BankingCorporate to Bank RelationshipsBenefitting From Multi-bank Trade Finance

Benefitting From Multi-bank Trade Finance

There has been a substantial shift in thinking around traditional trade instruments – but this has been obscured by many other factors: the disintermediation of banks from traditional trade, the associated move to open account and the search for the holy grail of a common supply chain finance product.

But there have been fundamental changes resulting from corporates’ increasing need to integrate their trade finance processes into other corporate business processes (supply chain management, supply chain finance and treasury) and the recent availability of open multi-bank technology that challenges traditional thinking in trade finance. That has in turn increased pressure, stress and even conflict in the interaction between corporates and their partner banks.

Challenging Traditional Thinking

It is a common failing that, without considered thought, we often design and build solutions to meet new requirements based on the same assumptions we had used to build the solutions that need to be replaced. The more relevant, proven and successful these have been to solve yesterday’s problems, the more difficult it is to avoid them restricting the design of solutions for new and emerging requirements. The solution providers and infrastructures that most successfully met the challenges of the previous market phase can, paradoxically, become the biggest constraints to solving today’s problems.

This is relevant to recent history in trade finance. With the move away from traditional risk mitigation instruments, like the letter of credit (LC), towards open account, much of the focus by banks (and to a certain extent, corporates) has been on designing products and solutions which benefit this new market requirement. It also allows the bank to re-introduce itself into the supply chain and trade finance process.

While this has been the focus, scant attention has been given to the 20% of trade still being performed under the LC and the somewhat larger percentage that utilise guarantees, standby LCs and documentary collections. For these corporates and their banks, little has changed. The original paper-based processes and the bank-centric technologies are still designed to reduce the cost of transaction processing by the bank and to delegate data entry to the customer through the use of customer portals.

Over the past few years, there has been evidence of a substantial shift in this position. Rather than preserve the traditional, often adversarial, roles of the corporate and bank and their respective systems and technologies, the new paradigm in trade finance automation centres on the rapid deployment of a common and open neutral trade finance channel. It enables multi-banking for the corporate while preserving the multi-customer standardisation essential for banks.

Over the past year in particular, there has been rapid growth in the use of this multi-bank channel, sponsored by a growing number of large and medium-sized corporates (in all geographical regions) and an increasing number of global and regional banks.

Removing Pain Rather than Transferring to the Other Party

The momentum behind this initiative is well beyond the ‘tipping point’ where the market simply returns to its previous condition. This is evidenced by the increased collaboration between groups of corporates to promote convergence on a multi-bank channel and the increasingly active participation of core partner banks pursuing similar objectives.

Under the old model, banks strove to attain lower transaction processing costs through higher levels of automation and global standardisation. However, this was implemented in a very self-interested manner focused almost entirely on the benefits accruing to the bank itself.

At the same time, pressures for corporates on costs and management of working capital have driven further integration of finance and treasury with the operational supply chain. This has led in turn to an increased requirement for speed and ease of access to the process, documents and data flowing between a corporate and its multiple partner banks. The result has been escalating difficulty for the corporate in dealing with bank-specific proprietary platforms, systems, procedures, security, formats, standards and data.

Simply adding features to the current trade finance systems and services did not resolve the problem. In fact, in many cases it made it far worse for the corporate customer who now had also to deal with multiple security formats, passwords, technology platforms, applications and user processes.

Responding to the increasingly critical nature of this issue, corporates and technology providers started to develop solutions that were focused on the corporate’s difficulties rather than on the bank’s transaction-processing efficiencies. But this resulted in ‘multi-bank’ trade finance platforms that aggregate data and process for the corporate but create multiple proprietary processes, channels and technology for the bank. Rather than resolving the issue, these solutions simply transferred it from the corporate to the bank. As a bank typically has more corporate customers than the corporate has banks, the transfer of these challenges actually resulted in an increase in pain for the whole collaborative community. This exponential pain, together with stringent requirements for banks in the areas of compliance, security and liability, has restricted the implementation of these corporate systems to a few pilots and increased the frustration between bank and bank customer. In most cases banks have simply refused to operate with these corporate applications. Clearly these solutions will not survive.

In stark contrast, the use of a neutral multi-banking channel to support trade finance automation for both corporate and bank is now well-proven and gaining momentum. The principal benefit of such a neutral multi-bank channel is that it avoids transferring the issue from one party to the other and facilitates the removal of this problem completely. By dealing with the whole process from corporate to bank to corporate it is possible not only significantly to automate and standardise the trade finance process, documents and data, but also to remove many of the causes of discrepancies and errors. At the same time, this provides the basis for standardised collaborative processes and a platform for further extension of the trade finance and supply chain ecosystems.

Trade Finance in the Current Global Recession

Overall, trade will decrease globally by as much as 9% over the coming year. As a direct consequence, the number of trade transactions managed by banks will also be reduced. There is clear evidence of this decline from individual banks, as well as the volumes processed over common bank infrastructures, particularly since the last quarter of 2008.

The increased risk associated with payment as well as the lack of availability of credit has started a trend back towards LCs and other traditional trade instruments, and away from pure open account. While clearly not likely to become a complete reversal of the trends of the past decades, there will definitely be a short-term increase in the use of these traditional trade instruments, together with other trends such as the increased requirements for confirmations and the increased use of documentary collections.

Although the overall volume of trade business has declined, about 40% of banks have now seen the volume and/or value of their LC business increase. In Asia in particular, there has been a significant increase in the value of LC business. These increases are also evident in Europe and the Americas. Indeed, Europe already transacts over 35% of its import business on LCs.

There are also interesting new dynamics between banks and corporates resulting from the credit crunch and the resultant ill-health of banks’ balance sheets. Depending on the health and the reliance on credit, power is temporarily shifting between certain corporates and banks. This is, on the one hand, confusing for some banks in determining priorities and their corresponding short-term strategies, but is at the same time helping them focus on being increasingly pragmatic and responsive to their customers’ needs.

Cost constraints in banks have led some to reconsider whether they can use existing bank infrastructure (such as SWIFT) to meet the emerging needs of their corporate clients. Those who have fully understood the needs of their corporate customers through live collaboration over a multi-bank channel for LCs, guarantees and/or collections, have quickly come to the conclusion that this constitutes defining the solution before understanding the problem. As the 20th Century American psychologist Abraham Maslow once observed: “If you only have a hammer then every problem looks like a nail.” What may work effectively between banks for trade finance is unlikely to provide a viable working solution for corporates. In addition, corporate clients have become very articulate in defining both their integrated trade finance requirements and the benefits which accrue to both communities (corporates and banks). With very few exceptions, these inward-looking initiatives by some banks have become no more than temporary distractions to properly supporting an open multi-bank channel.

The current situation is contributing to the increased adoption of an open multi-bank trade finance channel providing a process which reduces cost, risk and discrepancies while offering visibility, collaboration and the potential for extended business with key global customers.

An Unstoppable Shift and a Great Opportunity

It is clear that the support for multi-bank trade finance is here to stay. More importantly, as it becomes more generalised and standardised it provides benefits not only to the corporate community keen to streamline its finance and supply chain processes, but also to those banks providing trade finance services to these clients. As retailers regard their online retail outlets as a second channel entirely complementary to their traditional retail formats, so banks increasingly view a formal, standardised multi-banking channel for trade finance as complementary to their existing bank customer portals, or applications.

Banks that have embraced this new paradigm are benefiting from the economies of scale as well as the protection (reduced risk and cost) from the need to support multiple customer-specific trade finance initiatives. At the same time, many have seen the benefit of being regarded as true core bank partners to these large global corporates and have been rewarded with additional business.

Therefore, there is an opportunity for banks to serve the needs of their corporate customers as well as maintaining or increasing the level of trade service business once the current economic situation starts to reverse. This opportunity will arise if banks deploy a standardised multi-bank, multi-corporate channel for their customer and themselves. On the other hand, failure to respond appropriately with robust solutions in support of the traditional trade finance demands will result in a lost opportunity for individual banks and the sector as a whole.

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