Financial Supply Chain Automation – De-Risking International Trade

International trade is fast becoming a critical focus for UK businesses to navigate out of the current economic doldrums. Yet while export opportunities are encouraging and global trade is growing fast, many organisations are struggling with the challenges of accessing finance and ensuring on time payment from overseas customers.

However, new supply chain financing options are becoming available, most notably the Bank Payment Obligation from SWIFT and the International Chamber of Commerce. The onus is now on organisations to apply the same rigour and efficiency to financial supply chains that has been standard within the physical supply chain for two decades. Improved processes for the electronic exchange of key documents, from purchase orders and invoices to transport documents, enable organisations to provide banks with visibility of these milestones in the financial supply chain. With this real time insight, banks can deliver the risk mitigation and supply chain finance solutions required to support international trade.

Marcus Hughes, Director Business Development, Bottomline Technologies, outlines the key steps that can be taken to automate invoicing, payments, financing and associated documents for buyers and suppliers, supported by their banking partners.

Global Opportunity
Global cross border trade continues to grow rapidly and is now worth around 25% of consolidated global GDP according to figures from the World Trade Organisation. However, that growth is not uniform and the fastest growth is increasingly skewed towards the Southern Hemisphere. Despite strong products, track record and experience, companies across the UK, Europe and the developed Western economies are starved of the good quality, affordable finance required to maximise global opportunities.

One of the problems is that businesses looking at international expansion for the first time are not familiar with traditional trade finance instruments such as Letters of Credit. Many are concerned about the risks associated with selling in new markets, the challenges of chasing payment and assessing how to finance international expansion. Indeed, there is strong demand for a replacement to Letters of Credit due to the long delays in the manual processing of documentation and management of discrepancies. Too often, goods arrive before the required documents.

Undoubtedly the banks have made positive inroads in improving access to new trade finance models in recent years. Supplier finance solutions (also known as reverse factoring) have leveraged the credit rating of a major buyer to provide lower cost financing to a number of key suppliers. However, the process of onboarding suppliers, who become new customers of the buyer’s bank, is extremely time consuming. As a result, in the majority of cases, supply chain financing is only available to the largest suppliers in the supply chain, and for the large part domestically.

This reverse factoring model, which relies on invoices being approved before financing can be made available, has achieved double digit growth in recent years. However, it is still extremely hard for exporters to access the pre-shipment finance required to enable businesses to buy goods or raw materials for manufacturing, processing or retailing. This pre-shipment finance is a fundamental requirement for successful international expansion. It is clear that while supplier finance has delivered some benefits, it certainly has not scaled to support the demands for alternative international supply chain finance models.

Efficient Financing

With changes to payment regulations and international trade practices there is a real opportunity to create a highly visible, streamlined financial supply chain. Key changes include the introduction of SEPA and simplified EU VAT rules, as well as the introduction of the Bank Payment Obligation (BPO) from the International Chamber of Commerce (ICC).

The BPO is an innovative payment instrument in international trade that provides the benefits of a Letter of Credit in an automated and secured environment. Effectively, the BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of ICC rules.

BPO supports interoperability between participating banks by using a standard set of ISO 20022 messages. The matching of data using ISO 20022 messages reflects events that have taken place in the physical supply chain, which create trigger points for the provision of flexible supply chain finance solutions. For example, a proposition for pre-shipment finance based upon a confirmed purchase order; or a proposition of post-shipment finance based upon an invoice that matches electronically with a purchase order.

For exporters, the BPO provides both an irrevocable undertaking to pay and establishes the future payment date. This transforms export confidence and enables companies to improve cash management by raising finance.

Achieving Expansion

The ICC is releasing its Uniform Rules for Bank Payment Obligations in April. It also recently included the BPO in its standard set of payment terms (alongside open account, LC and payment in advance etc.) which appear in the ICC’s International Sales Model Contract used by many importers and exporters globally. This level of international recognition and credibility will undoubtedly help to raise market awareness.

Growing numbers of corporates and banks are now actively exploring just how to exploit this new open account payment term with integrated payment assurance and flexible finance options. At the heart of any automated and scalable solution must be electronic data capture. Information required includes buyer and seller names, countries and banks, PO and transaction references and payment terms, as well as basic information regarding the goods being sold.

All of this information typically appears on purchase orders, invoices, transport and insurance documents. The only requirement for corporates is to implement a solution that can extract this information from ERP systems, convert it into the required ISO 20022 format and deliver it to the banks for matching in SWIFT’s Trade Services Utility (TSU).

With this information, the banks have full visibility of what has been bought, who is buying and where it is going and when payment is due. They also have automated matching between invoice and purchase order data, delivering the transparency required to mitigate risk in international trade. A SWIFT service bureau with expertise in data transformation, invoicing and corporate onboarding is ideally suited to deliver such solutions on a hosted basis. The route makes it far easier for corporates and banks to achieve the compelling benefits of improved visibility and automation of the financial supply chain.

Critically, this does not require corporates to sign up to SWIFT to gain the benefits of BPO. A flexible range of connections between the bureau and corporates can securely capture the required data flow, reformat the data and transmit this to the relevant banking partner, using SWIFT for the second part of the journey from bureau to bank. Alternatively the process can be outsourced to a bureau which submits data to the TSU on behalf of a bank, provided it lodges a Bank Identifier Code (BIC) on the bureau.

For both corporates and banks, a hosted model is looking increasingly compelling. With banks experiencing a limit on discretionary spend, few have the resources to invest in a dedicated, in-house development to support BPO. Opting for a secure SWIFT approved hosted solution will enable banks to rapidly and effectively onboard corporate customers and seamlessly access the information required to support BPO. Taking this approach creates a highly scalable, low risk model, enabling banks to tailor new supply chain financing options and reach out to a new customer base.

Changing Global Commerce
Global commerce is predicted to grow to $33 trillion by 2020. European Commission-led changes to government procurement provide significant opportunities for cross border expansion. UK organisations need to put in place robust export strategies to exploit this new opportunity. Low cost, low risk supply chain finance must be a core component of that strategy for corporates and banks alike.