Banks and Supply Chain Finance: Something's Changed

I recently came across two announcements I believe deserve a comment. I wish to thank my colleague Nancy Atkinson for her precious contribution.

Background news

Metro Bank acquires SME Invoice Finance

Metro Bank created a bank model that applied to physical branches the 24x7 internet accessibility paradigm.

It started as a retail bank offering “always-open” branches and face-to-face customer relationships. It is now strongly moving up the chain and incorporating small enterprises that require very much the same service and care that of individual customers.

Deutsche Bank brings supply chain finance to the app market

Deutsche Bank (DB) is one of the global banks so not much to say more. The bank is known for being always ahead of the curve and first mover. Clear example comes from their commitment to offer SEPA-related services long while before other banks that were still questioning of what SEPA would mean to them. Last year they officially launched the Autobahn Apps Market- a collection of cash management applications that run on a cloud-based platform. These Apps have the potential of being used in a software-as-a-service (SaaS) fashion and, therefore, plugged into any system that wants to use them. In reality their use is so far limited to DB’s IT ecosystem.

Analysis

Banks have largely ceded supply chain finance for large corporations to electronic marketplaces like Primerevenue, Orbian, Ariba (an SAP company) or any of the eMarketplaces (based on industry and/or geography) identified on this website. eMarketplaces provide the information exchange between buyers and suppliers that is critical to implementing supply chain finance, while most banks (at least in the U.S.) concentrate on purchasing card (p-card) payment solutions to support SCF. When buyers use p-cards for payments to suppliers, the supplier gets their funds within two days, and the issuing bank expects the buyer to pay the bank in 30 days, thus supporting the reduction of days sales outstanding while lengthening days payables outstanding. Through the interchange pricing model, the bank gets more revenue than from per transaction pricing of ACH, wire transfer, or check payments.

Two major U.S. banks that offered eInvoicing solutions (an important component to support SCF), have sold them: Bank of America Merrill Lynch sold Paymode to Bottomline Technologies and BNY Mellon sold SourceNet to Cognizant. Further, U.S. Bank developed an in-house solution, PowerTrack, in which Visa invested and the joint venture changed the name to Syncada by Visa. Syncada has been noticeably quiet of late.

SCF banking solutions that focus on the middle-market and SMEs could be the only chance remaining for banks to stake a claim to SCF. The middle-market and SMEs need outsourced solutions that allow them to access the level of data and analysis between their company and key trading partners, to leverage that data for better liquidity and working capital management.

The mentioned announcements by Metro Bank and Deutsche Bank show both institutions are focusing their supply chain finance proposition to mid-sized companies.

Metro Bank is indeed a “bank for SMEs” while DB is the opposite. Both are however opening new channels for their clientele:

• Metro Bank to expand its products portfolio to business clients
• DB to expand its client base

Both banks are offering their SCF products via the internet to facilitate adoption and use.

In particular, DB’s offering via its Autobahn electronic distribution platform opens the way to better integration with a company’s ERP and treasury (TMS) systems. This validates the findings from my recent report on Treasury Intelligence Management Systems (TiMS)   about the necessity for TMS to expand their functionalities beyond basic bank account management and payments and become cloud-based decision support platforms for treasurers. The possibility to “plug” into a bank-provided SCF App allows a cloud-based TMS to achieve that goal, while the bank keeps control over the offered services

Similarly, Metro Bank’s 24x7 online services for business clients cover the wide spectrum of a treasurer’s needs (e.g., Bank Accounts, Deposit Accounts, Money Market Deposit Accounts, Borrowing, Business Loans, Cash Management)

The above facts validate what Aite Group anticipated: If banks want to keep control of their SCF offering they must adopt a two-pronged strategy:

1-      Educate and communicate the value of SCF to SMEs. Large corporations are already fully aware of SCF potential and have already decided whether to implement SCF projects. SMEs instead have normally been presented with SCF programs as sort of “imposition” from their large buyers. Eventually SMEs have enjoyed some benefits, but after the experience of bearing the costs to comply with the quite demanding requirements of a buyer-led SCF program. SMEs are still reluctant to SCF mostly because they lack proper and timely information

2-      “Being friends” with company treasurers by allowing them to easily access the SCF products and services from the ERP or TMS. Such ease of integration also removes the barrier of corporate IT

Bottom line

 The announcements show that both banks have focused on the “delivery” mechanism, with the objective of facilitating access and use

Aite Group will follow with attention the development of both initiatives to understand how the banks will operate when the “rubber hits the road”:

• While the entry barriers are reduced (i.e., easier for a client to use the SCF products), will it be the same for the exit barriers? How easy will it be for a company to disengage from the SCF applications?
• Are the contractual obligations for a company to adopt the offered SCF products and services simplified as much as the software is? Are the contractual entry/ exit barriers removed as well?