Financial Supply Chain

30 May 2008 Sanjay Dalmia

The following extracts are taken from Sanjay Dalmia's 2008 book, Financial Supply Chain – published by McGraw Hill.

While all commercial transactions resulting in the sale and purchase of goods result in settlement through money transfer between the banks of the buyer and seller - the settlement information around the exchange of goods has been quite independent of settlement information of money. This results in reconciliation delays and sub-optimal supply chain networks.

Also, the improvements in the physical supply chain in the last five decades, technology adaptation by corporates through implementation of ERP systems and automation at banks - provide an opportunity for banks and corporates to integrate the physical and the financial supply chain – thus improving overall efficiency of supply chain networks and providing enormous efficiencies on working capital utilisation.

However, considering that linking together several parties involved in a trade may not be simple, there are several collaborations and attempts to develop standards that will help inter-system automation and straight through processing.

The book defines the concepts of financial supply chain in the background of existing practices and changes that are taking place at the banks and the corporate. Cases from real life illustrate the opportunities and benefits of proposed financial supply chain services.

For a complete view on the subject, the book covers the various players in the field and their efforts in extending the boundaries of financial supply chain. The book also guides banks and corporates to the type of services that can be offered and received under the umbrella of financial supply chain. Finally, as money is closely linked to obligations and law, the book outlines the legal framework surrounding such offerings from banks.


One of the key models, expected to substantially improve processing efficiencies, is electronic invoice presentment and payment. However, the problem presented by Rose Mall Management incorporated a few new twists.

Rose Mall was in the business of constructing malls and letting these to companies, shops and banks as showrooms. On the 28th of each month, it raised invoices on the lessees for rent, electricity and utilities, which they were expected to pay by the 15th of the next month. Rose Mall also raised invoices for ‘pay per use’ kind of services such as common parking bays for unloading, common pantry and cleaning services.

The invoices for the ‘pay per use’ services were often contested-although they were later resolved-and were generally within 10%–15% in variance of the invoice. The payment for these was very often delayed and any subsequent overdue interest charges for delayed payments only added to more disputes and reconciliation problems.

The payment for these came in through multiple sources such as cheques, electronic collections and account transfers. The CFO faced the following problems with the existing system:

  • The reconciliation of payments and invoices was time-consuming and not smooth.
  • Often the customers complained of not receiving invoices or of having forgotten to pay on time.
  • The ‘pay per use’ services were a great hit with the showrooms but the implementation of the operational aspects of it were very cumbersome.

The CFO, in partnership with Creative Bank, decided on the following objectives:

  • The invoices would be presented over the internet to the shop owners.
  • They could accept the invoices in full or in part and then make payment for the accepted amount.
  • The disputed amount could be accepted and settled subsequently.
  • The bank would provide a single source reconciliation of all deposits for the various clearing methods whether they were cheques, electronic payments or electronic transfers.
  • The shop owners would receive e-mail and SMS alerts to remind them to pay on time.

Creative Bank, through their internet offering, proposed Rose Mall would upload all its invoices periodically through the internet channel. The shop owners could accept the invoices fully or partially. Shop owners, having an account with Creative Bank, could log on to the internet offering and place payment instructions for settlement of the invoices directly on the web.

All cheque collections from shop owners who did not have an account with Creative Bank were also routed through Creative Bank. On realisation of the cheque, the outstanding invoices were reconciled against the realisation based on shop owner codes.

For all other electronic collections received into the account of Rose Mall, shop owners were advised to provide reference details as ‘Mall Rent Shop Owner Code’ of the transaction in the electronic payment message.

Creative Bank uploaded all such payments received into the new system offering, which reconciled the outstanding invoices. Any remaining outstanding invoices could be manually marked as paid by Rose Mall if they were subsequently found to be paid. A report of all reconciled and unreconciled invoices for a period could be generated by the CFO as required, through the internet offering.

The system also generated e-mail and SMS alerts on outstanding invoices to the various shop owners. Implementation of this system helped the CFO in several ways:

  • Single view and better visibility on paid and unpaid invoices
  • Efficient reconciliation and follow-up, leading to reduced operations cost
  • Improved customer service through
  • Easier medium to deliver payment instructions
  • Generate timely follow-up
  • Reduction in unwanted follow-ups

As an analogy to trade, the structure is parallel to document collection instructions processed by banks for their customers.


During his visit to the US in early 2002, the Technical Director of the Central Bank of Malaysia was very impressed with the growth of e-commerce in the country. He liked the way in which corporates such as, airline companies, gift companies, and stock-broking companies were expanding their business by providing facilities to transact on their websites and the way such websites were growing by the day.

Eager to learn more about the customer conveniences offered, he transacted on a few of these sites. While he found the overall experience quite amazing, being a banker and familiar with the risks in payment processing, he noticed that making payments was not very convenient and efficient.

"The improvements in the physical supply chain in the last five decades provide an opportunity for banks and corporates to integrate the physical and the financial supply chain."

Most sites requested for payments by credit card. This in itself had two main draw-backs. The director felt uncomfortable giving his credit card details over the web, especially to the small travel operators. perhaps would have safe systems and processes for protecting the credit card details of customers on its websites, but how trustworthy were the small companies soliciting credit card information?

Contemplating promoting such a practice in his Malaysia, the director felt that while this may be possible for payments to the larger and well established corporate it might not work for small and medium-sized enterprises. However, the internet promised small and medium enterprises a powerful distribution mechanism in the future.

He also felt a payments transaction charge of 2% was very high for credit card purchases. Some of the sites offered to accept payments through a few selected banks.

On choosing a bank, he was re-directed to the bank’s website, where he was required to provide his user id and password to make the payment.

He liked the fact that some of the key transaction details such as the invoice number and the seller were transferred to the payments instructions page. This would help him in reconciling the payments in his account statement and also help the seller in reconciling the payments in his books. The medium also had very low costs.

While making payment through the bank had its advantages, he found that the system was not widely used. On investigation, he found that the real problem was the connectivity that had to be established between the banks and the merchants. For example, if wanted to accept payments through Citibank and Manhattan Bank it would have to connect its web servers to the servers of the banks.

The spread of this convenience was being hampered by such costly and time-consuming integration. On his return to Malaysia, the director therefore proposed an e-payment exchange with the following structure:

  • Set up a national web server for e-payments exchange.
  • Each of the banks and each of the merchants will tie-up with this exchange.
  • The bank distributed standards and tool kits for connectivity to its national web server to the merchants and banks.

The key benefit to the merchants was that by tying up with the national web server they were immediately linked to all the banks that were connected to the national e-payments exchange. Additionally, they did not have to maintain separate collection accounts with each of the banks. The reconciliation was easy since all the transaction information was available with the payments information.

The key benefit offered in the above solution is that the transaction information flows along with the payments information and thus makes the reconciliation very simple.

From an analogy to trade, the structure is parallel to document collection instructions processed by banks for their customers. As in the case of trade, it involves a buyer bank that makes the payments and a seller bank that receives the payments.