry should be making more efforts (see panel). Others take the view that there will be some sort of trickle-down effect, with large global companies like the car manufacturers interacting with their smaller brethren in the component supply industries, and so on down the pyramid. How far down the pyramid? “All the way to the window cleaner,” says Williams. “Window cleaners have broadband access these days.”
“With all the technology that’s available on every one’s desktop, the evolutionary issue here is that it is easier for smaller companies, who can’t necessarily afford an EDI system, to be brought into the ecosystem,” says Ravich.
So, there is a physical supply chain, and there is a set of financial services that have to be mapped to it. Given that the debate has already spanned decades, and that in the last five years there has been an accelerating trend for the web to generate whole new payment paradigms, how long is this mapping going to take?
“Will there ever be an end point? It’s a good question,” says Williams. “It is obviously an evolutionary thing and there will be greater and greater adoption. What will eventually drive it will be the back-end infrastructure supporting the communications of these documents, and that is really where the banks come in. They already have global infrastructures for the communication of payments. What we are really driving for now is that they will also have global infrastructures for the global communication of all the business documents that surround those payments.”
Talking points: the view from the Financial Supply Chain Forum
The arrival of the Single Euro Payments Area has led to the creation of a split between what banks are providing and what businesses want. This fragmentation will be further compounded in the build up to the introduction of the Payment Services Directive.
The changing relationship between banks, corporates and other players, such as the card and payment networks, formed the basis of a recent discussion held by the Financial Supply Chain Forum, part of the London-based Financial Services Club. Chaired by Eric Sepkes, recently retired as global FI strategy director EMEA, Global Transaction Services at Citi, the discussion centred around what issues banks face in bridging the gap that is still left between them and their customers.
Sepkes expounded the idea that a bank’s role is not to pay for things, but to enable those who want to buy or sell something to be able to do so, and asked how SEPA and other changes in the eurozone help people to buy and sell things?
Ashley Dowson, managing director of the SEPA Consultancy, opened with a view of how SEPA relates to the supply chain. Most banks, he suggested, think B2B means bank to bank rather than business to business. “What you should really do is rename SEPA as SEBA – the Single Euro Business Area,” he said. That said, there is also a split in the corporates between those who have embraced the paraphernalia of SEPA, such as IBANs, and those who say it has nothing to do with their business.
Some banks, generally in the top handful, have been working to capitalise on this in a business land grab, but what is more worrying for the banking industry is the entry of new players offering the services that corporates want. “There are new players out there, some of whom you’ve never heard of, which will be payments institutions in this space, such as Travelex,” Dowson said. “Travelex.com USA is all about FX but Travelex.co.uk is all about being a payment services provider – they’ve built an invoice management capability, and they’re leading the way for the future.”
With the delayed advent of the PSD will come further opportunities for new players who will harness themselves to the banks and become the big players in their turn.
Looking to 2015, the landscape is starting to look like it will consist of infrastructure players, such as the European Bankers Association, or an evolution of that; a handful of large banks like Deutsche; and a few players not currently in that space.
A second line of development is the coming together of cards and other payments players. Businesses are unlikely to be willing to continue to pay for double infrastructures from Visa, MasterCard, VocaLink and others, when they can do it all for much lower cost business-to-business, or even for free.
The forum also considered the role of government and public sector agencies. One comment, from a government agency, was that many in that sector felt that SEPA has nothing to do with the PSD, but they had been working on e-invoicing for over 25 years. Internally, this is starting to lead to the development of a mini-civil service bank.
