Corporate TreasuryFinancial Supply ChainLetters of Credit/Open AccountTaking the TSU Forward

Taking the TSU Forward

Managing the supply chain and improving efficiencies within trade finance processes has always been a challenging prospect for corporates. The industry has seen many initiatives introduced over the years to help mitigate and eliminate operational risk such as non-payment, as well as ensure the straight-through flow of data along the supply chain.The focus has also shifted from managing trade documents more efficiently to how to manage the actual data contained in those documents.

The fact that 85% of trade today is done on open account has also driven this change in dynamics. Web-based tools and portals that allow corporates to view, confirm and exchange data online is the latest trend and it is the Trade Services Utility (TSU) that will help fuel this development.

The Current Trade Environment

The TSU is a data matching and workflow engine that compares the commercial data submitted by banks and reports the matching results back to banks. It was developed in response to the increasing decline of traditional trade instruments, such as letters of credit (LCs), which are considered to be cumbersome and expensive, and the move to open account where banks have been disintermediated. As a result, banks have been unable to provide important value-added trade finance services to corporate clients as well as the certainty and assurance that underpinned LCs in trade transactions.

The TSU is helping to bridge the gap between the LC era and open account environment by re-affirming the bank’s role within the supply chain, such as the ability to assess the underlying transaction of trade flows and offer financing options triggered by trade transaction data as well as provide automated reconciliation of incoming payments. There is certainly room for improvement, however, and banks need to work hard to provide the services that corporate clients currently demand.

When corporates interact with their banks, they provide data on a continuous basis – be it for a LC, payment, guarantee or foreign exchange contract. Systems integration that can allow that flow of data effectively is vital and the transition away from processes based on documents within the trade cycle is a priority. By their very nature, documents are difficult and slow to manage and, because they are usually manually processed, they are also error-prone. Products and initiatives that can add value without disturbing the trade flow are essential; and we can see in the next section that the focus on documentation is at the heart of corporate pain points in the trade cycle.

Corporate Pain Points in the Trade Cycle

In order to assess the efficiency of a corporate’s trade flows, it is important to ask three basic questions:

  1. How do you contract?
  2. How do you invoice?
  3. How do you reconcile the payment with the invoice and the contract?

The first issue that arises when we talk to corporate clients is that, no matter how big the company is, they still use a variety of methods to contract with counterparties, such as paper, e-mail, phone or a proprietary system from their customer or counterparty. Having so many methods in place is an operational risk, legally complex to manage and, as a result, very cost inefficient. Addressing this problem depends on the corporate’s negotiating power and whether they can encourage customers and suppliers to install their transaction management system of choice – not an easy task. This also applies to invoicing where corporates often use a variety of methods to invoice customers.

In response to the question about payments, i.e. reconciliation, the main problem is lack of clarity and certainty around the incoming payment. The amount does not often correspond to the amount expected and there are insufficient references to link the incoming payment to the pending invoice. In addition, payments are often incorrect
and this is usually because the process is manual and therefore error-prone. In addition, if we consider the export and import side, treasurers can tightly control outgoing payments because they make the final decision but incoming payments are more difficult to manage and it is harder to predict the exact payment date.

These inefficiencies are caused by the fact that, right now, we don’t have a standardised way of doing business and this is where the TSU can really help to eliminate unnecessary complexity. Corporates can benefit from the automated international, standardised acceptance of an invoice through the TSU, which should make it a lot easier for treasurers to predict incoming flows. The TSU created international standards for the exchange of data for contracting and invoicing, which will improve the reconciliation process and allow banks to offer products that have greater security around the assurance of payment.

Dealing with Trade Challenges: Action Points

First of all, it is important for corporates to pinpoint all of their trade flows and identify which ones are causing problems that could immediately benefit from the TSU. Incidentally, using the TSU requires no implementation on the corporate side. Most of the banks that have been active with the TSU from the beginning already have the necessary web-based connection in place with customers so getting the data to the bank is no extra burden for the corporate.

From a technical point of view, the use of web-based portals really improves efficiencies by creating direct links with ERP systems where data can be easily uploaded – accurately and automatically. Compare this to using documents where data has to be re-entered and typed – slow and likely to contain mistakes. The benefits are clear but the real stumbling block is how corporates can convince their counterparties to conduct business online, such as view payment terms on a web-based system rather than relying on physical documents.

The counterparty has to understand and believe that the data they receive is real, that the bank can assure this fact and that the customer is real – this is a fundamental change in mindset though. The best way to help counterparties make this transition is to help them see the cost of their current inefficient way of working. For instance, if counterparties can identify the cost of non-integrated data and the inefficiency of working with numerous methods of contracting, they might re-consider how they currently do business. We could compare this to the first time electricity was introduced – people managed before electricity was invented – but didn’t electricity make life so much easier?

Conclusion

To make sure the TSU continues to evolve, we need to increase the number of transactions that pass through it; this will really enhance its credibility within trade finance. There are about 60 banks currently on board and it is also important to encourage more to join but this is a gradual process – not all banks have the right systems in place and there are also banks that still have a long way to go in understanding what it is and how it could be used. In addition, there is the challenge of creating products that can be used with the TSU. For example, many banks focus on supplier financing, which might not always suit the exporter driven markets, such as Belgium, France or Germany.

Among corporates, there is growing awareness of the TSU and how trade finance is evolving, but making the first step and convincing counterparties to transform the way they do business is a substantial challenge. Keeping in mind the benefits and advantages of using the TSU is one way that corporates might find this transition a little less arduous.

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