The Evolving Bank-to-Corporate Relationship in the Post-SEPA Environment
With the single euro payments area (SEPA) coming into effect this month, new landscapes will be drawn in the payments world that will change the way banks and their corporate clients interact. Some commentators are noting that if banks take a more active role in the financial supply chain, intermediating themselves at all stages, they will be able to offer their corporate clients an increased and improved range of services. These could include cash forecasting, supplier financing, and other more advanced working capital services.
Concerned at the loss of revenues in some parts of the payments business, financial institutions are keen to seek new sources of revenue. Many have targeted the financial supply chain and in particular the transactions that occur between corporates in which they currently play only a minimal part. Such transactions start with the purchase order (PO) and finish with the payment advice and subsequent invoice reconciliation, included in this chain is the invoice.
Getting more involved in the financial supply chain by offering value added services is a way for banks to replace the revenues that will be lost in the SEPA world, but will also generate greater customer loyalty and open up new markets both national and cross border.
To date, there has been piecemeal automation of the financial supply chain by both banks and corporates. However, technology is now sufficiently advanced to enable a scenario in which the different chain of events can be linked, through more advanced mapping technologies and a general move to standardisation corporate straight-through processing (STP) is becoming possible. An STP infrastructure, where data flow is automated along all points of the financial supply chain will give corporates total near real-time visibility of their business activity, from receipt of electronic PO’s from their customers, through to electronic invoices and subsequent buyer payment initiation. These new sources of information will provide the basis for the value added services that the banks will be able to offer.
Unfortunately for banks and corporates, there are still differing views on what is needed. For some banks, understanding how they can play a role in certain parts of the supply chain can be a challenge. Take, for instance, the PO, which occurs at the very start of the financial supply chain and is the beginning of the flow of funds that takes place when a corporate does business. As soon as a supplier receives the PO, it can seek funding, this information can also be used for cash forecasting by the treasurer.
There is a rich supply of such information all along the financial supply chain but at present it remains largely untapped. This is best illustrated by comparing the physical supply chain with the financial supply chain. In most large manufacturing organisations the movement of goods has been fully automated – at any given time a corporate can track where a particular item is and when it will arrive at its target destination. Not so in the financial supply chain; it is almost impossible for corporates to identify at what stage a payment is in the financial supply chain or to automatically reconcile its credit advice with the original invoice, in nearly all countries and corporates this is still a manual process.
If banks can intermediate themselves at all stages in the financial supply chain, they will be able to help corporates overcome this problem by aggregating all of the information relating to the financial supply chain and offering services such as supplier financing cash forecasting and other working capital services in a much more targeted fashion.
If corporates can achieve STP on the main processes in the financial supply chain, they will get the same efficiency in their back offices as the banks currently enjoy. There is a disparity, however, between what banks think are the appropriate services for corporates and what their corporate customers think.
One of the reasons for this is that the corporate world is not easy – it is heterogeneous, comprising large, medium and small enterprises from a diverse range of industries. What suits the large multinational corporate with subsidiaries throughout Europe will not, of course, be appropriate for a medium or small sized business that conducts most of its business within its domestic market. The large corporates want better working capital management so they can put all their liquidity to the best possible use. Smaller organisations want to improve their cash flows, which are currently hindered by breaks in the financial supply chain.
Add to this diversity another complicating factor – some domestic organisations are very large and have significant payments volumes. The vast majority of payments undertaken by Europe’s public authorities and utility companies are domestic – how will banks convince these players to migrate their payments on to more efficient, SEPA-based instruments when so little of their business is related to cross-border payments?
Why then should a corporate consider restructuring its payments processes? First, it will achieve sufficient efficiencies if it automates its back office processes, moving initially to electronic invoicing (e-invoicing). Second, once that process starts, banks can provide new services on top of this, which will enable the corporate to consider a much broader range of services. If the corporate can automate its back office it will be able to gain more accurate information about its treasury operations, thus de-risking many elements. It should also be able to get better finance and credit deals because these will be based on actual positions rather than estimates or historical data.
If the banks take a more active role in the financial supply chain, this distance between corporate and banks could be closed significantly. For example, with the move to corporate STP a bank could insource the accounts receivable (A/R) and accounts payable (A/P) functions of a corporate, this would remove a significant cost to the corporate and the new information flows could provide more efficient financing options. Some corporates may have difficulty with this scenario but there is a very large number that spend an inordinate amount of time managing their cash flows as their buyers extend their payment terms.
Doing this enables the information generated by the different steps in the financial supply chain that currently flows around the bank to flow through the bank. This will enable the bank to see everything that is happening in the chain and to structure its offerings accordingly.
It is only once automation has taken place that information can be truly exploited. The technology to do this has existed for some time, but not in a form that corporates have been able to work with. For example, electronic invoicing has been around for quite some time but is only just beginning to take off. One reason it stalled is that it was not ‘joined up’ with the rest of the financial supply chain. For example, large corporates gained efficiencies in their A/P departments through electronic invoicing but not elsewhere, corporate STP should be a CFO’s priority.
The information resident in the financial supply chain can only truly be exploited if STP is present along the entire chain. This will then deliver visibility of transactions and all the benefits that come with that.
One of the key issues for large corporates is working capital management. In Europe around €580bn in cash in excess working capital sits around in corporates’ bank accounts. A CFO’s worth is calculated on how well he or she manages the working capital of the business.
Financial supply chain automation will help corporates to tap into the information they need to better manage their working capital. Banks can provide real-time information that will enable corporates to unlock the cash in the supply chain, thus enabling them to better negotiate financing deals. These deals will reflect their real positions, rather than any historical figures.
Having been talked about for some time now, e-invoicing is taking off. The Nordic countries in particular have, through bank-wide cooperation, made great strides in this area and are offering their corporate clients, both large and very small, both B2B and B2C electronic invoicing capabilities.
There is no doubt that the introduction of SEPA will create profound changes in the relationship between banks and corporates. Banks will need to adopt a proactive approach to their corporate relationships and one of the key components to a successful relationship will be how fast banks can bring their new services or product offerings to market. By doing this and intermediating themselves in the financial supply chain, banks will be able to provide solutions that corporates until now have very often only dreamed of.