• TRADE FINANCE, TECHNOLOGY

    Financing purchase orders – the best medicine

07 June 2021

How can buyers, suppliers and their financiers match supply and demand for purchase order and invoice finance in a transparent and safe environment? Much more easily, now that the Trade Information Network is live. flow reports on the Network’s first transaction in the pharmaceutical sector

Lack of access to trade finance is, according to the World Economic Forum, one of the top three export obstacles for half of the world’s countries and traders will generally abandon transactions if rejected.1

As part of a collective initiative from its six founding banks –  ANZ, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered – to address this unmet demand for financing early in the supply chain the Trade Information Network (the Network) was established, being first introduced at SIBOS 2018.  Corporates can now easily and securely communicate trade information directly with banks of their choice, via a global multi-bank, multi-corporate network in trade finance.

By providing banks with access to trusted trade information, the Network will help mitigate the risk of double financing and fraudulent trade information.

“The Network puts banks in a better position to assess the risks across the full trade cycle and facilitates banks to provide trade financing earlier in the supply chain to their clients. This will help fill the trade finance gap,” says Deutsche Bank Global Head of Trade Finance and Lending Daniel Schmand. He adds that banks will still continue to provide financing outside the Network using their existing systems.

Sudhir Dole, CEO of Trade Information Network Limited makes the point that the Network creates “the possibility to unlock additional financing opportunities along the entire supply chain”, and as a result, will further support the overall growth in global trade.

The Network is now live and open for business.

How it works

Figure 1: Transaction journey on and off the Network

The Trade Information Network follows an invitation-only principle, i.e. existing users of the Network can invite new users to join the Network. After the new user has completed the registration on the platform, Trade Information Network Limited, the operator of the platform, will review the request and activate the new account. 

Sudhir Dole, Chief Executive Officer, Trade Information Network Limited"The Network unlocks additional financing opportunities along the entire supply chain"
Sudhir Dole, Chief Executive Officer, Trade Information Network Limited

Once corporates are connected on the Network, they decide which orders to upload (the buyer) and which ones to ask to be financed (the supplier) and from whom (the bank). The selected bank processes the financing outside of the Network. The request for financing can be raised also when the invoice is issued and, where applicable, used to repay the earlier financing of the purchase order.2

While the Network’s main aim is to help banks better serve their clients in the pre-shipment phase, and the first transactions (see below) are purchase order finance, its structure “makes it possible for banks to offer end-to-end financing – including post-shipment and payables finance”, explains Kirsten Kunz, Head of Trade Flow Product & Process Management, Deutsche Bank.

First transaction

As one of the founder banks, Deutsche Bank has been instrumental in exploring ways to reduce the risks of open account trade finance and allow its customers to get better access to pre- and post-shipment finance. The Network sits at the core of the Bank’s strategy of reducing risks in this space, thereby increasing the flow of additional finance.

With the successfully executed first real transaction – that involved F. Hoffmann-La Roche AG (Roche), Targos Molecular Pathology GmbH, and Deutsche Bank – having proved the full functionality of the platform, Deutsche Bank is ready to add further clients to the Network.

Jens Noffke Working capital Lead, Global Procurement, F. Hoffmann-La Roche AG"The Network … makes it possible “to provide liquidity at different points of the supply chain process”"
Jens Noffke Working capital Lead, Global Procurement, F. Hoffmann-La Roche AG

The buyer

Roche is the world’s largest biotech company, providing differentiated medicines in oncology, immunology, infectious diseases, ophthalmology and diseases of the central nervous system. The company sees itself as a global pioneer in pharmaceuticals and diagnostics focussing on advancing science to improve people’s lives.

The company established a supply chain finance relationship with Deutsche Bank more than a decade ago. “We have a three-digit number of suppliers across the world focussing on larger suppliers and this number is increasing on a weekly basis,” reflects Head of Treasury Operations Martin Schlageter. 

He explains that for the past four years, in response to supplier feedback Roche has been working with Deutsche Bank to find a way of extending the SCF liquidity to an earlier stage in the supply chain relationship. “The moment they actually raise an invoice they have already spent the money to sell to Roche, so they need financing up-front,” explains Schlageter. If a supplier was limited to their own Hausbank as provider of purchase order finance, this could be quite limiting in certain cases. The Network can help the supplier to gain access to additional financing opportunities from other banks.

Jens Noffke, Working capital Lead, Global Procurement at Roche agrees, “The purchase order that we place initially means a cash outflow for the supplier, so having something on the table at favourable rates that helps is very attractive.” He adds that the Network supports partnership sustainability between Roche and supplier, and makes it possible “to provide liquidity at different points of the supply chain process”. Without such an arrangement, the buyer might have to explore prepayment options as some suppliers could maintain they cannot start the project without up-front liquidity.

The Network, continues Schlageter, “underlines how the banks were willing to invest time and resources in purchase order financing”. It provides the supplier with much more flexibility on how they finance purchase orders and invoices; the buyer simply uploads the purchase order onto the secure Network. Only those banks given access to the purchase order data by the buyer can review it and only the bank the supplier picks gets the finance request.  

Discussions between Roche, Targos and Deutsche Bank started in November 2020. The preparation of the pilot took a little longer than anticipated as each involved party wanted to be extra well prepared.

While the execution of the first transaction worked very well, it also provided scope for further ideas that will improve the experience for other users. The Network took these up right away and made the necessary changes.

Another hurdle that led to slight delay was in getting suppliers used to talking to Roche rather than a financial institution about purchase order finance and allowing Roche to have a more detailed discussion with them on financing and credit aspects – in the same way a bank performs due diligence on a supplier for enrolment on a supply chain finance platform. “They are already overwhelmed by these talks with the banks, but we learned a lot about how banks address financing and how they screen,” says Schlageter.

The supplier

Thomas Henkel, CEO, Targos Molecular Pathology GmbH – a Discovery Life Sciences Company"The Network gives you early money and underpins the business relationship"
Thomas Henkel, CEO, Targos Molecular Pathology GmbH – a Discovery Life Sciences Company

Targos has been providing standardised development and application of clinical biomarkers for the international pharmaceutical and diagnostic industry since 2005. “We already have a successful factoring/payables finance programme running with Deutsche Bank and Roche, a relationship that has been in place for 17 years,” explains CEO Thomas Henkel.

He adds that if a company as large as Roche makes a proposal of supply chain finance to a trusted vendor, then whether or not the up-front liquidity was actually needed, “we would be mad to say no”.

Targos was acquired on 18 May 2021 by Discovery Life Sciences,3 but the Network pilot took place before the change of ownership. Here, adds Henkel, was the opportunity to “strengthen the existing business relationship enabled by this platform on top of the refinancing possibilities”. One example of this was wider access to the Roche procurement team, such as the involvement of Roche procurement – in the form of Jens Noffke – on progress calls.

One size does not fit all of course; the biomarker service involves clinical trials that cannot simply be packaged up and delivered. Trials routinely get put on hold while side effects are dealt with and before they can progress to the next stage. “Here it is a study going over to one to five years, and nobody knows when the conclusion will be – which makes it difficult to work out how much to borrow against the purchase order,” says Henkel. Some projects go on for 12 years, with contracts extended. “We adjusted as we went along but never borrow 100% of a purchase order anyway. We would definitely recommend the Network to others – it gives you early money and underpins the business relationship,” he adds.

However, with Targos now owned by Discovery Life Sciences with an entirely different treasury strategy, Henkel was not in a position to confirm whether or not other purchase orders would follow at this stage.

The financier

Roche uploaded the live purchase order data onto the Trade Information Network platform. The company then gave Deutsche Bank permission on the Network to view this specific individual purchase order and any other of its purchase orders. Targos was notified by the platform that Roche had uploaded the purchase order and could check, verify, and raise a financing request for this order to Deutsche Bank.  The Bank could view the purchase order from Roche, and the result from Targos’ review as well as the financing request

Deutsche Bank picked up the finance request from the Network using API connectivity and executed the financing on its Supply Chain Finance platform. “As a result of the verification on the Network, we were able to successfully apply and receive pre-shipment financing,” says Targos’ Henkel.

With a successful purchase order financing completed on the Network, Targos decided to let a second purchase order follow immediately afterwards.

Kirsten Kunz, Head of Trade Flow Product & Process Management, Deutsche Bank"The Network is a fantastic enabler for us to support our large MNC clients and in particular their suppliers earlier in the supply chain"
Kirsten Kunz, Head of Trade Flow Product & Process Management, Deutsche Bank.

Outcomes

  • As explained earlier in this article, Deutsche Bank was able independently to confirm the purchase order data with both the buyer and supplier and the finance status of it by using the Network.
  • Roche and Targos both assessed the purchase order data as easy to add and approve on the platform. They also confirmed the onboarding process was very straightforward.
  • Targos could move forward with the pre-shipment financing of a purchase order thanks to the usage of the Network platform.
  • As confirmed by both Roche and Targos, the pilot had strengthened their already robust business relationship.

The results highlighted that the platform was simple, secure, and transparent and served the needs of all parties - buyer, supplier and their banks.

Where next?

“We are very excited by the success of the first set of transactions, and it is particularly satisfying to see how effective APIs are to connect the parties to the Network. At Deutsche Bank, we firmly believe that the Network is a fantastic enabler for us to support our large MNC clients and in particular their suppliers earlier in the supply chain,” said Deutsche Bank’s Kunz

Having completed this pilot, the platform is now focussing on adoption and scalability. As Sudhir Dole puts it, “Effectively managing and financing global supply chains is essential for sustainable growth. The first set of transactions confirms the original business case for Trade Information Network and will serve as the basis for the onboarding of a large number of corporates and financiers. This transaction is the first of many lined up over the next few months to continue to demonstrate the platform and its benefits.”

At the time of writing (May 2021) four other financial institutions have already joined the Network for the Pilot and are live – thus supporting the aim to establish an industry standard multi-bank platform.

The prognosis is good, given the reaction of the counterparties in question and further transactions are planned by the banks on the Network.

“I think it is much easier to bring a supplier onto the Network now we have done this pilot,” says Schlageter. “We are having discussions with many suppliers and banks will think more and more how to establish this. Once the platform gains traction more will want to come onto it, but these things do not happen overnight.”

He is confident, however, that there will be more using the Network by the end of the year and has plans to bring more of Roche’s own suppliers and purchase orders onto the platform.


Sources

1 See https://bit.ly/3ihaNFO at weforum.org
2 See https://bit.ly/3wY27Ix at tradeinformationnetwork.com
3 See https://bit.ly/3g7Wn88 at targos-gmbh.de

Stay up-to-date with

Sign-up flow newsbites

Choose your preferred banking topics and we will send you updated emails based on your selection

Sign-up Sign-up

Subscribe Subscribe to our magazine

flow magazine is published twice per year and can be read online and delivered to your door in print

Subscribe Subscribe

YOU MIGHT BE INTERESTED IN

TRADE FINANCE

More Rethinking global supply chains

Supply chain finance (SCF) industry experts gathered virtually for BCR’s 6th Annual Supply Chain Finance Summit to discuss how the industry is recovering from Covid-19 dislocation, embedding ESG into platforms and schemes, and progress on automation and digitalisation. Clarissa Dann reports

More More

TRADE FINANCE, SUSTAINABLE FINANCE

Sustainability and supply chains Sustainability and supply chains

While ESG principles and alignment start at home, they must carry through to supply chains, explain Deutsche Bank’s Anil Walia and Bjoern Goedecke in BCR’s World Supply Chain Finance Report 2021

Sustainability and supply chains More

TRADE FINANCE, EXPORT FINANCE {icon-book}

Is just time... out of time? Is just time... out of time?

As corporates revisit their supply chain exposures as a result of Covid-19, could just in time supply chains be replaced by planning ‘just in case’? Treasury specialist Helen Sanders reports on business continuity management strategies

Is just time... out of time? More