Trade Finance? It's All About Trade Services
The world of trade finance has witnessed a dramatic restructuring of the traditional bank-to-corporate relationship. Now, more than ever, banks operating in the trade finance arena need to be able to understand and anticipate their corporate customer’s every need, and be prepared to adapt their trade services business accordingly.
In Financial Insights’ most recent study, Payments and Finance Meet the Supply Chain, when businesses were asked to select their main business goal, the top goal was efficiency and cost reduction, which drives and underpins the next most common goal – process improvements and the increased use of technology. Fifty per cent or more of respondents included improved financial reporting, process reengineering or improvement, maintaining or improving audit control, and more effective risk management. All of these require deeper integration of business and bank processes and greater visibility across the entire end-to-end process flow of a transaction.
In order to grow their business, banks need to be more involved in their clients’ supply chain management, gain a deeper knowledge on their corporates needs and provide the technology to facilitate that and attract clients. Until recently, most banks kept themselves out of the financial supply chain and have offered corporates a portfolio of limited online facilities to help them enter details and initiate transactions. While this has proved valuable for banks, it has yet to provide real value to corporates.
In an open account world, documents still need to be checked, and the process is so similar to letters of credit (LC) checking that many banks are now providing it as part of their service package, thus relieving their customers of a very routine job and, if the process is properly integrated within the business and systems workflow, achieving STP benefits too. By developing niche expertise in certain regions, the banks can help their customers reduce the risk of entering and operating in such markets, as well as helping with trade facilitation.
The role of banks is not just restricted to processing LCs and managing documentation, but provides expertise at a detailed level. Often a bank’s trade experts sit down with their corporate clients and their suppliers to advise on the trade services processes and help them design new documents, for example, and this is when they provide true ‘business consultancy’.
According to the Financial Insights study, the lack of integrated financial flows is a barrier for banks and businesses. A lot of value will be placed on technology that enables business process automation and improvements across organisational silos.
In order to optimise cashflow, corporates need to receive information more quickly to reduce costs, increase productivity and reduce discrepancies. Finally, corporates need to increase the visibility of the supply chain internally as well as for their suppliers and match the flow of goods more closely with payments and invoices.
Corporates have to do a lot of things when managing their supply chains and frequently their internal systems don’t handle these tasks as well as they would like. Technology, however, can bring corporates and their importers improved task management capabilities as each user has a personal customised task list which is directly linked to the corporates’ business priorities: diary function and alerts, treasury dashboards and so on, as a fully integrated solution.
Technology enables corporates to raise LCs automatically as soon as purchase orders arrive, removing the need for significant manual intervention. Technology can also improve the way in which corporates interact with their banks on one side and their suppliers on the other. This would result in a faster delivery of goods globally and ‘significant’ cost reductions through the automation of the management of LCs.
Corporates need the kind of functionality that can be built on top of these basic input mechanisms and can make use of the data contained in them such as the provision of custom reports based on extracted data. Corporate treasurers will be able to see upcoming payments details that could help them to identify possible cross-sell opportunities – financing requests, forward rate contracts and so on. It is easier now to cross-sell because of the level of business and technical integration within companies, rather than siloed as before.
The Financial Insights study also found that 88% of the corporates surveyed thought they would be either equally or more dependent on their bank, while very few (11%) thought they would be less dependent. This result reinforces the conclusion that corporations see banks as crucial partners in achieving their financial supply chain objectives
To this end, the corporates have ‘raised the bar’. Banks have recognised the need to change their approach and many are committed to new trade services business models. For those that manage to break down the traditional trade finance silos, there will be a whole new revenue opportunity to sell an extended range of financial products under the trade services umbrella. The convergence of cash and trade may not be new, but it has been gaining momentum recently as more and more clients ask for the capability. According to the Aite Group’s most recent study, one-third of US banks surveyed currently offer their corporate customers a web portal for integrating cash management and trade finance, while an additional 40% plan to do so over the next 24 months. Those that don’t adapt to market trends will find that they are operating in a shrinking, niche market.
For a variety of reasons, the corporate-to-bank relationship has changed radically over the last decade and this has perhaps been most evident in the consolidation of the number of banking relationships retained by companies. These clients expect a closer relationship with their selected bank (or banks), with the latter becoming true business partners, moving deeper into the business to interact and advise. Corporate banking products and services have been very much commoditised in recent years, and banks now need to look very closely at what they are offering to ensure that that they are adding genuine value to their clients’ businesses. Technology is a key enabler and both corporate businesses and banks need to have modern, open systems in place so they can interact effectively and meet the challenges of today’s markets.
For both supply chain and connectivity, these are examples of practices and attitudes changing – from corporates as well as banks. Many challenges remain, but with every challenge comes an opportunity; from the banks’ perspective, an early move to ‘re-inventing’ services in response to corporate expectations should pay substantial dividends in the future.
The market has been revolutionised by the introduction of supply chain techniques, aimed at integrating the global trade process from purchase order to payment. Banks need to handle shorter time cycles for processing, process multiple transactions of lower value and be able to align the movement of documents with goods. They need to reorganise from a business and technology perspective in order to support end-to-end trade operations. Rather than the traditional approach of operating a single point of contact with the corporate to execute a specific function, banks need to convert from being intermediates to becoming a ‘participant’, serving the whole chain and providing visibility over the entire trade process. This will give them the opportunity to provide value-added services to all parties in the transaction.
Banks could do well to look at the evolution of the logistics industry over the last 15 years where there has been a step change in logistics operations. In goods tracking a frequent issue – no-one ever knew where the goods were in the system. Now goods can be pinpointed immediately. Banks need to provide the tools and services to fully integrate the ‘purchase-to-pay process’ from a business and technical perspective and provide full transparency of the cycle in order to help modernise trade finance for corporates and keep their place in the ecosystem.