Will IT automate the financial supply chain?

Every year, US$30 trillion dollars of trade in goods and services is shifted across the globe through a computerized supply chain. Buyers and sellers can access the web on their laptops, key in a given consignment number and find out what it contains, where it is and when it will arrive.

But moving in the opposite direction is the US$30 trillion of cash that pays for the whole show-grinding its way erratically across the globe, triggered by mountains of paper documents. Many of the payments are arranged by a 500-year-old system-the letter of credit-which entails a messenger presenting 30 or so documents to a bank to prove the 'compliance' of the consignment with the purchase order before the cash can be released. If three-quarters of the letters of credit have errors that delay payment, they've had a good day.

Automating purchase to payments

If billions of dollars can be saved by automating the financial supply chain with technology that already exists, what are we waiting for? A group of specialist vendors has answered the challenge by setting up hosted web-based systems able to convert all their clients' trade documents to electronic format, from purchase order-to-payment by EIPP (Electronic Invoice Presentment and Payment) transfer. In 2005, Forrester Research chose nine "Accounts Payable EIPP" vendors to analyze in detail, and four of these stand out as leaders.

"On average, American vendors TradeCard, Xign and Ariba scored better than the European vendors in most areas, especially in terms of Accounts Payable features, security and architecture," said the survey. "European vendors scored highest on technology. Basware stands out among the European vendors with current offering scores that were equal or close to those of the American vendors."

Financial services

TradeCard is a web-based system that supports a complete purchase order-to-payments cycle, including shipping documents, insurance, customs returns and warehouse receipts. The trade finance options include credit and payment insurance, factoring, and many banks services, which are facilitated by the visibility and predictable transaction times associated with electronic working.

TradeCard claims it integrates easily with SAP, JD Edwards, Intentia, Oracle and other ERP systems, and is equally easy to connect to external services, such as logistics companies and customs brokers. Implementation, including training and getting suppliers on board can take as little as 90 days.

Overall, electronic payments is a fast growing sector, says Robert Lin, TradeCard's Asia Pacific VP: "In Asia Pacific, Hong Kong, Singapore, Taiwan and South Korea are all relatively advanced, with about 20 percent of large enterprises having some form of electronic payments," he said. "For smaller companies and other locations, the figure drops to 10 percent and below."

In Hong Kong, regulations are no obstacle and the government tends to endorse electronic working, said Lin. "Local companies are ready to adopt new supply chain systems, but their partners across the border or overseas may be more difficult to persuade," he said.

"Banks are key players in the payments world, but they are not in the business of providing technology solutions," said Lin. "Users may reject bank specific solutions for electronic payments, because there is a loss of neutrality. What happens to their payments at a later date if he needs to switch banks? One way forward is for banks to use white label purchase-to-payments systems such as TradeCard."

Even then, there's a catch, said Lin: "Banks that automate labor-intensive manual payments systems face the stigma of restructuring and reorganizing their staff. Also, banks charge high rates for manual processes and customers might expect a reduction in charges with automation, so banks might see this as cannibalization."

Lack of standards

BasWare also offers an end-to-end solution for the purchase-to-pay process. The customer benefits from a unified solution from purchasing through e-invoicing or scanning to matching and, if necessary, state-of-the-art invoice processing. The systems can be integrated with any ERP or finance system in the market, said Jari Tavi, BasWare's CTO.

"The lack of global standards (or obsolete and inadequate standards) means governments cannot endorse electronic trade sufficiently", said Tavi. "The most promising standard, introduced by Oasis, is UBL 2.0, which is based on XML and defines e-commerce messages related to catalogs, purchase orders, shipping and e-invoicing."

The Nordic region of Europe introduced a harmonized payment infrastructure that halved the cost of payment transactions from two percent to one percent in 10 years, said Tavi.

"Consequently, the EU has defined the SEPA (Single Euro Payment Area) standard that will be in place during 2008," said Tavi. "Commercial standardization efforts, driven by companies like ABN Amro, Citigroup, GE and HP, include an exciting proposal called TWIST, which targets the paperless and electronic transactions for management of the treasury related operations, including payments and third party financing transactions."

Xign is another specialized vendor that creates electronic documents and makes EIPP payments to the bank ACH (Automated Clearing House). Xign is used by 35 of the Fortune 500 companies.

ERP or accounting applications are used as systems of record for the transactions executed by the Xign system, said Chris Rauen, marketing manager.

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