Bank-to-corporate Relationships: Can Technology Offer a Clearer Perspective?
The ‘back to basics’ theme that we have heard over the past 12 months will surely produce a different Sibos this year, with increased emphasis on resiliency and traditional fee-based services for many banks. But beyond the doom and gloom, it is exciting to see that SWIFT has enhanced the agenda with a forward-looking set of sessions on innovation. Banks are often chastised for not being innovative enough or daring to think about innovation in a period of turmoil, so it is great to see this issue becoming a major stream in the annual Sibos debate.
There is growing confidence that the market is starting to move in the right direction. However, we’ve not seen any significant changes to suggest that we can be sure of when it will become fully stable. That being said, we have seen a great amount of activity in the areas of both transaction banking and risk management, currently two important areas for banks.
A theme that will become increasingly prominent at Sibos and beyond is the relationship between banks and their corporate clients. This has changed dramatically over the past decade and is no longer the happy marriage it once was. The influences that have shaped this transformation are being felt throughout the whole financial services sector, from the largest global business right through to the humblest small or medium enterprise (SME). In the current context, amid the credit crunch, banks need to do more to support their corporate clients who are calling for innovative solutions.
This is an age of urgency: as business volumes decrease, companies are forced to look inward and find opportunities for improving process and organisational efficiencies. The ripple effect has also meant that market structure has undergone a transformation too, with many organisations regrouping following corporate restructuring, and larger companies moving from multiple, decentralised operations to shared service centres (SSCs). The markets today bear little resemblance to those we were working in as little as five years ago – and even less compared to the past 18 months.
In the trade finance world, the move to open account trading in recent years has marked the shift of power in bank-to-corporate relationships. It is widely said that open account trading is a faster, easier and a less costly way of settling transactions than using traditional documentary credits and collections. Despite being the least secure method for exporting, open account trading now represents around 70% of global international trade, compared to 15% for letters of credit (LCs) – and the reported come-back of the latter does not seem to change that share significantly. It was the corporates who led the change in the trade finance market and decreased significantly the use of traditional trade finance tools. This is, in part, a response to the banks’ inefficiency in this space and lack of agility.
Banks have traditionally offered corporates online facilities to ‘help’ them automate their trade finance business and have a clear view of their transactions. However, this has too often tended to be restricted to the provision of rather limited online web forms in which corporate clients can enter LC details and view the status of their transactions. While valuable for banks because it saves them a data input or re-keying job, this had no real value for the corporates.
Companies that are major users of trade finance products, both traditional and more tailor-made working capital financing products, want to gain a common way forward with banks but this has always proved to be difficult.
Corporates need to receive information more quickly to allow them to optimise cashflow as they look to reduce costs and increase productivity. Treasury departments are coming under pressure to manage costs in line with their banking needs – an increasingly difficult task. The knock-on effect should be that banks are able to react to these market forces as corporates become more willing and able to move their business relationships elsewhere.
Corporates need to increase the visibility of the supply chain internally for their suppliers and match the flow of goods more closely with payments and invoices. But more than anything, corporates need their banks to become a participant rather than an intermediary. They need them to take a more active role in helping them manage their supply chain and their trade services business. The shift to open account transactions led by corporates has proven to banks that if they don’t reduce cost and offer more services, corporates have the power to find different ways to trade and can effectively bypass the banks.
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. One example is how market trends in the trade services and financial supply chain space have propelled the development of multi-bank platforms, which provide a true multi-bank architecture where customers – typically large international corporations – can access multiple banks and their consolidated financial supply chain transactions via a single front-end solution.
With many companies operating with multiple relationships insisting upon a single sign-on and view of their trade transactions, the development of multi-bank platforms benefit both those large international companies that need consolidated access to multiple banks and banks that require financial supply chain solutions to meet their clients’ needs. While such multi-bank services are not the ultimate one-size-fits-all answer to all corporates’ requirements, they can nicely complement a bank’s proprietary channel optimised for other customers’ segments and are a good example of where technology can improve transparency and quality of the bank-to-corporate relationship.
We’re observing that the transaction banking area, with its focus on fee-based revenue models, is an area that is nicely weathering the economic storm as demonstrated by the positive contribution that transaction services has made to the bottom line of several major banks over the past year or the lively interest a solutions provider receives for its solution in this space. But beyond the significance and growth of banks’ revenues in this area, we are also seeing new offerings being developed with cash management and trade finance convergence leading to many new service offerings and, dare we say, innovative approaches by banks to address their corporate customer needs.
Bunge, one of the largest agribusinesses and a user of trade finance, is an example of one corporate that has been proactive in telling their banks that they want a single channel of communication and value-add business functionality. Seeking to improve its operational efficiency, Bunge looked to remove faxes and emails as well as manual tasks around the monitoring of its credit lines. By using a multi-bank portal, it was able to manage instruments like export LCs and export documentary collections to support its domestic Swiss hub and production centres around the globe.
Technology is something that requires investment in order for banks to be more attractive and maintain or gain a competitive edge in today’s market. What corporates ultimately want is an efficient means of dealing with banking partners and the services they provide. Without doubt, corporates have ‘raised the bar’ by leading this revolution.
Meeting customer expectations will not be an easy task for the banks, with less money available for investment, but they have recognised the need to change their approach. 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. Those that don’t adapt will find that they are operating in a shrinking, niche market.