Trade Finance Challenges Facing Banks
In recent years, trade finance has undergone sizeable changes. Increased migration of manufacturing production to lower cost base countries such as China continues to fuel a trade boom as these countries rely on the large-scale import of raw materials to feed their manufacturing capabilities. The export-led growth of these countries also underpins higher spending power for their workers, in turn driving consumer demand for imported goods.
To compete on such a playing field, banks need more than ever to offer innovative and better-integrated trade finance solutions. Only those banks able to deliver such solutions, while containing costs, will protect and grow their revenue stream.
International trade relies as much on smooth cross-border financing as on the smooth cross-border flow of goods. As importers and exporters become more sophisticated in their demands, they will give their trade business to banks that can work within multiple time zones and currencies, that have on-the-ground experience of their markets and counterparts, and have the expertise to pull these offerings together in one seamless transaction.
To be first in line, trade finance teams need to ask themselves a number of difficult questions. How well are their resources being managed? Are they overstaffed but under-specialised? Are their IT budgets overstretched but leaving key banking operations under-served? Are they compliant with upcoming regulations or perilously unprepared? If you know these are issues facing your bank but are not sure of the solution, you are not alone. In fact, you may be surprised to find that the answer could lie in your IT department.
There is no point in a bank being global on the outside if it is not also global on the inside. Just as there is no use in having numerous regional or overseas offices if they don’t know how to talk to each other. Having a handful of IT applications that aren’t on the same page is clearly a waste of resources.
In an ideal world, the answer would be found in a one-stop solution. Tailored to meet the needs of your bank, such a system would standardise and centralise all your transactions and client data, allowing trade teams unprecedented flexibility in how they manage workflows and international client relationships. Divorcing transactions, staff and applications from specific locations would allow banks to build virtual teams able to manage each other’s backlogs and ensure true transparency across the organisation.
Asked what they look for when choosing a bank for their financing needs, importers and exporters increasingly cite one key factor (sometimes above price) – market knowledge. Ask trade finance teams what sets them apart from their competitors and the old adage ‘know your customer’ rings out. Both concepts are interlinked and only achievable with the right operating system.
Knowing your customer means understanding its business from a global perspective. That means an awareness of how a production slow-down in China impacts its African operations, how a hurricane in the US affects its shipping orders, and how legislative change in Eastern Europe affects the enforceability of its contracts. It also means having the ability to respond to these changing conditions with speed, efficiency and seamlessness.
Knowing your customer from a practical perspective depends on having a network of offices, either regional or international, that are truly interconnected. It depends on an operating system that allows for a standardised relationship and risk management information about a client’s transactions to be accessed across the whole organisation.
Knowing your customer is also in a bank’s immediate self-interest. Only by knowing exactly who they are financing can banks ensure that deals are priced according to true risk and that they are properly protected against fraud.
In an increasingly regulated world, financial institutions face two new challenges – how to ensure they are insulated from counterparty risk and how to guarantee internal compliance across all levels of their organisation.
Banks have seen the damage that a lone ‘rogue trader’ can do yet many continue to give individuals unprecedented autonomy in terms of their own transactions. They have seen the consequences of institutionalised window dressing or carpet sweeping but many continue to use operating systems that allow transactions to go untracked from a central perspective.
What banks need is true transparency. For this they require a solution that reveals the bigger picture and that provides a range of authorised staff the ability to access transaction records and to intervene when necessary.
Equally important, banks need to be able to respond to regulatory change, especially when, as in the case of new regulations such as Basel II, compliance impacts directly on their bottom line.
Trade finance teams are under increasing cost-containment pressure, especially in some of the emerging markets on which the sector traditionally depends. Faced with tightening margins, many teams need to tighten their belts. Fortunately for many there is plenty of room to do so.
While investing in new technology may not seem an obvious step towards cost cutting, many banks fail to realise how much more they are spending by running multiple applications that may be neither up to date nor cost effective. Not only is their technology spend unnecessarily inflated – imagine the economies of scale achievable in terms of installation, training, upgrading and support with only one system in use – but the unsuitability of the applications being used is preventing them from optimising their resources.
For most banks, people constitute their best, and often most expensive, resource. Managing that resource to maximum effect is therefore one of the most important things a bank can do to not only achieve cost efficiency but to increase capacity.
Financial institutions are rightly prepared to pay a premium for banking professionals with the right skill set but not all of them are making best use of those skills. Within a global sector such as trade finance, expertise transcends borders making it vitally important that the input of specialists can as well. Only by releasing key professionals from the constraints of location can the benefit they bring be felt across the whole organisation.
In a world where bankers are regularly transferred from region to region or country to country, each building up specialist knowledge of industrial sectors or legislatures, the person best placed to advise on the intricacies of a deal originated in one country office is not always the person currently heading that team. In short, true flexibility allows the expertise of key individuals to be tapped to best effect.
Just as out-of-date operating systems lead to out-of-date working practices, isolated applications lead to isolated teams. Ask yourself how much more efficient your trade finance team would prove if it could work in real unity. Consider what is stopping your trade finance specialist sitting in London from handling the transactions of his Hong Kong team members, and vice versa. Move a step further and ask what is stopping you outsourcing some of your operations to low-cost processing centres. Again, the answer most probably lies in your IT department.
The ability to see and predict demand and to manage capacity accordingly is one of the key challenges facing trade finance today. To rise to this challenge banks need, more than ever before, new solutions to ever-evolving problems.