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Wholesale Banking
ING’s e-commerce event:
Transaction Services Solutions Group
Enhance working capital performance in a ‘brick & click’ scenario
Brussels • November 15, 2016
Wholesale Banking
1. Working Capital - concept
Enhance working capital performance in a “brick & click” scenario | November 15 2016 3
The current market scenery places working capital in the fore front
Buyer
Supplier
• Working capital (W/C) management has moved to the top of the agenda
• Treasurers seek ways to unlock funds trapped in their supply chains
• W/C initiatives release cash and increase liquidity that can be used for strategic investments or debt reduction
Balance Sheet
€Assets Liabilities
Accounts payable
Inventory
Accounts receivable
Cash Drain Cash Source
Net W/C Funding gap opportunities
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Net cash tied up in W/C impacts short term liquidity and operational efficiency
4
Timeline
Order Placed
Stocks
Order Receive
d
Cash Paid Out
Cash Receive
d
Purchase to Pay (Payables)
Order to Cash (Receivables)Forecast to Fulfil (Inventory)
Net Cash Tied up in W/C
Working capital performance metrics
W/C % of sales=
(Trades receivables + inventories –
Trade payables)÷
Sales
Days Sales
Outstanding
(Trade receivables÷
Sales) x 365
Days Payables
Outstanding
(Trade payables÷
COGS) x 365
Days Inventories
Outstanding
(Inventories÷
COGS) x 365
Cash Conversion
Cycle(CCC)
Enhance working capital performance in a “brick & click” scenario | November 15 2016 5
Internal optimisations and external solutions lead to improvement opportunities
Internal optimisations External solutions
A/P process improvement
Inventory management
Incentives alignment
A/R process improvement
Centralise treasury
Rationalise purchasing
$
€ ¥
£
Supply Chain Finance
Receivable-based finance
Letters of credit & guarantees
Payments & cash Management
Risk management
Liquidity management
Cards solutions
Value Chain
Financial supply chain
Physical supply chain
Pu
rch
ase
to
pa
y p
roce
ssO
rde
r to
ca
sh p
roce
ss
Platform Payables
ReceivablesGoods delivery
CashWork in progress
Suppliers
Customers
Wholesale Banking
2. Outside-in view on working capital
Enhance working capital performance in a “brick & click” scenario | November 15 2016
(8) (7) 9 10 15 20 24 27 27 35 38 43 45 45 51 84
25
50
75
100
Hy
pe
r-
ma
rke
ts
Foo
d R
eta
il
Inte
rne
t
Re
tail
Dru
g
Re
tail
De
pa
rtm
en
t
Sto
res
Foo
d
Dis
trib
uto
rs
Ge
ne
ral
Me
rch
an
dis
e…
Au
tom
oti
ve
Re
tail
Co
mp
ute
r &
Ele
ctro
nic
s…
Ho
me
Furn
ish
ing
…
Ap
pa
rel
Re
tail
Dis
trib
uto
rs
Ca
talo
g
Re
tail
Ho
me
Imp
rove
me
nt…
Sp
eci
alt
y
Sto
res
Lu
xury
Go
od
s
Da
ys
DSO DIO DPO CCC
15
4035
27
16
47
38
27
6
50
25
3733
5550
39
10
20
30
40
50
60
DSO DIO DPO CCC
Da
ys
Asia & Pacific Europe US & Canada South America
2 16 23 28 30 30 50 53 60 62 64 67 70 74 80
25
50
75
100
Tra
vel
& L
eis
ure
Te
leco
m-
mu
nic
ati
on
Re
tail
Oil
& G
as
Uti
litie
s
Me
dia
Au
tom
ob
iles
& P
art
s
Foo
d &
Be
vera
ge
s
Ba
sic
Re
sou
rce
s
Co
nst
ruct
ion
& M
ate
ria
ls
Ind
ust
ria
l
Go
od
s
& S
erv
ice
s
Te
chn
olo
gy
Ch
em
ica
ls
Pe
rso
na
l &
Ho
use
ho
ld
Go
od
s
He
alt
h C
are
Da
ys
DSO DIO DPO CCC
7
Opportunities to release cash from W/C exist globally and across industries…
1. DSO, DIO, DPO and CCC are medians, calculated based on sales and end of year balances for comparability. (panel of 11,300 companies) Sources: Capital IQ, ING adjustments, PwC’s “201 Annual Global Working Capital Survey of the Retail Sector
• W/C improvement remains a focus point in many sectors
• In 2016, REL has identified a W/C improvement potential of €1.0tr assuming all companies become top performers
• DPO appears to be the shortest in the US & Canada whereas they seem to be best-in-class for the DSO
• Inventory is the largest area forimprovement
• PwC has identified around€84bn of cash opportunity across the sector
• Overall improved W/C performance due to enhanceddemand forecasting and more agile supply chains as e-commerce requires more accurate availability
• Driven by short receivables, Retail’s W/C intensity seems to differ among subsectors with payables and inventories setting the business mixes
W/C
da
ys
by
ind
ust
ry (
20
15
)1R
eta
il W
/C d
ay
s b
y s
ub
sect
or
(20
15
)R
eta
il W
/C d
ay
s b
y
reg
ion
(2
01
5)
Enhance working capital performance in a “brick & click” scenario | November 15 2016
14
%
9% 1
2%
(2%
)
27
%
21
%
17
%
4%
(4%
)
(6%
)
1%
(2%
)
(5%
)
(2%
)
17
%
(1%
)
(3%
)
(2%
)
14
%
11
%
12
%
(2%
)
27
%
23
%
19
%
5%
(3%
)
(7%
) (0%
)
(2%
)
(6%
) (2%
)
17
%
(1%
)
(10
%) (2
%)
14
%
10
% 13
%
(1%
)
27
%
21
%
20
%
5%
(3%
)
N/A
(0%
)
(2%
)
(6%
) (2%
)
16
%
(0%
)
(11
%) (2
%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
Ap
pa
rel
Re
tail
Ab
erc
rom
bie
& F
itch
H &
M
Ind
ust
ria
de
Dis
en
o T
ex
til
Ap
pa
rel,
Ac
cess
ori
es
& L
ux
ury
Go
od
s
Ke
rin
g
Ra
lph
La
ure
n
Inte
rne
t R
eta
il
Am
azo
n.c
om
Co
olb
lue
Za
lan
do
Hy
pe
rma
rke
ts
& S
up
er
Ce
nte
rs
ME
TR
O
Ca
rre
fou
r
Ott
o
Fo
od
Re
tail
Te
sco
Ah
old
De
lha
ize
2013 2014 2015
8
Peer comparison: W/C as % sales
The W/C performance of selected retail companies active in e-commerce
Sources: Capital IQ, company publications, ING estimates
Comments
• Overall the selected companies show a better w/c performance than the respective sector
• The selected companies have different degrees of adoption of the online channel in their sales strategies (Amazon 100%, Otto 65%, Tesco 6.5%, Zalando 100%, Metro 2.4%, Carrefour 1.8%, etc.)
• Differences in business profile, geographic presence, financial reporting might influence comparability
Subsectors within the Retail industry Companies identified in each subsectors
Enhance working capital performance in a “brick & click” scenario | November 15 2016
19
8 9 7
49
36
24
32
23
10
18
10
3
26
56
10
3 4
18
6
9 7
50
37
29 3
4
23
9
23
10
3
27
52
9
3 4
16
5
8 7
52
36
31 33
22
N/A
18
11
4
28
48
12
5 4
0
10
20
30
40
50
60
9
W/C metric analysis for the selected group of companies and respective subsectors
Sources: Capital IQ, company publications, ING estimates
60
35
47
36
86
68
47
30 3
6 38
69
37
33
27
38
25
22
16
64
47
47
37
86
81
50
31 34
34
57
38
36
30
42
25
21
18
66
45 5
0
37
88
69
50
32 35
N/A
61
40
34
30
44
25
19
16
0102030405060708090
100
29
11 14
51
38
29
8
47
74
71
85
55
54 6
2
32 3
8
35
2730
12 13
52
38
36
10
48
68
68
81
56 6
1 64
31 3
7
60
3031
14
12
50
40
30
10
48
70
N/A
80
57 59 6
4
34 38
63
27
0
10
20
30
40
50
60
70
80
90
Ap
pa
rel
Re
tail
Ab
erc
rom
bie
& F
itch
H &
M
Ind
ust
ria
de
Dis
en
o T
ex
til
Ap
pa
rel,
Acc
ess
ori
es
& L
ux
ury
Go
od
s
Ke
rin
g
Ra
lph
La
ure
n
Inte
rne
t R
eta
il
Am
azo
n.c
om
Co
olb
lue
Za
lan
do
Hy
pe
rma
rke
ts
& S
up
er
Ce
nte
rs
ME
TR
O
Ca
rre
fou
r
Ott
o
Fo
od
Re
tail
Te
sco
Ah
old
De
lha
ize
2013 2014 2015
Subsectors within the Retail industry Companies identified in each subsectors
DSO
DIO
DPO
Wholesale Banking
3. Ideas to optimise working capital performance
Wholesale Banking
a. Internal corporate initiatives
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Closely related and overlapping, they determine the amount of cash reuired to finance operational activities
The level of W/C is the result of three main processes
Purchase-to-Pay
Planning and Strategy
Sourcing and supplier
management
Requisition and ordering
Receipting and Evaluation
Invoice Processing
Dispute Management
Payment Initiation / Cash
Management
12
Order-to-Cash
Sales and Quote Management
Credit and Risk Management
Order Processing
InvoicingCollections
Management
Dispute and Discount
Management
Collection Initiation / Cash
Management
Forecast-to-Fulfill
Product Range Management
Forecast and Demand Planning
Sales Order Processing
Materials Planning,
Purchasing and Replenishment
Manufacturing Scheduling and
Execution
Inventory Management
Warehousing, Distribution and
Reverse Logistics
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Setup of W/C related KPI’s
Strategic level (CEO, CFO)
Working capital
• DSO, DIO, DPO
• Cash Conversion Cycle
• Return on Capital Employed
• W/C as % of sales
• Benchmark (historical, peers, budget)
Tactical level (Division management)
Supply chain management
• DSO, DIO, DPO
• Best possible DSO
• Delinquent DSO
• Aging Balance
Operational level (Department management)
Payables
• Early/Late Payment
• Spend per Term• Supplier pareto• Blocked
payments• Electronic Data
Interchange %
Receivables
• Cycle Time• Cash Target• Dispute reason
ProductionKPIs
ProcurementKPIs
Sales KPIs
Internalfocus
Optimal use of capacity KP
I a
lig
nm
en
t
Setting right KPI’s at each level and cross functional teamwork will stimulate effective W/C control and management
13
Enhance working capital performance in a “brick & click” scenario | November 15 2016
e-commerce’s impacts on W/C performance
DPO
• Digital data: control supplier relationship, better administration of account payables
• More transparent win-win communication along the value-chain, performance gap identification
• Extended ERP platforms, whichstandardize and integrate tradeinformation from trading partners, banks and logistics providers
DIO
• Digital data allows better inventory control
• Reduce physical presence: reduce inventory level
• Improved distribution capabilities and / or Outsource logistics / fulfillment
• Build efficient return infrastructure
• Cross channel inventory is critical to retailer success; flexible fulfillment
DSO
• Operational aspects to be considered (payments security, fraud protection),
• Cash at the counter vs. Online payment methods (purchasing behaviours)
• More efficient payment and settlement solutions (through a new generation of payment service providers PSPs)
• Digital data: track-record of payment behavior, anticipate disputes, easier collection process
A balanced combination of physical and virtual operational setups serving the overall business strategy will lead to enhanced commercial and financial benefits, incl. working capital performance
Wholesale Banking
b. External solutions
Wholesale Banking
b1. Online payments considerations
Enhance working capital performance in a “brick & click” scenario | November 15 2016 17
Within Europe still many differences in preferred payment methods
Italy: 83% cards as preferred payment method
Spain: 91% cards as preferred payment method
The Netherlands: 55% iDeal as preferred payment method
Some countries show “dominant” payment methods
And other countries show many different preferred payment methods
Germany: ELV with 38% most dominant
Poland: Cards with 45%, Online banking 35%
45%
35%
15%5%
Credit Cards
Online Banking
Cash
Paypal
83%
13%4%
Visa / Mastercard
Paypal
American Express
38%
25%
16%
15%
6%
ELVVisa / MastercardPaypalSofort BankGiropay
55%
23%
15%
7%iDeal
Credit Cards
Direct Debit
Paypal
91%
6%3%
Visa / Mastercard
Paypal
American Express
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Use of different payment types for E – and M-com in Belgium
A closer look at consumer payment behaviour in Belgium
3%
1%24%
56%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
E/M Com payments
in Belgium
Other
Cards
Credit transfer
Direct Debit
E-Wallets/Mobile
6%
43%
64%
5%
9%
9%
3%
5%
13%
37%
5%1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Value Volume
Other
Debit card
Credit Card
Direct Debit
Credit transfer
Cash
Consumer Spending Payment Mix Belgium
Enhance working capital performance in a “brick & click” scenario | November 15 2016 19
Ecommerce process
Collecting PSP
Distributing PSP
Choice of set up has impact on your cash flow:
• Collecting PSP: PSP pays out all funds at once or in split payments. Settlement determined by PSP. Timelines can differ from T+1 up to once per month
• Distributing PSP: payment methods / acquirer pays out directly to merchant. Different timelines applicable
Customers Webpage
Account
Account
Enhance working capital performance in a “brick & click” scenario | November 15 2016 20
Closer look to different Payment methods
Payment method Impact on your working capital compared to POS cards
Impact on working capital compared to cash on POS
remark
Cash on delivery -/- -/- payment on delivery. Settlement at T+A after delivery of goods
Cards payments + / neutral + T+1 after ordering of goods
Paypal - - / neutral Cash flow always directly from Paypal
iDEAL + / neutral + Guaranteed and committed payment
Klarna - - Option to also hand over the debtor risk
Enhance working capital performance in a “brick & click” scenario | November 15 2016 21
Considerations when offering payment methods
Client segment
• Consumers vs. Business
• Consumer: local differences
• Business: mainly credit cards
Conversion
• The more payment methods, the higher the conversion rate.
Costs
Cost structures differ among different payment methods:
• Consumer cards v.s Paypal
• Klarna vs consumer cards
• Cash on delivery vs SEPA credit transfer
Settlement timelines
• Among PSP’s
Wholesale Banking
b2. Receivable-based solutions
Enhance working capital performance in a “brick & click” scenario | November 15 2016
• Each solution can be tailored to the company’s specific needs
• Diversification of funding sources; scalable to finance trading growth
• Tailor made and highly flexible (multi-originator, -jurisdiction, -currency)
• Off-balance sheet treatment possible
23
Receivable-based finance
• Receivable-based finance facilitates reducing W/C through the financing of trade receivables
• Depending on the number of debtors, size of the receivables and granularity of the portfolio, various solutions can be offered
Schematic overview
Single debtor
Portfolio approach
A/RA/RA/R
A/RA/RA/R
A/RA/RA/R
A/RA/RA/R
Receivables
Pool
Granular Portfolio
TRPP /
SecuritisationICRF/ Factoring
Approach:
Granularity:
ING Solutions:
Multiple debtors
• Line-by-line approach suited for smaller and multi-country portfolio
• Flexible structure from single receivable financing to a facility for multiple receivables
• Quick execution process
International Corporate Receivables Finance
• Strong balance sheet management tool
• Portfolio approach provides flexibility
• Multiple jurisdictions, originators and currencies can be brought together under one program
Trade ReceivablesPurchasing Program
Non-Granular Portfolio
Single invoice / multiple invoices
What is receivable -based finance?
Receivable-based finance benefits
Wholesale Banking
b3. Payables solutions
Enhance working capital performance in a “brick & click” scenario | November 15 2016
• W/C reduction and free cash flow increase
• Improve supplier relationship combined with better trade terms and conditions
• Reduced operational and payment costs
• Reconciliation tool and early dispute warning
• Automation of payments to key suppliers
• Unlocking W/C and free cash flow improvement
• For worse rated suppliers, attractive source of funding based on Buyer’s credit quality
• For stronger rated suppliers, SCF can still create value, due to improved liquidity, optimised balance sheet and reduction in credit risk
• Transparency regarding status of invoices and timing of payment
• Possible savings in credit insurance
Supply Chain Finance for the upper end of the spend base
• Supply Chain Finance (“SCF”) is a W/C optimisation tool which offers payment certainty, transparency and liquidity to suppliers
• In exchange for these benefits, Buyers are able to improve and modify commercial terms with its suppliers while increasing W/C performance
Benefits for Buyer Benefits for Supplier Schematic overview
2. Supplier sends goods/services and invoice
3. Buyer approves invoice and presents on platform
4. Supplier requests early payment
1. Buyer sends purchase order
5. ING pays invoice amount less discount
6. Buyer pays invoice amount to ING on due date
7. Third parties provide additional liquidity to the program
25
What is Supply Chain Finance?
2
3 4
56
1Invoice
Invoice
PO
7
Buyer Supplier
SCF portal
Funding parties
Enhance working capital performance in a “brick & click” scenario | November 15 2016 26
ING Purchase Control: optimise low-value non-strategic spend
• Purchase Control enables purchasing using virtual credit card numbers. It is based on proven technology/infrastructure
• Purchase Control enables an increase in Straight Through Processing of purchasing, reducing handling cost and enabling extension of payment terms for buyers while improving liquidity for suppliers
Purchase Control mechanism
0,5
2022
1
22 22
0,5
23
0,5
25
20
25
32 32
24
3635
39
0
5
10
15
20
25
30
35
40
Followers (80%) Leaders (top 20%)
% P
C u
se in
va
rio
us
spe
nd
ca
teg
ori
es
Comp hardw, softw & peripherals Printing, copying
Courier, shipping Media, marketing & advertising
Lease & rental Maintenance, repair & operations
Travel expenses Catering
Office supply & equipment
Other possible categories include payments for: subscriptions, seminars, janitorial supplies, telephone/mobile, temporary staff, advertising and promotional items
Purchase Control utilization1
Virtual Card benefits
1.Purchasing cards: Redefining identity in the evolving payments landscape. Aberdeen Group July 2013
What is Purchase Control?
• Cost reduction through less administration, reduced fraud risk, improved supplier negotiation position
• Improve payment terms for buyers, extention up to 90 days
• Control over corporate expenses and compliance
• Convenient and easy to implement
• International solution
Benefits for Buyer Benefits for Supplier
• Faster payments, improve liquidity
• Guaranteed funds
• Reduced collection activity
• Preferred supplier status
Issuing Bank
Buyer/ Importer Seller/ Exporter
BuyerExtend
DPODecrease
DSO
3
4
Suppliers1
Issuing Bank
Issuing Bank
9
8
6
Acquiring bank
2
PO
10
7 7
5
Data flow
Purchase Control™
Wholesale Banking
Annex I. Selected players’ description
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Selected listed players’ description
28
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Selected listed players’ description
29
Enhance working capital performance in a “brick & click” scenario | November 15 2016
Disclaimer
This presentation prepared by ING Bank N.V. (“ING”) is intended to provide information and to serve as a basis for discussion purposes only. While reasonable care has been taken to ensure that the information contained in this herein is fair and reasonable as at the date hereof, ING has not independently verified the information herein and accordingly makes no representation or warranty, express or implied, that the information contained herein is accurate, current, complete or correct. Any estimates in this presentation are provisional only and for indicative, preliminary and illustrative purposes only. This presentation does not constitute any valuation, appraisal or advice and there can be no guarantee that any projected results will be achieved. ING reserves the right, but does not have any obligation, to amend or change such projections or assumptions if ING deems it appropriate to do so. This presentation does not constitute an agreement or a commitment or an offer to commit to or a recommendation to enter into any transaction, or creates any obligations on the part of ING. This presentation and the information contained herein are confidential and may not be disclosed to any third party without the prior written consent of ING. ING does not accept any liability whatsoever for any loss however arising from any use of this document or its contents arising in connection herewith
30