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Stick, TWIST or Buy..? Oh dear, BUST..!

First of all, credit where credit is due - the title concept is attributable to one of my colleagues, not me - thank you Howard!

Yesterday evening we attended a lively Financial Services Club session of the Supply Chain Management Forum focus group chaired by Eric Sepkes. The guest speaker was Shaun Maine, who happens to be Chairman of the TWIST Technical Committee so hence the more tenuous of the links to the title and theme.

The intended topic of discussion was: Which Technologies should Banks focus upon in the Supply Chain?

However, I think it would be fair to say that, with circa 70% of the participants coming from technology vendors, the conclusion was rapidly reached that the right technology is available, proven in other industries and affordable. The real questions are; whether banks really have the appetite to risk change, and whether corporates trust banks to understand the supply chain?

As an aside, I think there was also broad agreement that increasingly in an "open account" environment the shift is from performance risk to credit risk in the supply chain. This should be good for banks because they understand credit risk, but then there is the challenge of having limited credit risk data available for SMEs - but maybe banks could collaborate here?

Anyway, back to the risk appetite question and hence the main link to the title and theme...

Firstly, are banks really motivated to get into this space?

In other industries we have seen transparency in the supply chain improve in leaps and bounds using available technology. Just take on-line shopping where, for example, as a consumer you can see exactly where your order is in the process and even once its left the suppliers doors you can then use a reference number to check the status on-line through the courier company. For these companies, transparency and speed of delivery are good things.

BUT, for banks, which are making money on payment balances sitting around in their systems for a period of time, are they really motivated to start providing similar transparency and speed. Isn't it the regulators, with initiatives like UK Faster Payments, PSD and SEPA, that are pushing them kicking and screaming towards the edge of the cliff?

Secondly, even if you don't buy the commercial argument for intransigence, are banks prepared to take risk of change to legacy technology?

Many banks are still running systems that have changed little over the past 15, 20 or even more, years! Changing all or part of something that old is a risky business. Let's take the analogy of a vintage car: I used to run an old Mini, but it developed a problem - one of its drive shafts broke. So two choices really (other than buy a new car - but I'll come back to that option)... 1) Try to find a replacement part of similar age, wear and tear that would minimise the impact on the well oiled workings of the rest of the engine, or 2) Buy a new part.

Option 1) is like a bank fixing or adding to its existing technology by writing bespoke software on the legacy platform - a route that is becoming increasingly expensive with resources being harder to find, unlikely to deliver the state-of-the art functionality that the market really demands, but less likely to cause the rest of the systems a problem.

Option 2) is the equivalent of implementing a new modern piece of technology that provides all the visibility and real-time whistles and bells the market and the bank would like - but this would expose the weaknesses in the rest of the systems and the strain may be too much for them to bear - BUST!

I chose option 2) for my Mini, and ended up having to buy a new car anyway for exactly the same reasons!

Here's a thought... The days when the adage that you are more likely to leave your wife than your bank are fast disappearing (although, I have to admit to being foolish enough to stay with my bank for over 25 years! And what did I get for our Silver anniversary? Probably a £30 bank charge for being 50p overdrawn!). Anyway, people are increasingly less shy of changing bank and are not so fazed by new brands...

So perhaps the solution to the original problem of risk and trust is to set up a green-field operation with a new brand, which provides the opportunity to build trust, and new scalable technology, which will not impact that well-oiled legacy machine?

Finally, to finish off a mammoth blog for the weekend, just a quick thought around the subject of nanotubes (http://en.wikipedia.org/wiki/Carbon_nanotube), which Eric threw into the mix for the last 10 minutes of the session.

Nanotubes are extremely thin (less than a hair) but incredibly strong - an example of new quantum technology that will potentially lead to being able to "build" anything from its atomic constituents and thus change our way of life.

So, picking up on this train of thought (maybe a bit laterally), Banking really hasn't changed must in the past 30 years and is grappling and struggling with changes now... perhaps the industry should just resign itself to the fact that Gene Roddenberry (http://en.wikipedia.org/wiki/Gene_Roddenberry) was right and stop trying to adapt...

In 30 years time, technology will have created a world without money, payments and supply chains - we will all just need replicator rations!

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Comments: (1)

A Finextra member
A Finextra member 28 November, 2007, 20:40Be the first to give this comment the thumbs up 0 likes

There are a couple problems I see for banks trying to get into supply-chain-finance.  First is their stove pipes, and second I don't think they really understand the risk involved.

I don't know what can be done about their stove pipes.  Cross-selling has always been a problem for big financial institutions because they can never agree who controls the customer, who gets credit for sales, and because there is some overlap in the products different bank units offer customers there's a reluctance to involve another vertical line of business if the referring line-of-business risks losing future income.

But more importantly, too many banks still think they're making loans to suppliers.  Face it, loans is what banks have been doing with their legacy software and legacy think for a long long time.  Probably since before there was software to become legacy.

After fraud--which is more often than not perpetrated by bank officers themselves--the biggest risk is obligor payment risk.  The probability of any item being paid relies more heavily on the obligor than the supplier.  Face it, if the obligor doesn't pay the supplier the latter can threaten to shut-down a manufacturing line--which is a pretty big stick.

Yet still, too many financial institutions exploring this space ask suppliers for more information to finance $500,000 worth of trade payables than a mortgage bank would ask me for to buy a $500,000 home.  Sure, they can limit their products to investment-grade obligors and suppliers but anyone can do that.  And investment-grade suppliers have more financing options already so the market isn't as big as it is with non-investment-grade suppliers.

I'm pretty confident that the first FI to understand they're not making loans to suppliers but are instead financing a gap between obligation and remittence and basis its financing cost on a buyer's credit and payment history rather than the suppliers could own the space. 

Alan Goodrich

Alan Goodrich

Regional Sales Manager

ERI

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This post is from a series of posts in the group:

Financial Supply Chain

In the world of international trade, the process of exchanging payments, information and documents between buyers, sellers, banks, and other involved parties is becoming increasingly important for financial institutions. This community aims at presenting views and innovative ideas related to this financial supply chain space.


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