http://www.ibspublishing.com/index.cfm?section=TRS&action=view&id=10226
Tom Dunn,
Orbian
Over the next few pages, we call in on some of those claiming to offer solutions for the financial supply chain. Who does what to whom?
Clearly not one to mince his words, Tom Dunn, chairman of Orbian, claims his company is the ‘world’s largest supply chain payments processing system’. The system certainly has a solid background, originally being launched in 1999 as a co-venture between the world’s largest bank, Citibank, and German technology giant, SAP.
Several years on, it is now a privately held company headquartered in the US with an office in London. And despite the change of ownership, Citibank still maintains an interest as one of Orbian’s many global sales partners.
The basis of what the vendor offers is a business-to-business supply chain payments platform that provides an interface between corporate buyers and their suppliers, largely operating in the open account trading arena.
The platform was built ‘at considerable expense’ (a little over $140 million), eventually going live in 2001 with US-based tool manufacturer, Stanley Works. Since then, Orbian has processed over 600,000 individual transactions worth more than $15 billion. Having gathered momentum, it currently shifts transactions worth around $5 billion a year for a list of 20 large corporate buyers and just over 1500 of their suppliers, each of which receives it payments via the platform. Since day one, Dunn claims the system has not had a single technical error.
In its own words, the company provides hosted electronic payables presentment and payment services, and offers ‘cost-effective’ receivables finance. ‘It is unique as a proposition as an adjunct to the payments system,’ Dunn adds. The platform enables ‘accelerated funding’ for suppliers receiving their payments instructions through the system because Orbian buys the receivables from them, either automatically or as a manual offer by the supplier through the web portal. Once the vendor has received funds from Orbian (within two days of receipt of payment instructions) it no longer has any exposure to the corpor-ate buyer. Effectively this means suppliers can enjoy account terms of just two days, even if they are actually on standard 60, 90, 120 day or longer terms with their buyers.
The Orbian concept works in this way because it is a two-stage affair. It has the payments structure, and this is supported by a funding business, Orbian Finance. As an example of the benefits of this model, Dunn cites the case of another US-based corporate client, Autozone. This is a large corporate retailer that has hundreds of car-part shops across the US, and a long list of suppliers from around the world. He says that, through Orbian, Autozone has dramatically improved its working capital management by extending the terms it imposes on its suppliers to 360 days, without damaging the relationship it has with them. In isolation, such an action would be most unpopular and would all but destroy any sustainable supply base, says Dunn. By working with Orbian, he says, it can get these extended terms, aiding its own cash flow. Meanwhile, the suppliers also benefit from cash payments, from Orbian, much earlier than is normal.
To enable this model, what the vendor has developed, says Dunn, is a ‘well-respected and unique’ funding model allowing it to go to the capital markets with a programme supported by the future payment instructions of Autozone (or any of its other corporates).
Armed with these, it borrows principally in the US commercial paper market for the 360 days that Autozone’s payment terms adhere to (commercial paper is a money market security issued by large banks and corporations, generally used for purchases of inventory or management of working capital). When Orbian receives the funds due from Autozone, it pays back the holders of the securities.
In essence, the suppliers are enjoying the benefit of Autozone’s strong credit rating, getting a far lower rate than they would otherwise obtain. The lower rate also determines Orbian’s cost of funding, allowing it to add its margin on top. It also charges for each process transaction.
On the buyer side, to date, the system has been US-focused. However, Dunn says it is now ‘building up a European and Asian capability’. On the supplier side, it has users from all around the world. In certain locations the LC might prove a more reliable payments mechanism. Indeed, although the Orbian system is based on open account trading, Dunn remains convinced that the LC still has a role to play, simply because the penetration of systems from Orbian and its competitors is ‘fractional’ in the context of total global trade payments. However, the way forward for the LC has a clear path for Dunn. ‘All of the logic indicates that it’s going to be electronic-based and with in-built platforms that allow for accelerated funding of supply chain resources.’
Orbian’s response is to offer its two-part solution as discrete products. Corporates will likely take both, but banks have been approached to take just the payments aspect on a white label basis. The vendor is therefore working both for and against the banking community. Dunn is ‘constantly mindful’ of this, but says that Orbian’s bank customers are still able to make a profit on processing, ‘even in the most tightly fought competitive situations’ – something which the humble paper-based LC seemingly does not allow. Orbian, he adds, can also deliver ‘decent volumes’ by getting a raft of new supplier businesses on board.
Orbian is happy to supply both payment and funding products to banks that are up against credit limits on certain clients or that don’t see buying receivables as an efficient use of their capital. To date, Orbian claims ‘one of the five largest banks in the world’ as a white label user, and another ‘top-fifteen’ European bank that has the portal set up and is ‘out marketing to its customers’.
As far as setting the standard of trade payments operation goes, Dunn is realistic in his appraisal of Orbian’s market penetration: ‘The market is still evolving and the needs of customers are still sufficiently evolutionary that it would be inappropriate to suggest that anybody is yet to emerge as an industry standard’.
‘The market is still evolving and the needs of customers are still sufficiently evolutionary that it would be inappropriate to suggest that anybody is yet to emerge as an industry standard’ - Tom Dunn, Orbian
Making integration with the buyer as seamless as possible is his answer. To this end, Orbian has adopted the ANSI (American National Standards Institute) communications protocol, as well as its own proprietary format. Rather than trying to mandate how the product works, this is intended to keep the buyers’ processes ‘fundamentally unchanged’. Indeed, states Dunn, ‘having something that can be embedded more straightforwardly into the payables and receivables function of large industrial corporations is going to be more valid’.
Although partisan towards open account trading, Dunn’s take on the LC is that it is not dead, simply ‘because it has a big installed base’. Predictably though, he foretells of a ‘migration away from it’. Supporting his view is Dunn’s colleague, Greg Gorman, EVP for product growth and development. Gorman has first-hand experience of the delights and complexities of the LC, having worked alongside banks such as Standard Chartered, one of the world’s major trade finance players. From this perspective, he feels more than qualified to assert that the paper-based LC is an ‘extremely inefficient and cumbersome process’.
Gorman too notes that in recent years there has been ‘a bit of a seachange’ in the move to open account trading, as well as a ‘solidification of international supplier relationships’ where buyers and suppliers are taking a much longer strategic view of their partnerships.
This, he believes, has allowed products such as Orbian to come into the market. The race to gain some kind of critical mass is on it seems.
Labels: Economics
