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Financial Supply Chain Management Continues to Evolve

Financial supply chain management continues to evolve as a promising business line for banks, particularly as corporate clients look to maximize efficiencies during the economic downturn. But creating connections among all the participants in the supply chain remains a challenge.

In the world of treasury management, corporates (at least the largest ones) have always placed pressure on their banks to provide innovative products and services designed to optimize performance and cost savings. In the current economic environment, their petitions are likely to become louder as companies are impelled to shore up their working capital and every new expenditure is subjected to intense scrutiny.

With the world economy in flux, banks and their clients want to find even more ways to squeeze efficiencies out of their systems. One area that is ripe for reevaluation is financial supply chain management (FSCM). FSCM consists of services that bring together data and transactions from trade and payments activity in a manner that provides the parties in the supply chain with all the information they need to effectively complete their business transactions -- at least, that is the ideal for which banks, corporates and technology vendors strive. In reality, FSCM is still evolving, and the services and technologies that crop up to support it need room to incubate. At its core, however, FSCM is about efficiency -- something that never goes out of fashion, particularly in tough times.

"The economy could have an impact on how we deal with our corporates, but it presents an interesting opportunity," notes Bill Grace, VP, global treasury management product manager, with Cleveland-based KeyBank ($101 billion in assets). "Everyone will want solutions that focus on doing more with less. If the ROI is attractive and helps reduce overhead, that's where the success will be."

According to Jim Gahagan, global industry executive for financial services with Columbus, Ohio-based business process integration provider Sterling Commerce, until things settle down in the markets, controlling cost will play an even greater role in companies' purchasing decisions. "The economic situation is the overriding factor in any technology investment for banks and corporates today," he says. "Any technology initiative is under more scrutiny around its ROI. But streamlining the interactive supply chain is a value to corporates, and they understand this."

To Christopher Baker, SVP and trade executive for the Americas and Europe for Charlotte, N.C.-based Bank of America ($1.7 trillion in assets), it certainly is not "business as usual" for the bank as it deals with its commercial customers. "As the economy tightens, liquidity follows," he explains. "But there is a recognition that if a supplier needs faster working capital turnaround, there is a greater willingness and recognition [that it is] a co-equal in the supply chain ecosystem. As we build the global supply chain for key buyers, suppliers and financial intermediaries, they will all see they have a stake in making it work efficiently. It's a mentality that will grow."

But always at the core of FSCM is process optimization, adds Ian Watkinson, head of e-invoicing with Edinburgh-based The Royal Bank of Scotland (RBS; US$3.5 trillion in assets). "The trend among our customers is that they are looking at ways to optimize their processes," he relates. "That's the heart of what they are seeking."

A Portal Into Supply Chain Activity

While banks take numerous approaches to meeting the FSCM needs of their corporate clients, some services are fundamental to any FSCM offering. For instance, the portal concept has been gaining steam. These Web-based hubs are designed as repositories of information for the buyers (banks' corporate clients) as well as the suppliers in the chain.

According to Enrico Camerinelli, a senior analyst in Boston-based Celent's banking group, "visibility portals" are key to supply chain management. "Visibility portals are where the buyers and suppliers meet and exchange bills and invoices," he explains.

Christopher Doroszczyk, a principal in the financial services arena with New York-based Deloitte, says portals should constitute the core of FSCM offerings. "The biggest technology today in this area is around client access -- the ability of banks' clients to access a plethora of services offered by the financial institution," he relates.

When this is combined with other services, such as electronic invoicing and the integration of supplier invoices with buyers' payments, banks have a well-rounded supply finance offering, claims Doroszczyk. "This is beyond a Web portal because you're offering different services and the ability to settle in different markets where the portal lets you check transactions and pay," he continues. "It connects corporates' ERP [enterprise resource planning] systems to the portal, their positive pay to the portal -- they can do reconciliation and can move to different liquidity activities. It's like a portal on steroids."

According to George Ravich, CMO with Fundtech in Jersey City, N.J., more visibility enables banks and their corporate clients to more efficiently fund the supply chain. "It's like just-in-time cash," Ravich comments. "This drives the working capital needs of a company. It's a business we think the banks should get into."

Peter Radcliffe, executive chairman of Accountis, a Fundtech company that provides an e-invoicing solution, says visibility into the financial supply chain creates opportunities for banks. "This will allow banks to provide services like invoice discounting and factoring, and they won't have to handle paper," he notes. "They receive an electronic copy of the invoice, and they know it has been received by the purchaser and that it's scheduled for a payment. This gives the bank a greater opportunity to be more dynamic."

Creating an End-to-End Supply Chain Solution

This past year, RBS went live with the Accountis solution. The e-invoicing service complements bank clients' ERP systems, says the bank's Watkinson. "We want to help clients process invoice information in a cost-effective and compliant manner," he explains. "We want to support and complement their ERP systems. ... We want to help them get the information in and out efficiently."

One way RBS supports its corporate clients is by helping to on-board their trading partners to the service hub. "We're creating a network where all the participants can connect to each other," Watkinson relates. "We host and run the service. It is ERP-independent, plus we don't force our customers to change their accounting systems. It is easy to use because it interfaces with their ERP systems."

Most of the large, money center banks are attempting to establish this kind of hub. Mike Quinn, managing director responsible for product management in the global trade services unit of JPMorgan ($1.8 trillion in assets), says the New York-based bank is committed to creating an end-to-end trade finance solution for its large corporate clients.

"Our services range from classifying a part for duty purposes to license determination to clearance of goods resulting in cash," he relates. "Straight-through processing is more than just going from point to point. This is taking data from its inception and enhancing it in the physical and financial supply chain."

BofA's Baker looks at FSCM as the convergence of trade and treasury management. "It involves aggregating those technologies for the best value proposition for our clients," he explains. "Banks have been investing to upgrade and globalize their infrastructure to bring clients greater value."

The bank offers Bank of America Direct Trade Services, an integrated trade and treasury platform for its clients. An important component of the service, according to Baker, is electronic document preparation, which helps cut down on paper pushing. However, he notes, whether a bank builds in-house or with a technology partner, there is no one-size-fits-all solution for FSCM, as each client will have specific needs.

According to Deloitte's Doroszczyk, developing an integrated FSCM solution still requires a high degree of technology customization. "There's nothing off-the-shelf yet," he says. Due to the varying requirements of the different industries banks deal with, it just isn't feasible to develop a plain vanilla solution, Doroszczyk adds. "To develop the supply chain concept, banks have to be detailed to the industry they're dealing with," he explains.

Making Connections

Currently, BofA's Baker says, his bank is working to plug into its clients' systems. "Our challenge now is to seamlessly integrate with our clients," he relates. "With global supply chain [management], the key is the linkages you create. Connecting with and integrating the buyer and seller in multiple markets and meeting local finance needs requires a good deal of work."

Not only must banks create linkages to their clients, they also must establish connections to other financial institutions. Some of the largest corporates can have dozens of financial institution relationships due to the number of countries in which they do business. But Sterling Commerce's Gahagan says many businesses wish they could cut down on the number of banks with which they must deal.

"Corporate treasurers want to simplify their overall bank relationships. They want flexibility without having to deal with every bank in every country," he explains. "You won't see corporates dealing with just one bank, but there will be fewer of them, especially as the banks create linkages with clients' systems. Corporates want creative ways to streamline the interface with their banks." Gahagan notes that Sterling offers a solution that helps corporate treasurers centralize the message flows among their systems and their banks' systems so they have more flexibility to work with multiple financial institutions in their supply chain dealings.

However, the challenges of banks embedding themselves into their corporates' ERP systems go beyond technology -- a shift in mind-set also is required, says Steven Starace, director and head of trade and supply chain finance with technology services firm CGI (Montreal). "It's a struggle -- you're not just selling the corporate a product; you must also be a collaborator," he remarks. "And you're not just working with one department in the corporation anymore, either. Both sides are going through an evolution to be more open and collaborative."

For many banks, this process is proving to be a challenge, says SWIFT's Chris Conn, regional solutions manager, supply chain services. "This is going to take a lot of hard work because [FSCM] is outside banks' traditional trade discipline," he asserts. "It can be a challenge for some banks because they now must deal with the logistics department, even the merchandising department in some cases."

As a result of this transformation in their services, banks are beginning to remake their sales forces and are even hiring people from the physical supply chain world and teaming them with traditional trade bankers. "Once banks have articulated the value proposition, corporates are receptive to it," Conn adds.

SEPA: Simplifying FSCM

One initiative that may simplify FSCM is the Single Euro Payments Area. Now that SEPA has officially gone into effect, corporations that do business throughout the European Union not only receive a more equitable price on cross-border payments, they also may be able to more easily trim their banking relationships. There also is hope for banks in simplifying their payments infrastructures to accommodate the more commoditized system -- at least for those banks that can see beyond losing a source of fee revenue, experts say.

Celent's Camerinelli says SEPA goes hand in hand with FSCM. "SEPA offers a common [payments] platform so that banks can concentrate on offering more-valuable services and more STP," he comments. "The value of SEPA is full supply chain integration -- everything becomes easier from a technology perspective."

Sterling Commerce's Gahagan agrees that SEPA will have an impact on the FSCM area. "This is going to help simplify and unify things onto a single set of standards for transacting business across borders," he contends. "It's going to enable the physical and financial supply chains to converge." But, he points out, "Just because SEPA is 'official' doesn't mean everyone is using it yet."

Eventually, however, SEPA will help strengthen the supply chain, JPMorgan's Quinn suggests. The initiative promotes the use of standards and, ultimately, will help streamline FSCM, he says.

But Aaron McPherson, Financial Insights' practice director in payments and security, says banks are simply not ready for SEPA. "What the banks have been able to muster so far are consolidated payments in the EU," he says. "There are large cost savings there. This is good because SEPA provides efficiency. But no European banks are using it as a driver for financial supply chain management. Deutsche Bank is probably the furthest along with SEPA, but they haven't hooked it up with their financial supply chain management platform. They can do both, but they're not on a unified platform yet."

Moving Beyond the Concept Stage

McPherson says FSCM is in a similar place in its development to where enterprise payments were four years ago. "There's still a lot of debate around what kind of information and services to include and a lot of skepticism over whether banks can get their acts together," he explains. "In about three to five years we'll see some real movement here because it's still in the concept stage. It will take time to do all the integration."

One idea McPherson believes will help more banks expand their supply chain services is to enable e-invoicing using the check image exchange networks. "There's a lot of potential here for the image exchange networks to hold images of paper invoices to serve as a bridge technology," he explains. "The image archives might want to get in on this kind of business as check volumes and [transaction revenue] go down."

He adds that just as Check 21 allowed the image archives to provide a transition between paper and electronic check clearing, perhaps the same can be done for e-invoices. "Using this approach will pay dividends in the financial supply chain area," McPherson says. "It might be a good compromise since a typical buyer may have some suppliers that are more electronically enabled than others."

Leveraging existing technologies and bringing them into the FSCM space is also the way Cynthia von Hollen, principal for financial services with SAP (Walldorf, Germany), sees things evolving. "I think we always see a big focus on innovative payments at the consumer level," she relates. "As these new technologies advance, I think they will move into the corporate area as well. So how will mobile payments, standard payments formats such as ACH IAT [international ACH standard] or RFID [remote frequency identification] work on the supply chain side?"

Although there are many possibilities for new technologies to crop up around FSCM, BofA's Baker thinks the market will see an evolution of existing technologies. "The challenge will be to build an end-to-end global solution that leverages the infrastructure and to bring best-in-class services to clients. It will require more integration of systems and a refinement of existing technology into a cohesive whole so they can be deployed globally. Most of the technology is there, but not everyone is able to use it."

KeyBank's Grace says he will keep a sharp eye on any new technology developments in the FSCM area since the bank is preparing to relaunch its FSCM business in the coming months. But he also believes most advances will involve tweaking existing technology. "There are certainly other technologies that will be available. But I think the next big thing will be around creating even further integration into clients' ERP systems and their everyday operations," he comments.

According to SWIFT's Conn, the biggest challenge to the development of FSCM as a profitable business line for banks is the number of parties involved. "There are millions of individual players in hundreds of countries. But we see banks as the entry point in many respects. As banks come on board and provide services, they will need to be tailored to the needs of the various end points," he says. "Standardization will lead to greater adoption and maturation of financial supply chain management."

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