Potential Benefits of the SWIFT TSU Solution for Banks
Over recent years, banks have lost ground in the fight for trade business, as corporates have sidestepped financial institutions to become a dominant force in the payments market. However, banks cannot afford to ignore this growing and influential area of the market and the opportunity for growth remains.
The launch of the SWIFT Trade Services Utility (TSU) solution enables financial institutions to provide competitive services to their corporate customers – thereby enabling them to regain the business that was lost in the move to open account. So why do so many banks remain skeptical of its true business value?
With the market quickly becoming a volumes driven industry, banks need to automate transactions and deliver value added services, if they continue to seek opportunities to cross-sell their products in the fast growing open account space.
The SWIFT TSU solution was the result of an initiative started by the banks. Twelve banks, among them some of the most influential players in the trade services space, decided to form the Trade Services Advisory Group (TSAG) and work with SWIFT on a solution that would help them get back into the loop of trade transactions. Much ground had been lost by the majority of banks as the trade finance industry moved from a Letter of Credit (LC) basis to one based on open account transactions. These banks wanted to take more of a proactive role in the early stages of a transaction, so that they could exploit opportunities to cross-sell other products, e.g. financing and FX. These days, open account transactions are increasingly popular (the consensus seems to be around 80% of today’s global trade) and most banks know about a transaction only when a payment is required – too late to offer any value add services and too late to make any money on it.
It is very straightforward: when the economy is relatively good, LCs (however secure they are) tend to be out of fashion. The Internet has helped the unpopularity of LCs as well. When a buyer can run a simple check on the supplier over the Internet and lower the risk of the transaction, who needs clunky and expensive LCs? This is just one of the many reasons quoted to explain why they are being used less and less.
That’s not to say that LCs are dead. The developing world and its booming trade activities is still very keen on the traditional instruments such as the LC and will most likely be for the years to come. Even in the US, which arguably has the most wide-spread use of open account business, a recent survey by Bank of America of US manufacturers and their CFOs has reported that the bank products used most frequently by CFOs include cash management and LCs, both at 66%. At a recent trade services event in London, one of the speakers reported the findings of some research they had conducted, which found that the use of open account has risen by 11%, while the use of LCs rose by 7% – which is far from dead. The same is true from the solution provider’s standpoint, where the option to activate the LC functionality within our trade services solutions is very often the first thing that is asked for in requests for information (RFIs) and requests for proposals (RFPs) that we receive.
The problem is that the move to open account transactions has left banks with no real revenue-earning solutions. Trade transactions can be divided into traditional trade (LCs, collections, etc.) and open account (which has no real product).
So what can banks do? A number of things, beginning with enhancing their interface or online facilities with their customers. By enhancing their existing online trade finance facilities and linking it to the corporate ERP system, banks will improve the way in which corporates on both buyer and supplier sides interact with them. This could result in the faster delivery of goods globally and cost savings through the automation of LC management. Corporates could raise LCs automatically as soon as purchase orders are validated, which would remove the need for significant manual intervention. Alternatively, they could also automatically manage these orders as an open account transaction. Either way, the bank is involved early in that global trade transaction and it becomes easier to develop cross-sell opportunities such as financing or forward rate contracts, for example.
Phase one of SWIFT’s TSU project provides tools to enable banks to respond to the trend towards open account trading via a collaborative, centralised data matching and workflow engine. In order to make the most of it, banks need to build upon this new technology-based bank-to-bank service to offer value-add purchase orders and invoices management capabilities, not only in the context of LCs, but also to support open account transactions. By offering services relying on the TSU behind the scenes as part of the online facilities, banks ensure that all trade transactions, whether LCs or open account transactions are directed to them. Corporates get the benefit of using one tool to automate both their LCs and open account transactions.
For once, banks do not necessarily have the right skills to handle corporate-oriented supply chain issues. This is changing, as more financial institutions recruit people from traditional supply chain players such as logistics and transportation companies to help them handle this new trend, but acquiring this expertise is going to take time. These skills are crucial in managing the new relationships banks need to have with their clients. Banks need to have a deep understanding of their corporates’ needs; they need to understand how their customers work and what their actual financial supply chain needs are. It may involve a change of mindset as well, with more customer-focused operations building value add services that would suit their clients’ needs on the one hand and generate revenue for them, on the other. But more than anything in these fairly early days, banks need to pilot their new services with some of their customers and adapt these accordingly.