Supply chain finance and the art of double speak
I’m not really a linguist. I’ve tried to develop fluency in French and made an attempt at German but the only language in which I ever developed any competence, apart from English, was a form of double speak called Management Speak. I haven’t used it for a while but amongst a group of management consultants I can soon pick it up again.
Native speakers claim that it is merely a specialist set of terms, jargon if you like, that distills complex business issues into straightforward language and imparts a more professional tone. Why talk about “cutting out the middle man” when you can simply disintermediate? It’s not always best to say what you really mean. It’s more professional to say “We value your suggestion but I’m afraid this is non-negotiable on this occasion” rather than simply “f*** off”?
But there’s another language, a dialect of management speak, that is way more complex and it’s almost impenetrable to most of us: Banker Speak. Here’s an example from David Gustin, CFA from Global Business Intelligence, responding on linkedin to my article on the UK Government’s announcement on supply chain finance. I’ve exchanged views with David a few times and he has a highly expert voice on this subject. He explains why suppliers get to pay 20%-30% for credit:
“Everyone knows that if you have a BBB Balance sheet like Citibank, it is hard to finance Investment Grade companies which can effectively use the capital markets. So where does that leave the rest. Subjected to how Banks determine pricing, which really comes down to 4 factors:
1. Cost of Capital (very high for SMEs because of Basel III)
2. Operating Cost – High delivery costs to monitor SME lending
3. Cost of Funds – not as simple as what you pay for deposits, but a function of Asset Liability management and now with new rules around Liquidity and Net Stable funding ratios, impacts brokered deposits, sweep accounts, etc.
4. Profit Margin based on complex RAROC and other models; This is the secret sauce of banks and really who knows – relationship can come to play, competition, bank policies, etc.
Add all this up, and charging SMEs 15% to 20% for loans is Painful, but not surprising.”
Allow me to translate.
“Banking is a complicated and expensive business and what with those pesky regulators and all, we can’t lend for less than 20%. After all, someone’s got to pay for all this stuff!”
I shouldn’t mock. I mean it when I say I trust and respect David’s expertise and I don’t doubt that he’s right. But he’s right in the sense that Hewlett Packard was right in the 1990’s when they chose to maintain their distribution and Value Added Reseller (VAR) model for selling PCs while Dell was selling direct. Right in the old world but increasingly wrong in the new world.
I’m reminded of what Jack Welch did in the dot com boom. He launched an initiative in GE whereby all the GE businesses had to come up with a strategy to use the internet to destroy themselves. It was counter intuitive but genius. New, lower margin business models based on the use of the internet were threatening every industry and Welch realized that if GE didn’t do it to itself, someone else would. The same is happening now in the banking industry.
David Gustin is perfectly correct. The increased capital adequacy requirements and all of the other regulatory restrictions that have been imposed on the banking industry act like a straightjacket that prevents it from offering credit at commercially realistic rates. But the banks should stop acting like victims. There are financial supply chain models that are emerging that don’t rely on traditional trade finance model – just like Dell didn’t need VARs – and there are financial institutions including some banks, that know it. They are starting to think in a new way – even at the risk of destroying their own business – because they know that if they don’t, someone else will do it for them.
For buyers and suppliers in industry, they don’t really care about the plight of the banks and the increased cost of regulation, they just want to stay in business, and if that means cutting out the middleman – or, because I want to sound clever, disintermediating the banks, they’re going to do it.
Pete Loughlin can be found on twitter @peteloughlin