New Practices and Opportunities in Supply Chain Finance

Agenda

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• Urs Kern, SWIFT: An update on the Bank Payment Obligation

• David Hennah, Misys: Technology Innovations in Trade and Supply Chain Finance

• Ravichander Varadarajan, ING Vysya Bank: A Perspective on India and Cross Border Supply Chain Finance

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Evolution of international trade – risk mitigation and financing

First UCP

LCs loosing share in world trade

Trade finance instruments based on open account payment are increasing. First supplier finance products

Bank Payment Obligation

1933

Since about1960

Since about1990

2013

90 years

Innovation in SCF – The BPO; 13th March 2014, Istanbul

Bank Payment Obligation (BPO)

What is BPO? The Bank Payment Obligation is a new payment term based on data

matching which can be used for risk mitigation and financing!

Irrevocable

concrete & conditional

What are the general criteria

of a BPO?

„A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank in accordance with the conditions specified in an established baseline.“

(Extract from the URBPO)

What is new?For the first time an open account payment obligation can be confirmed by

banks in order to get financed. The ICC supports the market launch with the

release of unified rules (URBPO).

Innovation in SCF – The BPO; 13th March 2014, Istanbul

Payment risk mitigation instrument

Communication Channel

Communication standard

Three components for electronic matching of commercial trade data

ISO 20022 TSMT(Trade Service Management)

Between Banks:

TMA (Trade Matching Application)

BPO

(Bank Payment Obligation)

Between customer and banks:

Bilaterally to be agreed(Portal/SWIFT Score/Paper)

Innovation in SCF – The BPO; 13th March 2014, Istanbul

The BPO based on electronic data matching

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Matching of contract data

Transfer of funds

Matching of data

Buyer Seller

1) Sign contract (PO)

2) PO data 3) SO data

4) Match PO/SO data & confirm

6) Match requested datasets & confirm

5) Datasets

8) Transfer funds

7) Debit buyer 9) Pay sellerFIN

TMA=Transaction Matching Application, PO= Purchase Order; SO= Sales Order

TMA

Bank A Bank B

Buyer Seller

Bank A Bank B

TMA

Buyer Seller

Bank A Bank B

BPO is established

BPO is due

Trade is settled

5) Datasets

Innovation in SCF – The BPO; 13th March 2014, Istanbul

BPO as compared to Letters of Credit and Open Account

BPO enhances the LC process while addressing Open Account challenges

• Electronic presentation of data instead of physical documents - Improve quality and objectivity of compliance verification

• Quicker process as it focuses only on data relevant for financing

• Can be added at any time, for any amount value

• Sellers gain certainty of the timing of cash flow and can improve liquidity forecasts

• Sellers may use BPO to get pre-/post-shipment finance through their own bank

• Sellers can offer commercial incentives

• Buyers are able to reduce supply default risk

Compared to Letters of Credit… ….Compared to Open Account• Sellers get pre-/post-shipment financing to

support working capital needs – no need for loans or revolving credit lines

• Sellers can negotiate earlier payment terms as Buyers have better access to financing using BPO

• Buyers can extend payment terms from their own banks

• Improve transaction tracking and payment reconciliation

• Establish and maintain successful win-win trade relationships

• Reduce on-boarding and operational costs

Innovation in SCF – The BPO; 13th March 2014, Istanbul

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• Limited buyer-seller relationships • Target “wealthy” and risk-free corporates • Based on proprietary formats and channels• Business relationship with Trade Service Provider

Summary: Supply Chain Finance for corporatesOpen 4-corner vs. closed 3-corner business model

• Large and growing trade players worldwide • Any corporate irrespective of their risk profile • Requires open and interoperable standards • Business relationship stays with the banks

BPO

Buyer/Importer

Seller/Exporter

Exporter’s bank

Importer’s bank

Risk, financing & processing services

Risk, financing & processingservices

Routing and Settlement

Routing and Settlement

Production(Market)

Distribution(Client)

Business relationship & liability

+a/c

+a/c

Processing platform

Contract TMA

Processing platform

Business relationship & liability

Buyer/Importer

Seller/Exporter

Service Provider

Risk & processing services

Financingservices Routing and

Settlement

Production(Market)

Distribution(Client)

+a/c

Processing platform

Contract

+a/c

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BPO adoption grows steadily

Counter Count

Banking groups adopting BPO 55

Banking groups live on BPO 7

Corporates live on BPO 22

Banking groups ready for live use of BPO 17

Banking groups reachable on TSU 83

BIC8s reachable on TSU 146

BIC8s and BIC11s reachable on TSU 225

Countries reachable on TSU 45

BPO certified applications 5 for Banks4 for Corporates

BPO certified consultants 2

Innovation in SCF – The BPO; 13th March 2014, Istanbul

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Live BPO banksBanks with live transactions + 1 corporate case study

Live Banks Region Intra / Inter-bank transations

Locations of live corporate supply chains

Corporate case study

Bank of China APAC Intra in ChinaInter

CN Ito Yokado’s Chinese suppliers

Bank of Tokyo Mitsubishi UFJ

APAC IntraInter

CN, HK, JP, SG, TH, TW

Ito YokadoMitsubishi-Shindoh Co.,Ltd.MSM (Thailand)Vale

Korea Exchange Bank APAC Inter KR OMRON Automotive Electronics Korea Co.Ltd.

Standard Chartered Bank

APACEMEA

Intra BE, OM, TH, AE

BP ChemicalsOctalPTT Polymer Marketing Co in Thailand Polymer Marketing DMCC in Dubai

Siam Commercial Bank APAC Inter TH PTT Polymer Marketing Co

Hua Nan Bank APAC Inter TW Importer in TW

Bangkok Bank APAC Inter TH Exporter in TH

Technology Innovation in Supply Chain Finance

David Hennah, Head of Trade, Misys

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Emerging Trade Flows & Trade Corridors

Re-shaping the strategic approach of corporates and banks.

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Growth in International Trade

Year World Trade(WTO data)

Total Volume of LCs on SWIFT

Estimated Value of LCs

% world trade on LC (by value)

1970 USD 2 trillion USD 1.0 trillion 50.0

2000 USD 6 trillion 4.5 million USD 1.5 trillion 25.0

2010 USD 15 trillion 4.6 million USD 2.5 trillion 18.0

2020 (est) USD 33 trillion 4.7 million USD 3.5 trillion 11.0

Conclusion: if industry forecasts for growth prove correct, by 2020 we could have an additional USD 17 trillion worth of open account trade in respect of which banks will compete through innovative financial supply chain solutions.

Supply Chain Finance: the long view.....

Supply Chain FinanceTraditional trade Open Account

• Letters of Credit• Collections

• Standby letters of credit• Guarantees

• PO Commitment to Pay• Pre-shipment finance• Warehouse finance

• Post-shipment finance• Approved payables finance

• Receivables purchase• Etc

• Structured Trade Finance• Commodity Trade Finance

• Islamic Trade Finance• Bills discounted

• Factoring• Forfaiting

• Credit insurance• Etc

ANY Financial Solution that can be appliedto help a corporate

(a) optimise its working capital and (b) minimise its operational costs/risks associated with supply chain processes

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The challenge and the opportunity in Supply Chain Finance

New messaging standards / new rules /

new operating procedures

Continued growth in volume and value of

world trade (USD trillion by 2020)

Continued migration to open account (80/90% of

the market)

In the face of evolving market conditions and competition how can your bank retain and grow its trade business?

Regulatory requirements / capital

constraints

Demand for innovative solutions taking

advantage of trigger points in supply chain

Technology / automation a critical enabler of SCF

schemes

Supplier on-boarding, KYC, AML etc

Approved payables is a buyer-led proposition by which the bank provides financing to a clients’ suppliers by purchasing their Open Account receivables at a discount

Buyer centric solutionsExample and benefits for supplier finance solution

Buyer Supplier

Financial institution

2 Receivable purchase offer

1 Payable / Payment instruction

Buyer Supplier

Financial institution

3 Purchase acceptance / Sells receivable

4 Remits funds

Buyer Supplier

Financial institution

5 Disbursement of payment; settlement of invoice

Day 2 Day 3 Day 60

• The supplier can immediately discount the receivable

• Automatic discount is possible• The bank remits the funds to the

supplier (same day or next day payment

• The buyer funds a disbursement account via account payable process at maturity

• The Bank debits the buyer’s disbursement account for the full amount of the payment on due date (e.g. Day 60)

• The Buyer approves supplier’s invoice and electronically instructs the bank to pay the supplier on a future date

• The supplier is notified of a payment from the buyer scheduled for a future date (e.g. Day 60)

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Seller centric solutions -invoice discounting process flow

• 1 The supplier ships goods to the buyer and produces an invoice

• 2 The supplier sends a request for financing to the financial institution

• 2 The supplier sells it’s receivable of one or more buyer to the financial institution

• 3 The financial institution remits funds to the supplier (receivable minus a discount)

Buyer Supplier

Financial institution

2 Receivable purchase offer / Sells account receivable

Buyer Supplier

Financial institution

3 Remits funds (80%)

Day 3 Day 180

• 3 buyer pays the client (supplier) at maturity

• 4 supplier forwards payment to the financial institution at maturity

• Or the financial institution gets payment from the buyer(s)

3 Payment at maturity

Receivables finance is a supplier-led proposition by which the bank provides financing to the client (supplier/exporter) by purchasing their Open Account receivables at a discount

1 goods

Payment at maturity

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SUPPLY CHAIN FINANCE MARKETClosed 3-corner business model likely to evolve into open 4-corner

model BPO has a role to play here

Business relationship & liability

Buyer/Importer

Seller/Exporter

Service Provider

Risk & processing services

Financingservices Routing and

Settlement

Production(Market)

Distribution(Client)

+a/c

Processing platform

Contract

+a/c

• Focused on limited set of buyer-seller relationships • Demand driven by cash rich importers • Use of proprietary standards and channels• Relationships managed by central Service Provider • Significant supplier on-boarding issues

BPO

Buyer/Importer

Seller/Exporter

Exporter’s bank

Importer’s bank

Risk, financing & processing

services

Risk, financing & processingservices

Routing and Settlement

Routing and Settlement

Production(Market)

Distribution(Client)

Business relationship & liability

+a/c

+a/c

Processing platform

Contract

• Supports partnership banking globally • Applicable across the risk spectrum • Open, interoperable rules and standards • Relationships maintained by local banks • Supplier on-boarding not an obstacle

Processing platform

BPO Factoring Forfaiting

Automated versus manual

Fully automated Manual Manual

Financing % of transaction

up to 100% < 100% 100%

Availability across transaction lifecycle

Pre-shipment & post-shipment

Post-shipment Post-shipment

Risk (1) Bank risk (impact on capital reqts/cost)

Corporate risk Bank risk (impact on capital reqts/ cost)

Risk (2) Transaction Portfolio Transaction

Recourse Without With/without Without

Track record Developing Established Established

Standardised international rules

URBPO GRIF URF 800

Thank You

www.misys.com

Thank You

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