SME credit crunch: New spirit of cooperation promises accelerated supply chain financing growth
Swift and the International Chamber of Commerce's Banking Commission in recent weeks published new legal and technology standards for bank payment obligations, a payment term that allows buyers and suppliers to secure and finance international trade transactions. Will this turbo-charge supply chain financing adoption?
The new standards advanced by Swift and the International Chamber of Commerce (ICC) offer a combination of legally binding rules and electronic messaging norms, establishing uniform practices for bank payment obligation (BPO) market adoption. The authors hope these will provide a foundation for banks to develop risk and financing services aligned with today’s technology.
The BPO is an irrevocable conditional undertaking to pay given from one bank to another, which is executed electronically unlike traditional letters of credit. The format is also standardized, aimed at boosting the efficiency of communication between banks and corporate clients, in contrast to bespoke, bilateral documentation that takes longer to process.
|André Casterman, global head of corporate and supply chain markets at Swift|
“The BPO is designed to resolve the contradiction between buyers, which want to delay payment as long as possible, and suppliers, which want to be paid as soon as possible,” says André Casterman, global head of corporate and supply chain markets at Swift. “It allows the banks to support extended payment terms for the buyers and provide pre-shipment financing for suppliers, so everyone gets what they want via their preferred banking partners.”
In a whitepaper looking at issues around supply chain financing (SCF), Swift had cited a number of factors hampering the growth of SCF, including the inconvenience for suppliers in dealing with their buyers’ banks, rather than their own.
On the banks’ side, it is also an additional cost to conduct the necessary know-your-customer checks on their clients’ suppliers. A greater level of standardization between banks and products would also encourage further growth, Swift concluded.
By standardizing the processes, BPO makes it easier to involve suppliers’ banks, which are better placed to assess performance risk. This makes it easier to provide financing to smaller companies, and at different times throughout the process, says Casterman.
“It will be much easier to provide things like pre-shipment finance, which is a higher margin business, right through to payment from the moment the invoice is raised, before it has been approved,” he says.
“When extending post-shipment financing to the seller, the seller’s bank will not require invoices to be approved by the buyer as the BPO issued by the buyer’s bank will be used as collateral.
“Taking a bank risk instead of a corporate risk is a much more acceptable set-up for the seller’s bank to take on.”
Maureen Sullivan, North American trade sales head of global trade and supply chain solutions at Bank of America Merrill Lynch (BAML), adds: “Banks have been challenged by the need to offer SCF. There is a considerable technology investment needed to be active in this space, and not all banks are willing to do that, but increasing the standardization of the business certainly makes it easier.”
Says Steve Box, head of global trade and receivables finance for Europe at HSBC: “Selling and promoting SCF is not difficult – implementing and running successful programmes is.
“Implementing programmes requires considerable work and resource, from legal structure, data transfer and IT through to a supplier contact strategy and on-boarding. Any bank embarking on SCF needs a sizeable dedicated team, or the ability to leverage a wider existing infrastructure to support the programmes.”
However, once the investment is made, the business is scalable and replicable, and as the business grows and banks dedicate resources to it, that growth should build momentum.
The BPO is only one part of the increasing cooperation needed to move the business forward, says Sullivan.
As more SCF programmes are launched, the credit facilities required are growing, which will require a new level of collaboration among the banks, she says, adding: “As a community we need to do a better job of streamlining the process, bringing in new investors and building up our distribution capabilities.”
This should help usher in a new phase of growth, allowing SCF to address the credit crunch on SMEs.
According to Tim Breedon, the former CEO of Legal & General and author of the Breedon Report – examining the supply of credit for businesses – the gap between what British companies need to borrow and what banks are willing to lend could reach £191 billion by 2017.
Breedon cited SCF as part of the solution to this problem, but although a version of the product has made considerable advances in Spain, in the UK growth has been more modest. It appears to be hard to motivate the big companies to get involved, while some suppliers are suspicious.
Starting at a low level, the numbers are still impressive. In terms of SCF finance mandates, BAML alone saw a 70% increase in new mandate transactions since the start of 2012, and a 40% increase in existing facilities in Q1 2013 compared with the same period in 2012.
Growth at other top-tier banks involved in the business is likely to be along similar lines, analysts say.
Interest is building fastest among the biggest multinational corporations, says Jeremy Shaw, global head of supply chain finance and head of EMEA trade finance at JPMorgan.
“We see an ever-increasing number of RFPs and most multinational corporations either have a SCF programme in place or are actively looking at one,” he says. “Many multinationals also have multiple programmes serving different geographies so that they can best help their suppliers across the globe.”