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Developments in Financing the Corporate A view of the future for the academic staff of Trinity College Dublin Ian Armour iCST Ltd 14 th June 2007.

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Presentation on theme: "Developments in Financing the Corporate A view of the future for the academic staff of Trinity College Dublin Ian Armour iCST Ltd 14 th June 2007."— Presentation transcript:

1 Developments in Financing the Corporate A view of the future for the academic staff of Trinity College Dublin Ian Armour iCST Ltd 14 th June 2007

2 Global Trends Product realignment & development needs to leverage global trends in a rapidly changing business environment : Some of McKinseys current top 10 global trends: Technological connectivity will transform the way people live & interact – we have only just begun that change The role & behaviour of big business will come under increasing scrutiny – Corporates need to behave transparently & justify their social value Demand for natural resources will grow as will the strain on the environment – corporates need to take a lead in developing sustainable products The next 3 are key for existing businesses…. iCST Ltd - June 2007

3 Global Trends New global industry structures are emerging –non-traditional business models are flourishing –in many industries there are a few giants at the top, a narrowing mid-sector and then a flourish of small fast-moving players at the bottom –corporate borders are becoming blurred as interlinked ecosystems of suppliers, producers and customers emerge Management will go from an Art to a Science –more complex companies need new tools to run & manage themselves –todays business leaders are adopting algorithmic decision- making tools –information management is changing from a source of competitive advantage to a pre-requisite for being in the game iCST Ltd - June 2007

4 Global Trends Ubiquitous access to information is changing the economics of knowledge –this change is more profound than just the instantaneous access to large quantities of information –new models of knowledge production, access, distribution & ownership are emerging –open-source knowledge development will be driven by communities not individuals –companies will need to learn how to leverage the new knowledge universe iCST Ltd - June 2007

5 Corporate Trends Businesses are becoming more agile, demand-driven –Stockpiling inventory was an expensive & counter-productive method used to buffer shifts in demand in the last century –Buffering is being replaced by growing interdependence of supply chain partners who share information rapidly & collaborate closely –Enterprise service buses are now so powerful & capable that they can be used on a large scale to overcome information & process differences among partners & power the exchange of vast amounts of information in near real time –Corporates expect their financiers to become part of their collaborative network, making the cash flows as precise as the exchange of information, goods & services iCST Ltd - June 2007

6 Joining two Hemispheres A real performance step change is achievable with a clear roadmap to automate the interaction of the physical and financial supply chains Seller Buyer or Receive & Approve invoice Match PO, GRN & Invoice Receive Items Approve delivery Update inventory Create Goods Received Note Receive pre-advice of shipment (May) Receive Purchase Order Acceptance Buyer ERP or Accounting System + Match & reconcile financial information… Communication with Banks, trade facilitators & service providers Source Items Catalogue Auction Reverse Auction RFQ process Approve Payment Schedule payment/ instruct bank etc Create Remittance Advice Communicating between trading counterparties Respond to Queries & Disputes Raise Invoice Schedule & Initiate Delivery Source Items Ex-stock Manufacture Part-fulfilment Split delivery Receive Customer Order Receive Payment May reconcile RA with Invoice Update client account Effect Payment with or without Remittance Advice Validate & approve order: Item availability Credit check Terms of trade Create Purchase Order PO POA Deliver items (logistics) Invoice Resolve Queries & Disputes Send Revised Invoice? Send Credit Note? Creates & sends Advance Shipment Notice or Despatch Advice prior to shipping goods DA ASN GRN Raise Queries & Disputes or Buyer Source Items Catalogue Auction Reverse Auction RFQ process Seller or Receive & Approve invoice Match PO, GRN & Invoice Receive Items Approve delivery Update inventory Create Goods Received Note Receive pre-advice of shipment (May) Receive Purchase Order Acceptance ERP or Accounting System + Match & reconcile financial information… Communication with Banks, trade facilitators & service providers Approve Payment Schedule payment/ instruct bank etc Create Remittance Advice Communicating between trading counterparties Respond to Queries & Disputes Raise Invoice Schedule & Initiate Delivery Source Items Ex-stock Manufacture Part-fulfilment Split delivery Receive Customer Order Receive Payment May reconcile RA with Invoice Update client account Effect Payment with or without Remittance Advice Validate & approve order: Item availability Credit check Terms of trade Create Purchase Order PO POA Deliver items (logistics) Invoice Resolve Queries & Disputes Send Revised Invoice? Send Credit Note? Creates & sends Advance Shipment Notice or Despatch Advice prior to shipping goods DA ASN GRN Raise Queries & Disputes or Business Process flow & Key Documents iCST Ltd - June 2007

7 Seller Buyer or Receive & Approve invoice Match PO, GRN & Invoice Receive Items Approve delivery Update inventory Create Goods Received Note Receive pre-advice of shipment May Receive Purchase Order Acceptance ERP or Accounting System + Match & reconcile financial information… Communication with Banks, trade facilitators & service providers Source Items Catalogue Auction Reverse Auction RFQ process Approve Payment Schedule payment/ instruct bank etc Create Remittance Advice Communicating between trading counterparties Respond to Queries & Disputes Raise Invoice Schedule & Initiate Delivery Source Items Receive Customer Order Receive Payment Effect Payment with or without Remittance Advice Validate & approve order Create Purchase Order PO POA Deliver items (logistics) Invoice Resolve Queries & Disputes Send Revised Invoice? Send Credit Note? Creates & sends Advance Shipment Notice or Despatch Advice prior to shipping goods DA ASN GRN Raise Queries & Disputes or Financial Services interact with the process Paying Bank Receive Bank Versus Payment Commitment Versus Accepted Invoice Versus Issued Invoice Versus DA/ASN Versus POA Versus PO Credit Funding ServicesCredit Funding SWIFT TSU SWIFT TSU Services iCST Ltd - June 2007

8 Where Does The Bank Get Involved? Order Delivery (PO to ASN or DA) 1-3 Days Transmit Payment 4-7 days Resolve Exceptions days 20 to 120+ Days to convert a received Order to Cash Resolve Exceptions days Despatch Delivery Match Receivables with Remittance Advices X days?... Supplier View Buyer View Monitor Outstandings & Credit Limits days Buyer Receive & Route Invoice days Process & Approve Invoice 2-10 days Create & Send Order (PO) Day 1 Seller Check ASN/DA Create GRN Intra-day Send Invoice 4-7 days Discovery, Pre- Procurement Negotiation & Forward Intent Advice Bidding/ Response, Planning & Materials Forward Order Can Be Months Pre-Sales Finance Factoring Payment Processing Performance Guarantees Working Capital Finance / Inventory Financing Stock & Work-in-Progress Financing Letters of CreditPayment Guarantees iCST Ltd - June 2007

9 All over it – but not integrated Banks are delivering a wide range of niche products & special applications Customer –Confused & concerned about the cost of finance Bank –Expensive cost of delivery / delivery silos –Overly complex risk assessment –Failure to gain internal synergies and efficient use of capital iCST Ltd - June 2007

10 The Opportunity for Banks Integrate the lending products to give a unified risk landscape thereby: –Optimising return on bank capital –Providing understandable and justifiable financing costs to customers –To introduce new financial products with higher margins iCST Ltd - June 2007

11 Basel II encourages lenders to base their pricing on the risk timeline – successful ones will Information on the Transaction Status becomes time critical PO InvoiceGRN ASN POA Invoice? iCST Ltd - June 2007

12 Banks Must Meet Corporate Needs Working Capital Finance that targets specific transactions offering –pre-production finance, –shipment finance –the funding & management of receivables Pricing which reflects risk Enabling Suppliers to secure funding against the credit status of a large corporate Customer Offering Suppliers more financially efficient structures than factoring and invoice discounting Pricing that is transparent & based on the most complete knowledge of the status of the transaction Must offer Corporates working capital –in a quantity they choose, –at a price they choose –whenever they choose iCST Ltd - June 2007

13 Central Message Exchange SupplierBuyer Invoice PO GRN Remittance Advice Statement Transaction Data & History Payment Payment Message Tracker Certainty of Payment Guarantee Earlier invoice visibility & increased funding period Supply Chain Financing based on POs iCST Ltd - June 2007

14 The Threat to Banks: behind every carrot comes the stick If the banks do not occupy this space, others will The result will be the disintermediation of many existing corporate banking products with a consequent loss of profits to the banks Banks will be forced further back into the payments niche iCST Ltd - June 2007

15 Forrester Copyright Sept 2005

16 Corporates get savings Huge savings in printing, post & administration Full traceability & interlinking of invoices, credit notes & remittances - improved debtor reconciliation Real value added through pressure to "pay-on-time" - UK average is currently 56 days to pay But what about the Banks? iCST Ltd - June 2007

17 Xign Schematic Other banks make do with payments traffic For the house bank Financing opportunities

18 Cash Management today - A simplistic captive relationship Buyer Seller's Bank Buyer's Bank Rating Agency Info about Buyer Info about Seller Cash surplus (minus 70bp) Cash shortage (Plus 125bp) Buyer keeps cash by extending Payment Terms Seller gets cash by encouraging early payment using discounts Seller iCST Ltd - June 2007

19 Future - Competitive Financing Corporates will utilise event data to build a long history of their supply chain relationships & partner reliability Based on that view & a credit agency rating, corporates with cash surpluses will provide cash to their trading partners using Dynamic Discounting getting a better return on their surplus cash than depositing with banks or reducing their overdrafts Corporates will use electronic exchanges to show a panel of banks selected financing opportunities & auction their debt to the highest bidder Factoring will become eBay for invoices Lending timescales & rates will be based on the bi- lateral trading history of the corporates iCST Ltd - June 2007

20 Cash Management Tomorrow - free access Rating Agency Info Business Event Network Value Added Services iFacX Securitisation Vehicle Bank Independent FinancingBank Financing Open Lending Exchange Relationship Lending Global Settlement Notes Dynamic Discounting Any Bank Any Bank Buyer Seller Info iCST Ltd - June 2007

21 Will the banks respond? With the exception of Xign/JPMChase, no significant bank supplier is yet showing an appreciation of all the possibilities Banks have the presence to dominate the market & optimise the financial supply chain –breaking out of their "payment niche" –enabling efficient, open & transparent payments and cash management –opening the door to a host of new services But they need to get up to speed soon… iCST Ltd - June 2007

22 Banks have the potential to integrate the market Banks can reach out to the whole B2B community - every company has a banking relationship. IT companies by comparison have few customers The rapid deployment of an information exchange is needed; banks already have established virtual private networks Corporates trust their bank to secure commercially sensitive data Banks are used to co-operating to create an efficient marketplace iCST Ltd - June 2007

23 But: Can Banks eat their children? The new products will kill existing cash cows –Securitisation will kill corporate lending for the mid- market (written before the 2008 crash – but still true in the long term) –eBay for invoices will kill factoring for the SME market –Dynamic discounting will dent the overdraft market Can they face up to Corporate Payment Netting –Banks know how to do this; they net between themselves –They could choose to host netting for clients, or they can just watch payment volumes crash along with fee income iCST Ltd - June 2007

24 Central Message Exchange SupplierBuyer Invoice PO GRN Remittance Advice Statement Transaction Data & History Payment Payment Message Tracker Bank Independent Financing Invoice Securitisation for smaller companies iFacX Factoring Exchange Direct FX broker access for SMEs Multilateral Netting for Corporates iCST Ltd - June 2007

25 In Conclusion B2B financing is going to change radically in the next 5-10 years (2007 – 2017) Customer Expectation is the driver –Fuelled by cheap ubiquitous computing power The banks know it is going to happen –But will not drive it, they have too much to loose Banks will have to get involved sooner or later Corporates need to provoke the change –By encouraging suppliers –By sponsoring pilot projects –By publication of the ideas –By adopting a common model iCST Ltd - June 2007

26 acX Core Service – Tracker History & Audit VAS Notification of Overdue Invoices VAS Multi-lateral Netting document events document details iFacX iCST Reference Model cash events cash details Data Server Interface reconcilitaion events Tradocs EIPP Suppliers Burns Basware Xign Northgate Interface Buyers Suppliers Core Service Customer Views Core Service Customer Help Core Service Billing Business Event Interface Business Event Interface Business Event Interface Data Server Interface SWIFT BACS Target LINK CHAPS RTNS SWIFT Core Service Customer Registration VAS Bi-lateral Netting VAS Late Payment Penalty Interest VAS Early Payment Discount Loss Warning VAS Invoice Securitisation VAS Invoice Discounting VAS Rating Agency Data ERPs Microsoft Sterling Commerce ERPs Working Capital Service Interface Optional Formatting Layer iCST Copyright


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