In this blog post, I will explore some of the recent digital innovations that are paving the way for XAI-embedded SLAs and how these can benefit service providers and customers. 

The First Digital Innovation: Algorithmic Contract Types 

If you want to create and sell bonds, you need to specify how and when you will pay back the money to the buyers. If these financial assets are converted into digital tokens that represent their value and ownership, you can use smart contracts to code these rules into the tokens. Smart contracts are self-executing agreements that run on a blockchain. They can automatically check if the conditions of the contract are met and trigger the payments accordingly. This way, you can make sure that the bondholders receive their money on time and that you follow the regulations of the market.

By tokenizing digital assets, financial operators can create more efficient and transparent services for their clients. Here are some of the benefits of tokenizing digital assets: 

• Real-time balance sheet: Tokenized digital assets can be tracked and verified on a distributed ledger that records transactions and ensures their security and immutability. With these, financial operators can provide their clients with accurate, up-to-date views of their assets and liabilities without relying on intermediaries or manual processes. 
• Deterministic cash flows and price discovery: Tokenized digital assets can be programmed with smart contracts, enabling financial operators to automate the execution of payments, dividends, interest, and fees based on predefined triggers and events. Moreover, tokenized digital assets can be traded on decentralized exchanges, where buyers and sellers can discover the fair market price of the assets without intermediaries or manipulation. 
• Transparent liquidity terms with financial contracts: Tokenized digital assets can be used to create more flexible and customized financial contracts, such as loans, bonds, and derivatives. By tokenizing the underlying assets and the contractual terms, financial operators can offer their clients more transparent and tailored liquidity options, such as early repayment, collateralization, and risk management. 

The Algorithmic Contract Type Unified Standard (ACTUS) Financial Research Foundation¹ developed and curated the ACTUS Data Standard, which defines a universal set of legal terms used as parameters throughout the different financial agreements. It is implemented in the form of a data dictionary with attribute applicability by contract type. A second standard, the ACTUS Algorithmic Standard, defines the logic embedded in legal agreements that eventually turn the contract terms into actual cash flows or, more generally, business events.

With the core data of digital assets tokenized and embedded within the ACTUS standards, financial operators can offer clients real-time balance sheets through deterministic cash flows and price discovery. This enables machine-auditable and automated execution of transactions and more transparent liquidity terms with financial contracts.

Nucleus Finance, a fintech company, is developing Tokenization-as-a-Service solutions that translate financial instrument data into ACTUS smart financial contracts on the Casper blockchain². As a native financial digital asset, the token is machine-readable and executable for faster trading and settlement. 

The Second and Third Digital Innovations: Fuzzy Logic and XAI 

Fuzzy logic and XAI are two distinct concepts that can be used together to create more transparent and interpretable AI systems.  

Fuzzy logic is a mathematical framework that allows for the representation of uncertainty and imprecision in data. It is based on the idea that, in many cases, the concept of ‘true’ or ‘false’ is too restrictive—that there are many shades of gray in between. The fundamental concept of fuzzy logic is the membership function that defines the degree of membership of an input value to a certain set or category. The characteristics of an entity subject to personal evaluation (e.g., easy to use, improves quality of work) can be assigned quantifiable metrics based on the collective (i.e., membership) assessment constantly reviewed and calculated by the underlying algorithms. 

XAI, on the other hand, refers to the development of AI systems that can provide clear and understandable explanations for their decisions and actions. It contrasts with the concept of the “black box” in machine learning, where even their designers cannot explain why the AI arrived at a specific decision. Fuzzy sets can offer an effective paradigm for supporting an accurate understanding of natural language and building efficient linkages to human intelligence through concepts and computing with membership functions for XAI³. 

Temenos, a banking software company, launched a Software-as-a-Service XAI model based on ‘type 2’ fuzzy logic that leverages static and transactional data patterns, coupled with human judgment and expertise, to provide easy-to-understand explanations in human language to users, helping them identify why exceptions occurred and relay that information back to regulators and customers⁴. 

So, What Are XAI-Embedded SLAs? 

One of the challenges of digital innovation is to establish SLAs that reflect the value of the solutions provided. Traditional IT services can be evaluated based on quantitative indicators such as availability, performance, and reliability. However, digital solutions often affect the experience of users in more subtle and subjective ways. Therefore, SLAs for digital innovation should include qualitative indicators that capture the aspects of user experience (UX), such as customer engagement, client satisfaction, brand loyalty, or ease of use. 

UX is a broad term that encompasses the emotions, perceptions, and behaviors of users when they interact with a product or service. UX is often measured with subjective or qualitative indicators that are hard to quantify, but they are essential for creating value and differentiation in the competitive digital market. So, how can providers incorporate the UX value of one provider into their SLAs in a way that can be measured according to a standard reference and comparable with other providers’ UX? 

One possible way I envision to implement this approach is to use XAI-based algorithmic contract types that ingest “fuzzy” indicators and apply them as digital tokens to a financial transaction. While “traditional” indicators for UX are measured through surveys, feedback, reviews, ratings, or other methods that collect user opinions and preferences “offline” of the transaction, the data to measure XAI-embedded SLAs is collected “online” by the token throughout the transaction life cycle. The token feeds the collected data into the AI engine that calculates and attributes the relative quantitative values, compares them with the SLA metrics, and produces the results that the “explainable” component of the engine allows the human to interpret. A score for the “UX value” can be determined and compared with the SLA threshold. All this while the transaction is running live. 

Why Are XAI-Embedded SLAs Important? 

XAI-embedded SLAs are important for several reasons. First, they can help establish trust and transparency between service providers and customers, especially in domains where transactional systems have high stakes or social impacts, such as health care, education, or in our case, finance. By setting clear expectations and accountability mechanisms, XAI-embedded SLAs can reduce uncertainty and risk for both parties and foster confidence in the quality and value of the service.

XAI-embedded SLAs can also help drive innovation and improvement in the field of AI. By creating incentives and feedback loops for service providers to optimize their transactional systems and processes, XAI-embedded SLAs can encourage continuous learning and adaptation, as well as ethical and responsible design and deployment of XAI solutions.

Finally, XAI-embedded SLAs can help create new opportunities and markets for financial services. By enabling more standardized and comparable evaluation and benchmarking of transactional systems and services, XAI-embedded SLAs can facilitate interoperability and integration across different platforms and domains. Moreover, by allowing customers to choose and customize their desired level of service quality and performance, XAI-embedded SLAs can create more diverse and personalized offerings and experiences for different needs and preferences.

Algorithmic contract types, fuzzy logic, and XAI are powerful tools that can help providers incorporate qualitative and subjective indicators, such as UX value, into their SLAs and deliver solutions that impact the experience of their users.

Fintech providers should start considering XAI-embedded SLAs as innovative propositions to quantify and improve their performance in a transparent and accountable way. UX is just an example. Many other qualitative and subjective metrics can be processed in the same way. The algorithms behind an XAI-embedded SLA can also use the feedback loop of the data captured by the token throughout the life cycle of a transaction to adjust the scores and help users optimize the performance of the offered products and services according to the needs and preferences of their customers.

Banks should also consider these tools to create value and differentiation in the digital market, providing a new way to quantify (and consequently monetize) increases in customer satisfaction and loyalty.

For more information on this topic, contact me here.

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A supply chain is a network of relationships between different entities that create and deliver products or services. Every company, no matter its size or scope, plays multiple roles in a supply chain: It buys inputs from other suppliers, it produces outputs for other buyers, and it sells goods or services to end customers.

To show the complexity of supply chains, I use a graphical representation I am calling the “snake” because of its shape.

Figure 1: The “Snake”

A snake has different parts that work together to move and survive. Similarly, a supply chain has different components that coordinate to deliver products and services. A more accurate way to describe the components of a supply chain is to use the word “processes”. The processes are the steps that usually occur in any supply chain, regardless of the location. They are represented by the arrowed blocks in the snake diagram.

Source-to-Pay is a category of processes that a manufacturing company uses to purchase goods or services from a supplier. It includes activities such as finding suppliers, negotiating contracts, ordering materials, and paying invoices. Automotive, electronics, and aerospace are examples of heavy users of Source-to-Pay processes.

When a company receives a purchase order from its client, it becomes a supplier for that client. The supplier then has to fulfill the order and collect the payment from the client. This is known as the Order-to-Cash process, which covers all the steps from receiving an order to getting paid for it. The company’s production facilities handle the Fulfill-to-Service operations. This is where the products are made, stored, and packed for delivery to the customers, as illustrated by the diagram.

The Source-to-Pay category involves the processes that the company performs as a buyer when it receives goods from its suppliers. After the goods are delivered, the company verifies their quality and quantity, and then pays the supplier according to the contract terms.

The process of paying for goods involves several steps. First, the buyer takes delivery of the goods and checks their quality and quantity. Next, the buyer receives the invoice from the supplier and verifies its accuracy. If there is any discrepancy or disagreement, the buyer and the supplier need to resolve it before proceeding. Finally, the buyer issues and sends the payment to the supplier according to the agreed terms. The final step of the Order-to-Cash process is when the supplier gets paid by the customer. The supplier then has to record and match the payment with the invoice in the company’s account.

Where Life-Cycle Banking Fits In

In summary, the “snake” illustrates the common processes in a business’s supply chain. You might be wondering: What’s next? How does this relate to life-cycle banking? Let’s review the concept of life-cycle banking: Life-cycle banking provides financial supply chain (FSC) solutions triggered by physical supply chain (PSC) events.

There are two important keywords here: “triggered” and “events”.

The physical supply chain events are the actions that take place in the real world to produce and deliver goods to customers. The financial supply chain capabilities are the tools and processes that enable a company to manage its cash flow, payments, and risk along the PSC. They include things like invoice financing, trade credit, and supply chain insurance. The snake diagram helps to visualize how the physical and financial supply chains are connected and how they affect each other.

A purchase order, an invoice, and a payment are examples of business processes that involve people in the company. These processes are “physical” because they can be done by hand and on paper, as they were in the past. Some companies still use manual and paper-based methods for these processes.

The “snake” metaphor helps us understand how a process flows from one step to another. Sometimes, a process needs some extra services that are not available internally. These services can be provided by external sources, such as financial institutions or fintech vendors. The financial supply chain is a term that refers to the activities and services that external sources provide to support the supply chain. For instance, when a company wants to source suppliers for its products or services, it may require some additional help from outside parties. This could include financing, insurance, logistics, or legal assistance. These are examples of the supporting activities that belong to the FSC.

Examples of Events Triggered Along the Supply Chain

Market intelligence, for example, is a service that provides information about a company’s performance, reputation, and strategy. It can help businesses make informed decisions when sourcing a new supplier. The need for a market intelligence scan arises when a business faces a challenge or an opportunity in the market. This is a “trigger”.

Market scan is the triggered service that helps buyers find the best suppliers for their needs. It is activated (i.e., triggered) when the buyer starts the “Source Suppliers” process in the supply chain. The service can be provided by different types of providers, such as banks, consultants, or fintech companies. The service is integrated (i.e., embedded) with the supply chain process and delivered at the time in the buyer’s life cycle when they are sourcing a new supplier.

One of the other steps in the snake model is to assess the financial risk of the supplier during negotiation. This involves evaluating the probability and impact of adverse events that may affect the supplier’s ability to fulfill the contract terms. Financial risk analysis can help the buyer make informed decisions, quantify risks, and protect their interests. Some of the tools and methods for financial risk analysis that can be triggered at this time include credit scoring, cash flow analysis, ratio analysis, scenario analysis, and simulation. By conducting a financial risk analysis, the buyer can determine the level of risk exposure and the appropriate risk mitigation strategies for dealing with the supplier.

Fast forward: when the buyer’s purchasing department issues a purchase order, it means that they will pay the supplier in the future. This is a cash outflow for the buyer. The buyer’s treasury department needs to know how much cash they will have at that time in the future. This need triggers a service that can forecast future cash flows based on the purchase orders.

A letter of credit is a financial instrument that may be needed in the same process. It is a guarantee from a bank that the supplier will get paid by the client. Before shipping the goods, the supplier may also want to get pre-shipment finance from financial partners. This is a loan that helps the supplier cover the production costs.

What Does All This Have to Do With Life -Cycle Banking?

To provide the right services at the right time, you need to understand the supply chain you are working with. By knowing the supply chain, you can identify the needs and expectations of each stage and offer services that add value and efficiency.

Life-cycle banking is a new way of providing financial services that are linked to the physical activities and requirements of the user. It uses an API-based platform and a network of partners to offer solutions that are tailored to the user’s daily operations and needs. Life-cycle banking leverages the expertise and insights of the user’s industry and market to create value-added services.

The concept of life-cycle banking has been tested in a few scenarios and proven to be feasible. For example, PaperTrl is a platform that helps construction companies manage and automate their accounts payable (AP) processes. It has recently integrated U.S. Bank virtual card payment capabilities into its platform, allowing users to pay their vendors securely and efficiently. This feature also enables users to earn cash back rewards and reduce fraud risk.

The integration with U.S. Bank will allow PaperTrl customers to automate AP operations from procurement to payment. This includes vendor management, purchasing, receiving, invoice processing, and payments via U.S. Bank virtual commercial cards. Together, PaperTrl and U.S. Bank will help AP departments manage all B2B payments from a single platform.

The Next Level of Banking

Life-cycle banking aims to provide banking services that are tailored to the user’s daily sector-specific business activities and needs. It involves embedding the user’s data and preferences into banking capabilities, such as personalized recommendations, alerts, rewards, and insights.

Life-cycle banking integrates financial services with supply chain management. It allows businesses to access banking functions as service components that are triggered by events in the sector’s physical flow of goods and services. For example, an automotive parts manufacturer can use life-cycle banking to automatically initiate payments, invoices, or loans based on the status of their orders, shipments, or inventory. Life-cycle banking aims to improve efficiency, transparency, and cash flow for businesses and their customers. Such processes are peculiar to the industry sector’s PSC dynamics.

Embedded banking is the integration of banking services into non-banking platforms (e.g., ERP, e-commerce, social media, or mobility). Life-cycle banking is the next level of embedded banking, where banking services are tailored to the specific needs and preferences of customers at different stages of their enterprise process cycle. It leverages the data exchanged in banking transactions to create personalized and contextualized offerings that enhance enterprise value. To learn more about the role of life-cycle banking, please read my recent report The BaaS and Embedded Finance Ecosystem: A Reference Framework or my recent blog A New Approach to Sustainable Supply-Chain Finance. And stay tuned for the full version of the snake diagram, which will be published as a free report.

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Life-cycle banking is based on two key trends in the banking industry: Banking-as-a-Service and embedded banking. Banking-as-a-Service is the idea that banks can offer their core capabilities, such as payments, lending, or deposits, as modular and flexible services that can be integrated into other platforms and ecosystems. Embedded banking is the idea that banking services can be seamlessly embedded into the customer journey and context, such as enterprise resource planning (ERP), e-commerce, social media, or mobility.

By combining these two trends, life-cycle banking aims to create personalized and relevant banking experiences that match the customer’s life stage, goals, and preferences. My research explores the benefits and challenges of implementing life-cycle banking, as well as the best practices and examples from leading banks and fintech players around the world.

Life-cycle banking is a possible evolution of embedded banking, where financial services are not only integrated into digital platforms, but also tailored to the specific needs and preferences of customers at different stages of their enterprise business lives. In the first part of this two-part blog series, I will explore how life-cycle banking can be applied to the supply chain of a company and how it can create value for both the company and its suppliers, customers, and partners. In the second part of the series, I will present some likely use cases of life-cycle banking in the supply chain, and discuss the benefits and challenges of implementing them. But before diving into the use cases, let me explain what life-cycle banking is.

A Quick Overview of Life-Cycle Banking

Life-cycle banking is a concept that aims to provide banking services that are tailored to the user’s daily activities and needs. It is based on the idea that banking should not be a separate or isolated activity, but rather an integrated and seamless part of the corporate user’s life.

By embedding the entire knowledge of the user’s day-in-the-life business activities and needs within the offered banking capabilities, life-cycle banking can deliver personalized and relevant solutions that enhance the user’s company financial well-being. In other words, life-cycle banking means day-in-the-life banking capabilities that make banking easy and convenient for the enterprise user.

Day in the life of what? Let’s take the example of a day in the life of a supply chain manager.

What does a supply chain manager do? A typical day for a supply chain manager might start with checking the status of the orders, inventory, and shipments. They might use a dashboard or a software system to monitor key performance indicators (KPIs) such as delivery time, fill rate, inventory turnover, and customer satisfaction. They might also communicate with their team members, suppliers, and customers to coordinate activities and resolve any issues or problems.

Throughout the day, a supply chain manager might also perform various tasks such as:

• Forecasting the demand and supply of products and services based on historical data, market trends, and customer feedback.
• Planning the production, procurement, and distribution of products and services based on the demand forecast and available resources.
• Negotiating with suppliers and vendors to secure the best quality, price, and delivery terms for materials and services.
• Managing inventory levels and locations to ensure optimal stock availability and minimize storage costs.
• Implementing quality control measures and risk management strategies to ensure compliance with safety, environmental, and ethical standards.
• Analyzing data and reports to identify the strengths and weaknesses of supply chain processes and performance.
• Implementing continuous improvement initiatives and best practices to enhance the efficiency, effectiveness, and sustainability of the supply chain.

A supply chain manager might also participate in meetings, trainings, and workshops to share information, learn new skills, and collaborate with other stakeholders. They might also conduct research and benchmarking to keep up with the latest trends and innovations in the supply chain field.

The supply chain processes of any company, large or small, are the steps that transform raw materials into finished products or services. It is important, at this point, to review these processes to understand how they affect the company’s performance, efficiency, and customer satisfaction, as shown in the figure below.

Figure 1: Supply Chain Processes

The physical flows and the financial flows are two types of flows in a supply chain. The physical flows are the movements of raw materials in addition to semi-finished and finished goods from the supplier to the buyer. The financial flows are the payments that go from the buyer to the supplier. They move in opposite directions of each other.

Another crucial aspect of the supply chain is the information flow that connects all the parties involved in the physical movement of goods and services. The information flow includes data and documents that are generated by the physical flow, such as invoices, credit/debit notes receipts, purchase and sales orders, and delivery confirmations.

These information elements often trigger financial transactions, such as payments, collections, or loan applications. These are the components of the financial supply chain (FSC) that enable the smooth functioning of the business operations. In other words, life-cycle banking delivers FSC capabilities triggered by physical supply chain (PSC) events.

Life-cycle banking, however, is not very precise and can mean different things to different people. To illustrate how life-cycle banking works, let’s look at a scenario of a business customer who uses it. 

Life-Cycle Banking in Practice

For instance, let’s check the business of running a hotel with a brief set of examples of FSC flows for this specific sector:

• One-click reservations and payments
• Stock control, inventory, goods receipt, reorder and transfer requests
• Pay suppliers of goods and providers of services (e.g., maintenance, cleaning)
• Petty cash, on account, debit card, credit card payment channels for clients
• Get loans for refurbishments
• Hire and pay temporary staff
• Real estate administration
• Loyalty programs
• Price lists in foreign currency
• Payables and receivables in foreign currency with automatic exchange
• Payment schedules, bills, and payment orders management
• Retail store management for restaurant services

Figure 2, below, helps to visualize how the FSC capabilities relate to the PSC events in a hotel business.

Figure 2: FSC Capabilities Triggered by PSC Events Typical of Hotel Life Cycle

The table has one row for each FSC capability and one column for each PSC event. For example, the first row shows that reservation—and consequent payment—are triggered by the events of booking, check-in, stay, and checkout. When the client is checking in, that event will trigger the hotel system to pop up loyalty programs and discount/special price facilities. After a client used a room, the hotel system automates the payment process to the suppliers and service providers who are involved in the room usage, such as maintenance and cleaning staff.

This use case that explains how FSC capabilities are linked to (and triggered by) PSC events can be extrapolated from the hotel industry segment to any other business sector. The system records the data exchanged in each transaction based on the PSC triggers and the FSC capabilities. When goods are shipped, delivered, or returned, they generate data that can be used to optimize financial processes.

Such data can help reduce costs, improve cash flow, and mitigate risks. As seen for the hotel industry, data from PSC events can enable faster invoicing, better inventory management, and more accurate forecasting. This is how FSC capabilities are triggered by PSC events.

And this is the essence of life-cycle banking. Life-cycle banking is a way of providing financial services that are linked to the events and needs of the PSC. It uses Banking-as-a-Service components that can be customized and consumed according to the industry sector. Life-cycle banking aims to optimize the FSC for different stages of production and distribution.

Life-cycle banking is a way of providing banking services that are tailored to the specific needs and goals of a specific sector. It involves following the sector-specific process flows to execute banking capabilities, such as creating, processing, and storing data. By doing so, life-cycle banking maximizes the value of the data exchanged between banks and their enterprise customers.

Have questions about how life-cycle banking works? Contact me here. And stay tuned for part two of this blog series next week, where I will explore use cases of life-cycle banking across the entire supply chain.

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Stakeholder engagement is a crucial aspect of sustainable supply chain management; it includes communicating with and involving various groups that have an interest in or influence on the supply chain, such as suppliers, customers, employees, communities, regulators, and investors. This engagement helps companies:

• Understand the needs and expectations of their stakeholders
• Align their goals and strategies
• Build trust and credibility
• Facilitate innovation, learning, and problem-solving by leveraging the diverse perspectives and expertise of different investors

Businesses that want to be sustainable need to adapt their supply chain finance (SCF) programs to the changing needs of their suppliers, who are expected to follow environmental and social best practices.

This blog will explore some of the key topics covered in a recent roundtable session I hosted, with special guests from NTT DATA, BBVA, and Quantexa also taking part in the conversation.

Implementing ESG Goals Across the Supply Chain

One way to achieve ESG goals is to involve suppliers—especially if they are small and medium enterprises (SMEs)—in sustainable sourcing policies, better working conditions, and environmental impact reduction within their supply chain. Anchor buyers can influence their SME suppliers to address these issues by providing them with guidance and support. However, SME suppliers may face additional costs when they have to report and change their behavior to meet ESG standards.

SCF schemes can help SME suppliers adopt their anchor buyers’ sustainable practices and align with their ESG targets by offering them fair benefits and rewards. One way to support SMEs and ESG goals is to implement sustainability-linked SCF programs. These programs use financial incentives to motivate suppliers to meet sustainability standards, report accurately, and adopt sustainable business practices. By using digital applications, SCF programs can provide flexible and affordable financing to SME suppliers and help them improve their cash flow and working capital.

Corporate sustainability is a key factor for banks to consider in their financing and investment decisions. By applying different pricing segments based on ESG ratings, banks can incentivize corporate sustainability and reward responsible businesses practices. Innovative technology can help banks exchange crucial information efficiently and make informed decisions in real time.

However, to ensure a consistent and transparent approach, a standardized industry framework is needed to assess the impacts of climate, social, and organizational changes on cash flows and to ensure comparable sustainable reporting data.

Using ESG Data to Make More Informed Decisions

Sustainability is a key driver of change in supply chain management, as it requires a holistic and long-term perspective that balances environmental, social, and economic factors. Sustainable principles are embedded in the financing process of supply chain operations, enhancing stakeholder engagement and value creation. Sustainable procurement is a process that integrates ESG factors into procurement decisions and practices, while balancing financial, environmental, and social considerations throughout the entire value chain.

Businesses need to prioritize sustainability in their supply chain management and finance practices to align with stakeholder expectations and drive long-term success. By adopting a comprehensive approach that integrates ESG factors and involves stakeholder engagement, companies can gain competitive advantage, avoid reputational damage, and contribute to a more sustainable future.

Sustainability-linked SCF solutions are emerging as a new asset class for banks to meet the growing demand from clients for environmentally responsible and socially impactful initiatives. Organizations can promote more inclusive value chains by integrating social initiatives into SCF.

In response to the increasing emphasis on ESG standards by large corporations, which require their suppliers to comply with sustainability criteria, integrating SCF with ESG can bring mutual benefits for (large) buyers and (small) suppliers. Financial institutions are proactively developing ESG-linked products and services to extend the advantages of sustainable financing to their clients.

To make informed decisions, financial institutions should thoroughly assess ESG data from various sources and stages. The need for standardized information is becoming more crucial as regulatory bodies impose stricter transparency requirements in investment banking and capital markets. Industry stakeholders must collaborate and establish a uniform framework for disclosing information to decision-makers, ensuring compliance with regulations, and harmonizing the information shared in sustainability reporting. This approach will foster trust, efficiency, and protection of the interests of all parties involved in investment banking.

Leveraging fully digital solutions and incorporating ESG data on global SCF platforms, event-based financing (also known as event-triggered financing) can be integrated into conventional trade transactions. Financial experts can provide transaction-related solutions that can serve as a foundation for financing, which may be triggered by various events such as purchase order initiation, invoice generation and acknowledgement, and bill of exchange acceptance under a letter of credit.

Accuracy Is the Key to Long-Term Success

Forward-thinking financial institutions are offering guidance to their clients on enhancing sustainability and improving their performance in relation to ESG benchmarks. This is achieved through the development of customized sets of ESG key performance indicators (KPIs) tailored to specific industry sectors and regions. Furthermore, ESG ratings are now being integrated into risk models to effectively evaluate a company’s potential adverse impact and potential sanctions.

SCF programs that incorporate sustainability risk indicators assess a company’s potential to achieve ESG outcomes, rather than solely relying on its credit history. This inclusive approach allows companies of varying sizes, including large, small, or microenterprises, to access capital for growth based on their ability to adopt sustainable practices.

Banks with forward-thinking strategies can utilize statistical data related to a company’s supply chain performance, such as punctual deliveries, sustainability adherence, shipping documentation, and payment records, to evaluate credit risk for corporations. Skillful management of ESG risk factors by banks can create substantial funding and product prospects, as it enables them to accurately price their risk levels.

Sustainability-linked SCF instruments offer a novel asset class for banks to meet the demand for environmentally responsible and socially impactful initiatives. By integrating SCF with sustainability principles, financial institutions can foster more inclusive value chains and provide customized solutions for their clients. Thorough assessment of ESG data, harmonization of efforts, and standardized information disclosure are critical for informed decision-making. Incorporating event-based financing and ESG benchmarks can enhance sustainability performance and create opportunities for financing.

SCF programs that incorporate sustainability risk indicators promote inclusivity, and skillful management of ESG risk factors can lead to funding and product prospects. Financial institutions with forward-thinking strategies can leverage statistical data to evaluate credit risk accurately.

Overall, sustainability-linked SCF solutions provide a promising avenue for banks to align with sustainable financing and meet the evolving demands of their clients and stakeholders.

To learn more about approaches to sustainable SCF, you can watch the recording of our recent roundtable discussion here or contact me to learn more.

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Data is essential for identifying the opportunities and challenges of sustainability-linked SCF instruments, designing the appropriate financing mechanisms and incentives, and verifying the outcomes and benefits. Without reliable data, sustainable SCF cannot effectively assess the ESG performance of the supply chain or measure the impact of financing. This is why transparency is key to sustainable SCF, as it allows for the accurate measurement and monitoring of ESG performance.

Another key factor in sustainable SCF is stakeholder engagement. This refers to the process of involving and communicating with relevant parties that have an interest or influence on the supply chain, such as suppliers, buyers, financiers, regulators, NGOs, and consumers. By engaging with stakeholders, sustainable SCF providers can understand their data needs and preferences and then tailor their data solutions accordingly. Moreover, stakeholders are encouraged to disclose and report their ESG data in a consistent and comparable manner, enhancing the credibility and quality of said data.

Overall, data and stakeholder engagement are vital components of sustainable SCF to improve ESG performance in the supply chain. Companies that embrace sustainable SCF can not only improve their own ESG performance but also create value for all stakeholders involved.

Challenges in Collecting Data

ESG data sources vary widely, and different sustainability SCF providers may use different methods and frameworks to measure ESG performance. This makes results inconsistent and incomparable, and some ESG data may be self-reported by the suppliers or buyers, affecting credibility and accuracy. To address these challenges, sustainability-linked SCF providers need clear and transparent criteria for data collection and verification. They also need third-party auditors or independent rating agencies to ensure data validity and reliability.

With this in mind, advanced sustainable SCF providers are already collecting and verifying data on various aspects of the production process. In the agribusiness sector, for example, land use, water consumption, fertilizer use, greenhouse gas emissions, biodiversity impact, and labor conditions are all being scrutinized in this way. This data may differ depending on the type of crop, the location of the farm, the seasonality of the harvest, and other factors.

Furthermore, some supply chains may involve multiple tiers of suppliers and intermediaries, which may make it difficult to trace the origin and destination of the products. Therefore, sustainable SCF providers are becoming aware of the need to adopt a holistic and granular approach to data collection and analysis. This approach requires advanced technologies (e.g., blockchain, satellite imagery) to improve the traceability and visibility of the supply chain.

While sustainable SCF is a promising tool for incentivizing suppliers to improve their sustainability practices, achieving its full potential requires standardized and reliable ESG data that is transparent and independently verified. By adopting a rigorous and comprehensive approach to data collection and analysis, sustainable SCF providers can help promote a more sustainable and resilient global economy.

Building Sustainable Credentials for Supply Chain Finance Data

We know that SCF can help suppliers go green by offering cheaper loans for meeting ESG goals, but questions remain over how to measure and report the impact of SCF on sustainability. Not only that, but an equally important question: how to make sure the data is valid and comparable. These are some of the issues that SCF providers need to address to build trust in their data.

A common challenge for sustainable SCF is measuring and reporting its impact on businesses, and, consequently, the possible risks and rewards for banks that fund ESG-linked initiatives. As a result, the fact that different regions have different levels of awareness and adoption of ESG principles must be accounted for. In North America, for example, investors and regulators are generally skeptical about the concept of ESG and its impact on financial performance. They may view ESG as subjective and not the right way to decide whom to lend to or invest in.

In contrast, European countries are more advanced and proactive in implementing ESG standards and practices. They have created innovation hubs and teams to focus on sustainability issues and drive positive change. Looking at Asia, the challenge is less on the environmental side and more on social and governance. There is not enough data from the manufacturers and their suppliers on how they manage ESG impacts. There is also a severe lack of consistency or transparency on what criteria they use to measure their ESG performance. This makes it difficult for investors and customers to assess their ESG risks and opportunities. The Asian demographic is also very different from Europe and North America in terms of their values and preferences regarding sustainability.

With all this being said, we certainly shouldn’t look at one factor in isolation—ESG data is not a one-size-fits-all solution. It needs to be tailored to the user’s specific industry, market, and goals. An example might be a bank seeking to offer sustainability-linked SCF support. In this case, the bank must understand the context and the impact of its clients’ ESG data and how it relates to other aspects of the bank’s own and the supply chain partners’ business. For example, a bank may want to know how its clients’ ESG data aligns with their credit risk, operational efficiency, reputation, and regulatory compliance. The process of creating a consistent and streamlined framework for ESG data is complex and requires a variety of people and skills.

ESG data can come from different sources and formats, such as structured databases, unstructured text, Excel files, or social media posts. To manage this diversity of data, institutions need to establish a dedicated unit that focuses on ESG data. This unit is responsible for acquiring, integrating, standardizing, and linking the data from various providers and sources. The unit also needs to have a strong IT infrastructure that can handle the data flow and provide access to the business users.

Savvy financial institutions have decided to establish solid partnerships with specialized ESG data providers that independently collect and analyze ESG data exclusive to the SCF-demanding company’s market and aligned with the bank’s business objectives. A specialized ESG data provider identifies the most relevant ESG indicators and metrics specific to each industry and market and collects ESG data from reliable and verified sources, such as third-party audits, surveys, and reports. The data provider analyzes ESG data using advanced tools and methodologies (e.g., artificial intelligence, machine learning, and natural language processing) and uses it to benchmark a company’s ESG performance against its peers and competitors. The results are then communicated to the sustainable SCF financial institution, adding the final necessary step to the process.

My thoughts in this blog were sparked by a recent Roundtable I hosted along with NTT DATA, Quantexa, and BBVA. To catch up on the content of that conversation, view the recording here. You can also reach out to me with your thoughts on sustainable SCF here.

The post The Importance of Data in Sustainable Supply Chain Finance appeared first on Datos Insights.

But embedded finance is not just about enabling transactions. It is also about providing decision support and insights that can help businesses optimize their operations and achieve their goals. In this blog post, I will explore how embedded finance can become a full “decision support agent” for businesses, using generative AI models to leverage the data from both the enterprise (e.g., enterprise resource planning [ERP], treasury management system [TMS]) and the banking systems.

I want to prove that there is an advanced notion of the “embedded” proposition: What characterizes embedded finance is not only that financial applications are consumed “as-a-service” in a transparent way to the user. The key element is that the user can find support from a decision support “agent” embedded with the operations executed.

With the transactional part of embedded finance, there is a button on the ERP (or TMS) dashboard for users to click and open a new bank account, make a payment, or ask for a loan without having to move to a different environment. While still working within the enterprise environment, the decision support agent portion provides useful information and insights before the user clicks to execute a transaction.

Both the ERP/TMS and the banking systems hold a history of the user’s transactions that can give the user insights on what to do and what happens next. Generative AI models could give the user useful advice before executing the operation, learning from past experience what the bank is doing and what is the best option before execution. By generating that knowledge from existing transactional data and offering it as an embedded capability, “embedded” then becomes not only the transactional part but—most importantly—the knowledge part.

A likely use case: a business that sells parts for automotive equipment manufacturers uses an e-marketplace platform with embedded finance services. The engineering, supply chain, sales, and financial managers run a sales cash forecast from their ERP to determine whether the company should invest in a new welding robot machine to produce and sell a new line of products. This triggers the embedded decision agent that returns this message:

After analyzing your sales data and your bank account balance, here are some suggestions for you:

You have enough cash flow to invest in a new welding robot.

Based on satisfaction scores of the marketplace members, we recommend that you search across these three vendors: , , .

You can access each vendor’s catalogs from here.

You can issue your RFP from here.

You have an outstanding loan of US$150,000 with an interest rate of 5%. We suggest that you pay it off as soon as possible, as you can save US$500 in interest payments. You can use our embedded banking feature to make a one-click payment from your account.

You can submit a loan request to these three banks based on your credit score profile: , , .

To repay the loan installments, you can access the receivables finance program launched by by clicking here.

Based on past sales data, your customer base has purchased new products from you with a level of recurring sales over 75%. We propose that you offer them a discount of 10% on their next purchase. You can use our embedded banking feature to send them personalized coupons via email.

As you can see, this is an example of how embedded finance can become a decision companion for businesses, using generative AI models to provide actionable insights and recommendations based on the data from both the ERP and the banking system. This way, embedded finance can enhance the business operations and outcomes of non-banking entities, creating value for both parties.

Interested in learning more about my research on embedded finance and how it can benefit your business? Read my latest report, Embedded Finance for B2B Marketplaces: Onboarding New Client Bases or download the report summary here. You can also contact me here—I’m always happy to discuss your needs and offer you a tailored solution. In addition, I’ll be moderating a discussion on this topic with Citizens Bank’s Director of Product Strategy and Merchant Services, Kavita Kurella, and U.S. Bank’s Product Head of Fintech Strategy & Partnerships Bryan Schneider at Aite-Novarica Group’s Commercial and Small Business Banking Forum on October 5th. Register here to join us in New York.

The post Embedded Finance: An (Embedded) Decision Support Agent appeared first on Datos Insights.

Embedded finance, where financial services are integrated into nonfinancial platforms, also plays a role in the evolution of B2B marketplaces. Embedded finance can support the financial supply chain processes of B2B marketplaces, making transactions smoother and more efficient.

An overview of current B2B marketplace offerings shows that there is still limited coverage of financial supply chain capabilities. This presents an opportunity for FIs to provide tailored embedded finance portfolios to address this gap and better serve the financial needs of corporate clients. B2B marketplaces can enhance customer experience, increase loyalty, and generate new revenue streams by incorporating financial services into their platforms. As the demand for embedded finance grows, banks can offer a set of financial management tools integrated seamlessly within the marketplace to efficiently manage the financial supply chain of participants. Banks should also perform due diligence on marketplace intermediaries and plan regular audits for business continuity.

Fintech vendors can provide banks with new distribution channels and access to new customer segments. They can also offer technology, marketing, and customer experience design expertise to help FIs understand and meet evolving customer needs. Additionally, fintech vendors can become avenues for entrepreneurial banks to develop industry-specific banking, payment, and credit products. B2B marketplace-makers can embed financial capabilities within their platforms to generate more revenue, enhance user experience, secure platform stickiness, and gain a competitive advantage. They can also target lesser-known markets that are fundamental to the global economy.

Recently implemented use cases validate the above assumptions.

• Societe Generale has signed a deal with Lemonway—a Pan-European payment institution dedicated to marketplaces, alternative finance platforms, and payment processing—to deliver payment services to large corporates, launching B2B marketplaces in Western Europe.
• Samsung Electronics, Samsung’s B2B online store dedicated to small and midsize businesses, will expand to 30 countries worldwide.
• Johnson & Johnson has been leveraging its infrastructure to provide payments and decisioning layers that digitize workflows, stretching from procurement to extending credit to suppliers.
• Agro.Club, a digital agribusiness sales enablement platform, partnered with Crealsa, a Spanish neobank, to offer factoring, supply chain financing, transactional services, and “buy now, pay later” to farmers and distributors.

Incorporating financial services into B2B marketplaces offers significant opportunities for banks, fintech vendors, and B2B marketplace-makers. By leveraging embedded finance, they can better serve the needs of their customers, access new revenue streams, and stay competitive in the evolving landscape of financial services.

Embedded finance for B2B marketplaces is the focus of an upcoming report from Aite-Novarica Group. Keep an eye on this space in the coming weeks for more on this topic.

The post B2B Marketplaces as Embedded Finance Origination Platforms appeared first on Datos Insights.

While I cannot claim that I told you so, I can certainly assert that what I wrote in September 2016, Trade Facilitation and Trade Financing: Building New Bridges, and April 2019, Trade Finance Consortia: A Market Overview, both indicate what makes a digital trade platform successful, regardless of the underlying technology infrastructure (i.e., blockchain or not). Apparently, not all suggested indications were in place at TradeLens (nor at we.trade, another recently shut-down trade finance platform).

In Trade Facilitation and Trade Financing: Building New Bridges, written in collaboration with the UN/CEFACT Supply Chain Programme Development Area, you could read:

• The exclusion of financing […] as a key component of trade facilitation, misses a critical commercial reality that underpins global trade flows, trade relationships, and international supply chains.
• Explicitly integrate and include (i.e., bridge) trade finance and supply chain finance (SCF) into current frameworks and practices related to trade facilitation.

Where TradeLens Fell Short

The mission statement on the main page of TradeLens’s website reads, “Building a world of paperless trade.” There is no proposition of SCF instruments.

Trade Finance Consortia: A Market Overview showed a reference model for trade finance consortia platforms (Figure 1) and suggested a few ideas to remember:

Ideas to Remember:

• The supply chain finance cluster is the home of consortia that offer financial support to consortium participant firms by integrating them with banks.
• The trade facilitation cluster is where consortia will likely converge to provide a trade-facilitation-platform-based ecosystem that constructs collaborative business decision-making.
• Banks should not consider trade finance consortia as short-term sources of revenue streams. Time is still needed to see where the market will lead.
• Consortium supporters should be ready to contribute by building new platforms and piloting advanced cases. This will keep them in control of the timeline to get into real (and profitable) production. Until then, the consortium will not bring in significant revenue. It’s an investment.

Where TradeLens Fell Short 

Since its inception, TradeLens appeared to be an inner circle for selected partners and exclusively centered on one technology foundation (i.e., Hyperledger). Actions undertaken to relax this position in the course of time did not remove the feeling of a purposedly created high entry barrier.

Far from being a (mis)fortune teller, I believe that my 2016 and 2019 predictions are holding true and set the conditions for trade finance platform success. I recommend banks, fintech players, and corporate users to still believe in the value of trade finance consortia, to not give up and adopt a collaborative and competitive approach: Cooperate to decide what technologies to adopt, what standards to develop and follow, and what business processes to cover. Compete to establish how to use and price the new infrastructure to service clients and decide what services to develop.

I am keeping a constant eye on this space, and there’s much more to come with life-cycle banking, so feel free to reach me at ecamernielli@datos-insights.com.

The post Putting TradeLens Under the Lens appeared first on Datos Insights.

SCF today blends its traditional portfolio of finance instruments (e.g., payables finance and receivables finance) with new factors that are rebooting the whole model. One of those new factors is sustainability. Sustainability is embedded in everything that a firm (banks included) does.

There are no global banks that do not have a sustainability angle. They are all committed to achieving net zero carbon emissions soon to support the goals of their business ecosystem partners, either corporate client, retail consumers, fintech and financial institution partners, local and national communities, government, and supra-national initiatives, just to name a few.

SCF renewed characteristics allow companies to enhance the sustainability levels for their supply chain in a capillary way, with dedicated products that reach the company’s suppliers and clients, when needed. The overall goal of SCF innovation is to support banks in providing tailor-made solutions to clients that want to expand sustainability principles and best practices across their commercial ecosystem.

Sustainability in Action

An exemplary case study is the collaboration between Banco Santander and Tesco (the U.K. retailer): The firms created a joint solution to incentivize the retailer’s suppliers to enhance their sustainability levels and allow Tesco to reach its scope 3 emission target. With the solution, the bank can classify Tesco’s numerous suppliers based on the respective sustainability targets prepared by an external partner of the project.

Tesco, through the bank, incentivizes its suppliers to increase their levels of compliance to sustainability targets by providing them with a more competitive cost of funds in return for the sustainability target achieved. The model also creates mechanisms for suppliers to go from one level to the other and benefit from further cheaper SCF funding. This is an important milestone for SCF, as Tesco became the first U.K. retailer to deliver a sustainability-linked SCF program to its supply base.

Moving to a wider corporate audience, sustainability-linked SCF requires additional preparation and effort because not all enterprises are ready for it from a financial point of view. These companies can think of other products, less sophisticated but still focused on moving the user to a more environmentally friendly approach. For example, in treasury (just as in any company’s department) there are contracts to be signed. If all these documents could be signed with an e-signature, the result would be a very quick win that adds value and supports a company in its first efforts to become environmentally friendly.

Strategic SCF Systems

The SCF market is evolving, with banks dividing into two main groups. The first group wants to use their own SCF platform and primarily go with their business model, their product features, and their capabilities directly to the client. The second group has decided to be the financing source of a partner’s SCF platform. In both cases, the SCF strategy for banks is to help corporate clients make life easy for suppliers, and this requires blending technology with strong service and support teams.

Having IT systems in place and automation at the right level are the prerequisites for a company to drive toward more sustainable solutions. Removing manual and paper-based operations are the small, seemingly insignificant changes that accumulate at the end of the day and actually have a significant on overall sustainability behavior.

While corporations tend to be slow to move in this space because the change to sustainability requires support from technology and relative budget investments, sustainabililty-linked SCF can be a valid support to the transition. To learn more about how banks are working to make their SCF efforts more sustainable, clients can watch the full recording of the NTT DATA webinar here.

The post Trends and Drivers in Corporate Banking: Supply Chain Finance and ESG appeared first on Datos Insights.

In the roundtable at the webinar, we drilled down on two trends driving vendor selection and ongoing product/service evolution in corporate banking:

• How Banking-as-a-Service (BaaS) is transforming the banking landscape, and
• How banks and their corporate customers are addressing ESG in their supply chain finance policies and decisions.

In this two-part blog series, I’ll dive into how each trend is shaping the banking industry. In this post, I will be focusing on BaaS.

The Pillars and Drivers of Banking-as-a-Service

In my research, I’ve identified three pillars that lay the foundation for BaaS: The first is regulatory compliance that enables only players with a banking license to provide the needed banking capabilities pulled and offered as-a-service. The corporate end user can best integrate and consume these services through technology components, the second pillar. APIs are the best example of connectors that allow the enterprise system to call and consume the applications residing in the bank back office.

The last, but most important, pillar, is user experience. This is where we are really shifting from the notion of BaaS to the wider domain of embedded banking. The user experience pillar builds the front-end orchestration layer with the triggers at the point of use that transparently (to the user) enrich the experience and—at the same time—provides those as-a-service banking capabilities in a contextual manner.

There are three major strategy drivers that make the case for BaaS. The first is that banks are modernizing. To provide the necessary products and services at the point of use, banks have to modernize their infrastructures.

This, of course, is made possible through connectivity—the second driver—because corporate treasurers want to run all the financial supply chain operations directly from the enterprise system, whether that is the ERP or the treasury management system, or even smaller accounting packages. These are systems that belong to the daily working life of a corporate treasurer. The third strategic driver is the need for continuous efficiency and agility to keep up with the ever-changing demands of corporate clients and with the dynamics of the market.

How Corporate Bankers Are Modernizing

Roundtable participants were polled on how they prioritize the three strategic drivers:

Figure 1: BaaS Drivers

These results show that efforts today are focused on modernizing corporate banking: cloud advances, simple products, artificial-intelligence-based applications, blockchain, and BaaS are all helping banks create value for clients. If banks solely prioritized what helps them internally and only then, as a secondary effect, prioritized the things that help clients do their business, they would be missing the scope of their mission.

The ultimate driver for banks is client experience and client value. Modernization is the strategic driver to deliver cloud-based solutions, roll out faster in those geographies clients want to operate in, move away from other geographies, and steadily move from legacy into cloud. The shift from legacy to more efficient and modernized applications cannot happen without good, clean data. This is a challenge for banks that must do their homework before being capable of throwing innovative technology into the mix.

Solution providers are recommending that their bank clients establish the necessary priorities to modernize themselves, and transaction banking is the major area within corporate banking that demands more permanent innovation, evolution, and transformation from banks.

The problem is that once you start modernizing something, you realize that it is not only about technology. You need to invest in evolving your systems, your platform’s end-to-end capabilities, the connectivity, the resources for implementation, the reporting, and the monitoring. Banks must take a comprehensive approach toward modernizing transaction banking composed of trade, finance, and cash management, with all these moving parts evolving quite fast.

In response to that, there are banks that have decided to take a secondary goal and decided to become mere financiers or funders. Other financial institutions (FIs) instead aim to provide a client with an extended solution, and for that they must modernize across the extremes of their banking capabilities.

What Corporate Users Say

On the corporate side, decision-makers want to make sure that all the services they get from banks are acceptable for corporate needs. Just like banks, corporations are bogged with numerous siloed processes, so things can get quite bureaucratic when onboarding a new bank. Corporate users want this transition to be as smooth as possible, and here is where connectivity (or exchange of information) becomes important: It ensures easy bank onboarding.

The preferred solution for treasurers is to have a very solid ERP system and connectivity with all the banks to execute payments transactions from one central system. However, we are not there yet. There are quite a number of banking products without one consolidated view. When we look at different banks, there are quite a few solutions in the market that provide the opportunity to bring all this information in one platform and have all the information together.

But the lack of interoperability and harmonization of standards creates additional complexity for corporations: They are forced to onboard different third-party platforms to bring data available from different applications and make sure that there is no deviation between the information provided by externally accessed systems and what the company already has in its existing databases. So, there is still a way to go, although there are already workarounds to take out this complexity at some level.

Modernized bank services allow the end user to operate directly from its enterprise suite without having to move from one system to another or from one platform to another. And that requires connecting the bank with the enterprise clients. The need for connectivity demands a bank to adapt to the conditions of the client. There are certain regions where clients prefer uploading files into a website using essentially file interchange, while other clients might be demanding to be connected through APIs.

Sophisticated Connectivity Strategies

When it comes to connectivity, banks must be prepared to be holistic and swing from basic solutions to the most complex ones. In fact, sophisticated clients are already considering API connectivity as “limited.” If you want to go deep, intertwined between the corporate and bank systems, then there must be no layer between those systems. Very forward-thinking corporations do not have barriers in between the systems anymore: Messages get streamed directly from their applications into the bank’s as if they would be communicating directly within the bank IT environment.

That, of course, comes with a certain effort on both sides and requires a particular level of trust. Once the bank becomes an extension of a company’s own ERP system, there is no need for an API gateway to call the APIs of the bank. It is likely that a connectivity layer (i.e., the API gateway) in between the APIs can fail. That’s why forward-thinking corporate users opt for a solution that enables them to initiate payments on their enterprise system then streams the data directly into the bank systems and deep into the FI’s payment processing.

Once the bank’s applications have completed the operations, they kick the data back into the enterprise systems. Banks globally are starting to look to how their current architecture could be transformed to offer APIs for their clients’ needs as well as to offer a single digital platform that allows their corporate customers to operate in a single IT environment without having to access different products in different places.

From a corporate perspective, modernization and connectivity are a “push-and-pull” situation. Technology-intense companies in the beginning may have to push banks to get the level of service required. Moving forward, banks realize they should be happy to have client companies developing at a fast pace, as the bank brings in new features and supports clients in a solution where everyone benefits. The bank has a client to implement new features with, put them in action, launch a new product, and have a reference client. At the same time, it also benefits the corporate client because the client eventually gets the service it has long been asking for.

BaaS, just like any innovative—and potentially disruptive—solution set of financial supply chain features brings value to the bank—and to its corporate clients—only after the FI has matured appropriate strategies to modernize, connect, and be flexibly prepared to offer clients what they need to compete in an ever-changing market. To learn more about how corporate banking and BaaS are evolving in 2022, clients can watch the full recording of my webinar hosted by NTT DATA.

The post Trends and Drivers in Corporate Banking: Banking-as-a-Service appeared first on Datos Insights.

In fact, “interface” is the first structural component that builds the bridge between the systems to exchange the “applications.” These applications are developed by one party, then accessed via the interface and “consumed” by the other party to be finally released after use. Whenever the application is not providing the consuming party with the expected value, further improvement (i.e., programming) of the application is needed.

To implement an API, best practice suggests starting from the “easiest” component—interface—then reaching the “hardest”—programming—passing across application. The resulting sequence in terms of efficiency (i.e., cost minimization) is: interface> application> programming.

In terms of value to business results, best practice is to achieve the highest value first: that is, the “programming” component. In diminishing order, value is then brought by “application,” to finish with “interface.” The sequence of API value is, hence, programming> application> interface, resulting in a new acronym: PAI.

In the current dynamic and competitive market conditions, the sum of all these values must be available as soon as possible. That is, now. If we add “n” for “now” to the end of PAI, we get what might be a more accurate acronym: PAIn.

Monetizing Your PAIn

The apparently superficial consideration of acronym order hides a fundamental reality of APIs: An API is only as valuable as the programming behind it. And programming represents the hardest thing to do (i.e., the pain involved in creating a functional API).

Banks are well aware of this; they are pouring billion-dollar investments into development teams and working to establish strong relationships with programming partners. TD Bank Group, for example, reported earlier this year that it will be hiring more than 2,000 talented tech employees this year alone to further the bank’s growing tech capabilities.

Citi is another financial institution prioritizing tech; one of its main areas of focus in the near term will reportedly be automating processes involved in onboarding and self-service options, as well as boosting client communication.

To add real value to their APIs and monetize these tools, banks should consider taking the following steps:

• Nurture the business relationship with app programmers.
• Directly engage with their corporate clients’ teams to establish stronger business relationships and provide dedicated solutions.
• Compete directly against fintech vendors by creating their own app development platforms to attract API programmers.
• Engage with the programmer as a separate persona (e.g., with dedicated product team) and actively run a developer community to test new APIs.

APIs are useful tools, so long as the programming that powers them is done effectively. To learn more about what steps banks can take to ensure they’re getting the most value out of their APIs, contact me at ecamerinelli@datos-insights.com.

Check out related Aite-Novarica Group research:

Commercial Open Banking in Practice, March 2022

Creating Customer Value Through APIs: Research Study Results, January 2022

Open Banking Ecosystem: The Foundation of Treasury on Demand, March 2021

The post The PAIn of APIs appeared first on Datos Insights.

With supply chains suffering, companies are striving for resiliency, and many tend to hold more inventory. In a high-inflationary environment, the price of that inventory goes up and banks face a significantly higher demand for inventory finance than normal.

Industries Feeling the Squeeze

The demand for inventory finance is especially high in certain industry sectors, with commodity production and trading suffering from the highest level of squeeze. In metal commodities, for instance, large amounts of physical metal goods are being mined, shipped, and traded. A major commodity trader’s strategy is to go long on the physical and short on the exchange to hedge price volatility positions. Traders are totally focused on arbitraging dislocation of supply and demand, not speculating.

For example, between February and March 2022 the price of nickel doubled. The immediate consequence was that the amount of value to be hedged was also twice as much. In April, the price slightly dropped by 30%, but the volatility of nickel prices forced the London Metal Exchange and other exchanges to adjust the price margin to place against trade.

In any commodity market, the price margin is the minimum amount that allows a trader to participate in exchanging a commodity for money. Between February and April 2022, the trade margin price of the metal increased from about 12.2% to almost 88%, face value. When the price of nickel dropped back, it was still way higher than it was at the end of 2021, putting traders in the immediate need for something like seven times more working capital tied up in equity to do the margin trades and over 1.4 times the amount of dollar value (Figure 1).

Figure 1: Volatility of Nickel Prices and Trade Price Margins

The departure that took place a few years ago of commodity trade finance banks such as BNP Paribas, ABN Amro, Société Générale, and other commodity traders set the store for a brutal working capital squeeze in this part of the market.

The Commodity Market Is Evolving

With less supply in the face of a continuous, massive demand, everybody in the commodity market is now looking for additional working capital—and increasingly from non-bank financial institutions because banks are facing shortage of supply. This has created an opportunity for the big credit funds to start moving into this space.

One example is the establishment of Eliant—a combination of BNP Paribas in the senior funding tranche and Apollo Global Management and Athene Holding at the junior tranche (using the insurance subsidiaries with a lower cost capital). The combination of a big chunk of senior funding tranche from a commodity finance bank that was already in this space, but doesn’t want to take risk anymore, backed up by new capital from credit funds is rapidly changing how segments of this market work.

From recent conversations with one of the major players in the SCF space, Demica, Aite-Novarica Group’s advisors understand that there are billions of dollars of receivables finance transactions being negotiated between traders active in a wide number of commodities, such as oil, gas, wheat, nickel, and a broad range of non-bank financial institutions. The organization concurs with Aite-Novarica Group’s view that this is potentially the start of a major new trend in this sector.

Innovation in Supply Chain Finance

The shifts that Aite-Novarica Group’s advisors see in the commodity trade finance market are not unusual in receivables finance either. In a high-inflation environment, the pricing of receivables is rising rapidly. While the traditional supply chain finance (SCF) instruments offered to corporate clients remain predominant, they mostly resolve a liquidity play while corporate finance executives are also responsible for adjacent risk mitigants and hedging structures, whether on the FX side or on the price of goods. In a scenario of high price volatility, corporate people are much more likely to be hedging.

Aite-Novarica Group advisors anticipate that the use of SCF instruments—in particular approved payables finance—may be about to change. Historically, the product has been about the buyer extending its payment terms to the supplier, with the supplier discounting its receivables exposure from a bank at a preferential rate. Especially under rampant inflation, suppliers need to push up prices to offset the rising costs of materials and labor.  

Some of Demica’s buyer clients are responding when suppliers ask to increase price by making the counteroffer to onboard the supplier into a SCF program and giving the supplier access to lower cost of capital in exchange for the supplier not pushing through as much of the price rise. The offer to onboard the supplier on the SCF program allows the buyer to prevent the price increase of goods. With an attractive lower cost of capital, the supplier also benefits as it gets cheap cost of funding in return for accepting a lower gross margin profitability.

Moving Forward With New Tactics

This shifts the motivation for the buyer to use SCF away from the balance sheet optimization of extending trade payables and avoiding financial debt using accounting technicalities. Instead, it’s all about driving EBITDA margin by keeping the cost of goods sold lower than market value. And that matters a great deal more to the CEO, as the company’s value is generally gauged using EBITDA margin. Furthermore, this type of benefit to the company’s financial results is continuous rather than a one-off result of improved liquidity that discounted payables bring to the balance sheet.

Aite-Novarica Group expects to see companies using SCF much more creatively to deal with a new inflationary environment that will likely remain persistent in the future. While procurement’s traditional principal job has been to reduce the cost of goods, not working with treasury to extend payment terms (at best a second order function for most procurement teams), this novel approach to SCF will align procurement and treasury activities much closer. In addition, the change in the motivation for dealing with inflation does not require payment terms to be extended, making the accounting treatment much cleaner without the need to “artificially” adjust financial debt into commercial debt.

Apparently very few trade finance players have yet offered solutions that face (and leverage) this high-inflationary environment, most likely because they have never worked under high-inflationary pressures. The last time inflation in Europe was over 5% dates back almost 30 years, in 1994. Banks now have the chance to resolve the disruptive impact of inflation that waterfalls from physical to financial supply chains. These banks can reengineer SCF-approved payables finance programs to deal with inflation and respond to the rising demand for inventory finance from corporate traders.

Inventory Finance Makes Supply Chains Resilient

Until now, inventory finance has been introduced heavily only in some sectors, partly because it’s very expensive for a bank to provide this form of finance unless it can hedge it up. It works well in the commodity space, but not that much outside, and mostly in North America as part of asset-based lending (ABL) structures.

Traditionally, inventory finance has been cash-based, with banks extrapolating from a company’s revenue how much inventory it should hold. Based on an average figure, the bank then decides how much to finance. Today, the unpredictability of the value of goods in inventory requires literally following them item by item, individually tracking goods in the warehouse to know the value of each. Supply chain traceability systems become very important assets to properly price and hedge inventory.

The key to profitably managing inventory finance resides mostly in understanding what drives the price in the inventory. If the goods are heavily manufactured for specific uses, then inventory finance is still very challenging for most banks. It’s much easier instead for a bank to finance rolled steel or aluminum that might be eventually converted back and sold as raw material. Aite-Novarica Group expects inventory finance to rise more in the early stages of the supply chain and much less in the later processes of manufacturing transformation and distribution.

Most inventory-based ABL have two different financing components. In the first, the amount of funding is around 65% of the lowest between cost and market value. So, with rising prices of goods, the financing is calculated on the cost and not on the value of the inventory in the warehouse. If supply chains are becoming more disrupted, there’s the need to hold more inventory, with the inevitable consequence that the stock days on the balance sheet are also rising, creating much more of a problem. It’ll take a long time before the new price of inventory flows through into the base cost, bringing up the value of the cost-based funding.

The second leg of the ABL pricing structure is determined by the inventory liquidation value, along with the haircut applied by the agents. When looking at liquidation value in inventory, somebody estimates what price they can achieve if they have to sell the inventory. They’re looking at both price volatility and cost of actual liquidation (i.e., selling cost, transport costs). If the prices of raw materials are volatile, the person calculating the net liquidation value (NLV) is going to choose the bottom of the volatility and then haircut from below that to be confident that the price can be achieved.

The amount of funding that can be provided under that financing structure produces much lower numbers than it would have historically (e.g., two years ago) when prices were stable because the cost and market value were almost the same and NLV was a much higher number in less volatile conditions.

Concluding Thoughts

All considerations feed together to say that traditional inventory finance solutions are producing much lower advance rates on inventory than they have historically. Aite-Novarica Group anticipates that corporations with highly volatile raw material values (e.g., metals) are going to break apart their ABL, leaving the financing of receivables to large partner banks and moving inventory to somebody who will finance it at a percentage of inventory value, typically 85% of market value instead of 65% of cost.

The funder can afford managing this new financing model only with the support of an IT platform to manage all the pricing risk. Aite-Novarica Group advisors had the opportunity to view a good example of such platform during the conversation with Demica. Rather than doing monthly inspections as was the norm with a stable value of inventory, traders have access to daily or weekly feeds of all the inventory line items on the Demica Platform, with the ability for it to revalue the inventory in real time. The bank will then hedge the exposure much more precisely.

To learn more about how banks can help their corporate clients during this time of disruption and volatility, please reach out to me at ecamerinelli@datos-insights.com.

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This move signals a new form of competition between banks and fintech vendors. The deal has garnered significant media attention, not only due to the high price tag (the acquisition was for roughly US$650 million), but also because the acquisition speaks to broader trends in the financial services market. With this acquisition, Fiserv looks to offer clients a streamlined path to start a digital brand; modernize its core infrastructure; and provide new products, services, and digital solutions to its customers.

The transaction complements Fiserv’s digital financial solutions portfolio with Finxact’s API-first capabilities. Fiserv can now expand its client base with API-based solutions that enhance access to banks’ data. While on the surface Fiserv is simply complementing its existing services, a deeper look suggests this acquisition reconfigures existing competition between large banks and fintech vendors.

Large Banks and Fintech Vendors

Until recently, banks have tried to partner with fintech vendors to harmonize their offerings in the open banking space. In general, this collaboration was forced by circumstances and was a patch to banks’ lack of clarity on their open banking strategy.

For too long, financial institutions have wondered what comes after APIs and if there was any business potential in open banking. The current answer is that there is indeed business potential, and as a result banks (especially the global ones) want to regain control of the “tech” part of the “fintech” equation.

Evidence of banks regaining control of technology is confirmed by recent moves of global FIs to create their own digital innovation units, including JP Morgan, Standard Chartered, and TD. The “tech” aspect is centered on developing applications that will be consumed by clients and partners.

Recent Aite-Novarica Group research, Creating Customer Value Through APIs: Research Study Results, indicates that APIs are becoming a competitive differentiator for banks as a delivery channel to corporate clients. This shift brings to the forefront a strong market requirement to save scarce developer resources and reduce time to market by optimizing the developer experience and simplifying coding.

What Comes Next?

Aite-Novarica anticipates that global banks will win over fintech vendors if they are able to engage with the developer as a separate persona, for example, through having a dedicated product team. They can then actively run a developer community to test new APIs and receive valuable feedback, as well as focus on low-code development, such as through code samples, low-code tools, and abstracting entire experiences into APIs.

Large global banks will compete directly against fintech vendors by creating their own app development platforms to attract API developers. These FIs prefer to build in-house since, presumably, they can achieve a competitive advantage and deliver more value to customers. Smaller banks that do not have sufficient budget for such a demanding approach will rely on fintech partners to deliver API-based digital solutions to their customers.

Fiserv is addressing this need with its new Developer Studio and the upcoming launch of its revamped AppMarket. The planned acquisition of Finxact is an indicator of the market, and Fiserv is positioning itself to better enable clients in a new competitive environment going forward. If you have thoughts on this acquisition, I’d love to hear them! Please reach out to me at ecamerinelli@datos-insights.com.

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SCF platform vendors must integrate their platform solution using API connectors to share data with bank partners. Banks must set up tight partnerships with fintech vendors that follow the strategy of building a platform friendly to their banking partners.

Innovative SCF platforms create cloud-based ecosystems of best-of-breed players. The offered services enhance incumbent SCF platforms’ capabilities, providing treasury and finance teams with a decision-support system to optimize the enterprise working capital.

Corporate treasurers expect to run their operations from their primary workbench: the ERP or the treasury management system. SAP can now strongly secure this capability. While this announcement obviously has benefits, it will also have some consequences that corporate users, bank product managers, and other SCF vendors must be aware of.

1. For corporate users:

The SAP and Taulia proposition will remain of interest to very large corporations that act as anchor buyers and run SAP as their main ERP solution. The native integration into SAP’s ERP and Business Network solution portfolio builds the decision-making cockpit that Aite-Novarica Group predicted in the previously mentioned report.

SAP considers Taulia a market leader in the buyer-led SCF market. This will leave the supplier-led market—typically made of small-medium enterprises (SMEs)—out of the picture, apart from those SMEs that will be brought into an SCF program by their anchor-buyer clients.

2. For bank product managers:

A bank that wants to regain control of its customers’ data will likely decide to directly control its SCF activities. This type of bank also realizes that it must rely on a fintech partner to do so, with the partner running the “tech” side of the equation and the bank tightly holding the “fin” strategy and proposition.

The expected result of this partnership is a multi-bank platform model with member banks empowered to keep control of their corporate clients’ SCF data, moving from being solely providers of funds to becoming advisors and enablers of the client’s supply chain strategy for resilience. SAP’s proposition to become the working capital management leader through more direct control over Taulia makes this more difficult, as it inevitably relegates banks to the role of funding sources.

The announcement from SAP says, “SAP will invite additional financial institutions to run their clients’ working capital management business on the platform,” but the evidence is that corporate customers’ SCF transaction data will remain confined within the SAP and Taulia platform. The acquisition also supports suspicions that Taulia’s model of an independent-buyer-centric SCF platform tailored for large corporations cannot scale sufficiently without the direct (and financially interested) support of corporate-centric partners (SAP, in this case).

3. For SCF vendors:

This will cede ground to SCF vendors that deploy cloud-based platforms to build a marketplace-like ecosystem of buyers, suppliers, logistics service providers, fintech developers, and—of course—financial service providers (e.g., banks, insurance companies, credit risk management providers).

The tech solution will be a service in the hands of financial institutions that can keep visibility of their clients’ SCF operations (with the given permissions) even when that client is running an SCF scheme with some other financial institution in the marketplace.

The entire SCF ecosystem will be impacted by this deal, but steps can be taken to ensure a positive impact. Corporate users should select SCF partners that allow them to run all operations on their enterprise system (e.g., ERP or TMS).

Banks should set up tight partnerships with fintech vendors that follow the strategy of building a platform friendly to their banking partners. And fintech vendors should develop solutions that generate real business opportunities for banks while ensuring that SCF solutions reduce both operational costs and credit risks for bank adopters.

To discuss this topic further, please contact me at ecamerinelli@datos-insights.com.

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