Whales need Plankton!

There are banks today that are expanding their trade business with additional supply chain financing activates and many more considering adding SCF. The results for them are good with their best corporate clients taking advantage of these added services. Unfortunately, the supply chain financing services are not being offered to the Small and Medium Enterprises (SMEs) where this type of financing is really needed. The effect is that banks are hurting their best and biggest clients who depend on SMEs to produce and consume their goods and services. As in Nature, the biggest animal the Whale lives on the smallest Plankton. Without Plankton, the Whale Dies... 

The Bank Payment Obligation (BPO), has been formalized by the ICC Banking Commission with the release of the rulebook, Uniform Rules for the BPO, earlier in 2013. This makes the BPO viable with legal standing that the industry can depend on. This will be a great tool for enhancing and securing supply chain financing particularly for the seller where it is needed most. Additionally, the BPO will serve as a replacement for low value Letters of Credit and some usages of Factoring. Unfortunately, the SWIFT TSU messaging system only sends and receives messages from Bank to Bank. The content of those messages is corporate information (POs, Invoices, etc.) which means that each bank must buy or build the component to translate corporate data into TSU format. This investment is difficult for the big banks to justify unless a corporate is requesting to use the BPO instrument. For the next level of banks (many which are sellers banks), this investment is impossible to build a business case for. 

To me one of the concerns is what I hear from banks. Banks say that none of my corporate clients are asking for the BPO, but when I say how many of your corporate clients have you explained the benefits of BPO usage with an example based on what that clients usage case would be, all I have gotten is blank stares. Is this the case of bankers not wanting to cannibalize their Letter of Credit business? Is it that putting together a business case with an ROI for their client cannot be done? The same way a bank has vendors jumping through hoops to sell them an application is the same kind of information and justification that the banks clients need in order to understand the benefits to them for supporting their transactions with the BPO instrument. Banks must be on the front lines to sell their clients on the BPO with numbers and examples that have financial meaning. Without that underlining work and it is a big effort, the BPO will not be successful. 

The corporate world has worked hard over the years to take cost out of their supply chains starting with processes like JIT (Just in Time) and strict vendor management program's. The area now that they will be focusing on for cost reduction is in their Financial Supply Chain. The convergence of the Physical and Financial Supply Chains is the next logical step. Except the market has little in available solutions to assist corporations with this goal. Unfortunately, the banks believe that it is about rates and the money side without realizing that what keeps corporate CEOs and CFOs up at night is the fear of supply chain disruption. Banks must make it simple to feed corporations their financial data into their existing physical supply chain data in order for the ability to make real time decisions that are actionable. For the banks to be comfortable with working the financial flows to optimize the corporation's cash flow, they will need solutions that provide real time visibility of the end-to-end processes of their clients for each financial trigger points. This glass pipe of data will allow banks to clearly understand the movements of goods in order to minimize their risk when lending against each trigger point. This same information that the banks need can also be used by insurance companies to rate their risks and potentially offer sliding scales of adjustable rates as those same trigger points are successfully reached.

Clearly, the banks must find a way to provide financing for the SME's in a cost effective manner, which means that compliance and on boarding costs must be made manageable. The BPO can be such a tool if the banks accept to be the evangelist to their corporations using many of the same selling techniques that vendors use when selling to those very same banks. In addition, a solution must be available that allows the next level of 500 to 1,000 banks to connect with the top 100 banks to access the BPO. Many of these banks will represent the sellers and without a cost affective way to connect the BPO will be relegated to a closed loop or 3-corner usage model. The path of evolution in the market is the convergence of the physical with the financial supply chain in a way that allows for real-time visibility where the banking is a provided service of automated data accumulation and disbursement. Those that take on these tasks will reap the benefits of growing corporate clients.