Crossing the Chasm - Multi-bank Trade Finance Becomes Mainstream
Adoption of a new technology typically follows a number of distinct phases of market acceptance: from ‘early adopter’, to early and late majority markets, through to maturity and end of life. However, unlike traditional consumer markets, the transition from one phase of technology market adoption to the next is a discontinuous event where many of the aspects of market adoption have to radically change for the market to progress from one phase to the next. The most critical of these is the transition from the early adopter market for a new technology to the early majority market characterised by mainstream adoption as the next technological breakthrough. This transition is often referred to as ‘crossing the chasm’ due to the significant hurdles involved and the likelihood that the new technology may fail to ever become mainstream.
For some time, a growing number of major corporations and some banks have been driving the early adopter phase of the multi-bank trade finance market. This has proved to be a true paradigm shift from traditional bank-centric trade finance to putting the corporate at the centre of the financial supply chain ecosystem where it naturally belongs. This transition involves both a reversal of focus (from the bank to the corporate) as well as the introduction of a new technology focused on delivery of corporate-centric multi-bank collaborative trade finance.
Delivery of a multi-bank trade finance solution involves much more than just the dusting off of the legacy systems previously offered by banks as part of their trade services customer portals and re-branding them as bank-independent solutions. Nor is it sustainable to simply replace the legacy bank customer portals with essentially the same in reverse – the corporate trade portal – where the corporate attempts to get its banks to operate directly on its own proprietary trade finance database, application or portal.
Multi-bank trade finance represents the opportunity to drive new (collaborative) business processes and introduce a fundamental step change in the way traditional trade finance instruments are managed and used operationally. This new paradigm requires the existence of a foundation multi-bank channel or communication infrastructure which allows the corporate trade finance application to inter-operate with each of its bank partners without imposing proprietary applications, interfaces, or proprietary (expensive) integration technologies. Such inter-operation should necessarily support straight-through processing (STP) for both the corporate and for each of its banks as well as providing technology independence for each from the other party. Most importantly it should provide a robust end-to-end electronic channel between the corporate and its banks which enables full electronic collaboration in support of trade finance.
The availability of such an infrastructure and its rapidly increased adoption has been one of the factors which had allowed this market to successfully transition across the chasm and enter mainstream market adoption. However, if ever a technology were going to fail to cross the chasm from the early adopters to mainstream adoption, multi-bank trade finance certainly had the odds stacked against it. Firstly, the very nature of multi-bank trade finance challenged the existing bank paradigm of delivering deep and broad banking applications on a proprietary bank portal designed, if not to fully lock in a bank’s customers, then at least to provide transaction processing efficiencies for the bank and the opportunity for a bank to up-sell and cross-sell other bank products and services.
Ironically, one of the reasons that multi-bank trade finance has now become mainstream and its adoption has not been blocked is the fact that the initial areas of interest for multi-banking centred on the traditional trade risk mitigation instruments, most notably the letter of credit and more recently standbys and guarantees. For some while banks’ attentions have been elsewhere. With 80% of global trade now being transacted on an open account basis, banks have been very focused on how they can participate in their customers supply chain and the delivery of meaningful supply chain and supply chain financing products and services. The technology used to support traditional trade finance for many banks has been largely ignored as an area which does not require focus or strategic market attention.
Banks have now woken up to a market that has evolved from the early adopter use of these new-paradigm multi-bank solutions into a mainstream market that they can no longer oppose and for which many are now in catch-up mode to implement multi-bank support which does not simply shift the burden, cost and efficiencies from the corporate across to the bank.
Over the last 12 months, as this transition has gained momentum, banks have been turning their attention to how best to support the multi-bank needs of their global corporate customers in such a way that is sustainable and delivers efficiencies and benefits for both corporate and bank. This has led to some mature thinking on the delivery of multi-banking as a complementary channel to a bank’s existing trade services solutions.
In many respects, this has similarities to early market adoption of Internet retailing a decade ago. When it became evident at this time that it would be practical and possible for end consumers to purchase a whole range of products over the Internet, many traditional retailers viewed Internet retailing as direct competition and as a significant threat to their very existence. This was obviously compounded by the entirely confusing dynamics of the dot-com bubble, the emergence of ‘virtual marketplaces’ and a host of other strategic Internet phenomena. As the dust settled and the market matured it was quite evident as it is today, that the Internet offered an additional retailing channel for traditional retailers that, if fully embraced, would add growth and efficiency opportunities rather than simply erode existing sales. Likewise many banks are now recognising that multi-banking for trade finance is not simply a replacement of existing bank products and services, but rather an additional channel in support of a fast emerging customer requirement for collaborative multi-bank trade finance.
By fully utilising a secure and robust multi-bank channel infrastructure, banks are able to tightly integrate this new multi-banking channel into their back office systems alongside their existing proprietary trade finance channel and to recognise the opportunity to deliver added value services.
A growing number of banks have now secured global access to multi-bank channels in order to provide a standardised multi-bank solution to their global customers while also being able to deeply integrate the multi-bank trade finance messaging into their back office applications.
At the same time, there is evidence of community adoption of this channel through the network effect of corporates driving their banks which drives other corporates and then to other banks. In Europe, for example, a number of powerful global corporates have taken this further forward, establishing an alliance to support a shared vision of trade finance and to send a common and consistent message to their banking partners globally to drive adoption of a single standard multi-bank infrastructure.
Convergence in this area is also driving the possibility of electronic collaboration between the corporate and its banks, substantially improving the quality, timeliness and efficiencies of trade finance interaction and accruing benefits for both corporates and banks. For corporates, this provides the certainty and visibility for them to support more agile and decision-making around cash and the use of working capital as well as supporting new business processes in the financial and physical supply chains.
Most recently, there has been significant interest in the extension of this multi-banking paradigm and infrastructure to encompass guarantees, providing the opportunity to break from the largely manual and paper-based processes being used today by corporates and banks alike. This will only increase the pace of adoption for corporates and banks and establish the multi-banking foundation for broader and deeper trade finance and supply chain finance initiatives.
Although it is often very difficult to predict when a new technology market is approaching this chasm and even more difficult to guarantee successfully crossing it, it is always evident when this has been accomplished and the market has entered mainstream growth. The rapidly increasing momentum of adoption by both corporates and banks and the convergence of technology around a common multi-bank channel infrastructure as well as growing maturity in the understanding of the applicability of multi-bank applications all provide evidence of the mainstream arrival of this new paradigm as a cornerstone of future financial supply chain collaboration and the participation of banks as partners in their corporate customers’ financial supply chain ecosystems.