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Unlocking Working Capital with Supply Chain Finance

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Unlocking Working Capital with Supply Chain Finance 1

By Oliver Belin, Marketing Lead at Marco Polo Network

As companies become increasingly global in scale and physical supply chains are gaining in complexity, financial supply chains are also becoming more complex. The result is an increase in risk of supply chain disruption that

companies need to proactively manage. Supply Chain Finance programs have become a popular way for leading corporates to protect their supply chain and minimize the risk of disruptions.

Companies recognize the importance of working capital management to support their business in difficult times, and many have begun to look across the financial supply chain for opportunities to unlock trapped cash. In fact, generating additional cash flow through better management of working capital is a route that is being adopted by most leading organizations. With enough examples of successful implementations in the marketplace, Supply Chain Finance has emerged as the most popular solution for working capital management. This article describes the importance of liquidity for organizations and how working capital trapped in supply chains can be unlocked with Supply Chain Finance.

Liquidity, cash flow and working capital

The strategic management of liquidity, cash flow and working capital is essential to the survival and growth of any company. As the economy rebounds from the aftermath of the global recession, corporations have been taking stronger action to generate additional cash flow by managing their working capital more efficiently. Proactive management of working capital is also being mandated by the fact that cash requirements are underpinning strategic decision-making.

Past experience indicates that the priority given to cash and working capital management tends to have an inverse relationship with economic performance. In periods of contraction or sluggish growth, cash and working capital issues rise to the top of the boardroom agenda. When prosperity returns, the focus shifts elsewhere. However, the past is not necessarily an accurate predictor of the future.

Today, even though the last economic crisis is more than a decade old, the cheap finance that fueled the preceding boom is nothing more than a rapidly fading memory. Given this new reality, there has been a sustained shift in corporate behavior, with effective cash and working capital management rising to the top of the corporate agenda yet again. A recent survey supports this trend by showing that a majority of CFOs have been holding larger cash balances as a strong priority. For these CFOs, the next step is to identify the options available to unlock the working capital trapped in their ever-complex supply chains.

Importance of Cash Management[1]

Unlocking working capital in the supply chain

Oliver Belin

Oliver Belin

With multiple factors governing a company’s working capital performance, there are some aspects such as input costs that are beyond control as well as other factors which can be managed, controlled, and improved through strategic measures. These measures include: managing the firm’s inventory efficiently, collecting cash from customers early, and extending payment terms to suppliers.

Currently, the most common measure to manage working capital performance adopted by corporations worldwide is extending supplier payment terms, since it is an easy short-term action. However, seller actions run contrary within supplier organizations where the focus is on sustainable receivables improvement and getting paid earlier. With many suppliers undergoing financial stress, extending payment terms cause an increasing concern for buying organizations over the stability of their supply chain.

Furthermore, this approach often results in a domino-effect as suppliers respond by adopting similar measures with their own supplier base. Hence, a huge amount of working capital is being locked up across the entire supply chain.

Companies often underestimate their ability to extend payment terms with their suppliers. They lack awareness of financing opportunities that would add value to the firm, while strengthening relationships with suppliers.

Supply Chain Finance is increasingly being seen as the solution to this dilemma.  Supply Chain Finance addresses two challenges simultaneously. It allows the buying organization to extend their payment terms in order to improve their working capital, whilst minimizing the risks to continuity of supply by allowing their suppliers to get paid earlier at attractive financing terms.

Supply chain finance unlocks working capital

In today’s market, there is a very strong demand for Supply Chain Finance from large buying organizations as well as their suppliers. Companies from various industries have already implemented Supply Chain Finance programs and achieved more than $100 Million in additional cash flow within just a few months.

Many corporations realize that Supply Chain Finance is not only about improving their working capital but also reducing the risk in their supply chain and improving relationship with their trading partners. Additionally, governments across the world are recognizing the importance of providing ongoing liquidity sources to local businesses and boosting the use of Supply Chain Finance as an innovative way to ease the funding squeeze for many smaller companies.

What is Supply Chain Finance?

Supply Chain Finance, or Reverse Factoring, is a solution that helps meet corporate objectives including:  working capital, EBITA, and mitigating supply chain risks. It allows corporates to increase their payment terms and/or provide the option to their suppliers to get paid early.

How does Supply Chain Finance work?

Supply Chain Finance allows a buying organization to optimize its payment terms to its suppliers and improve its working capital. At the same time, it gives the option to its suppliers to receive early payment based on attractive financing rates.

The funding rate is based on the buyer’s credit worthiness or rating rather than on the supplier.

  • In practice, the supplier submits invoices to the buyer as before for approval following a commercial transaction.
  • The buyer approves the supplier’s invoice for payment and electronically transmits the payment instruction to the Supply Chain Finance Platform.
  • The supplier is notified and has full visibility on future dated receivables on the Supply Chain Finance Platform.
  • The supplier has the option to trade his invoices immediately and get access to cash by one of the funders or, alternatively, can choose to wait until invoices are due.
  • On invoice payment due date, the Supply Chain Finance retrieves the full amount of the invoice from the buyer in settlement of any discount or (if discount has not taken place) effects payment to the supplier.

[1] http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-spotlight-november-2011.pdf

Finance

The Psychology Behind a Strong Security Culture in the Financial Sector

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The Psychology Behind a Strong Security Culture in the Financial Sector 2

By Javvad Malik, Security Awareness Advocate at KnowBe4

Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.

Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.

With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.

Defining Security Culture: The Seven Dimensions

In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:

  • Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
  • Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
  • Cognition: The understanding, knowledge and awareness of security threats and issues.
  • Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
  • Compliance: Written security policies and the extent that employees adhere to them.
  • Norms: Unwritten rules of conduct in an organisation.
  • Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.

All of these dimensions are inextricably interlinked; should one falter so too would the others.

The Bearing of Banks and Financial Institutions

Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.

Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.

Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.

Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.

Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?

Towards Achieving Excellence

There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.

By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.

Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.

Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.

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Finance

Has lockdown marked the end of cash as we know it?

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Has lockdown marked the end of cash as we know it? 3

By James Booth, VP of Payment Partnerships EMEA, PPRO

Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.

Has cashless gone viral?

Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.

Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.

More choice than ever before

Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them[1].

As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z[2].

Does social distancing mean financial exclusion?

As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.

There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.

Supporting the transition away from cash

Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.

Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies 4
  • UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
  • This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.

The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide.  The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland.  The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.

With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs.  Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.

The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites.  UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.

Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies.  Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”

Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”

Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship.  Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems.  We look forward to working together on further partnership as we move forward.”

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