Interview: Crisis Emphasises Role of Trade Finance
Q: (gtnews): Globalisation means that to survive and thrive, even small companies must increasingly look beyond their national borders. The old maxim ‘export or die’ has never been truer; hence the growing importance of trade finance in the armoury of any treasury department. However, before we discuss it in more detail, what are MIT’s origins and how did it develop into a trade finance specialist?
A: Paul Cohen-Dumani, MIT:
Micro Informatique & Technologies SA, aka MIT, is based in Lausanne, Switzerland and was founded in 1984, so the company has recently celebrated its 30th anniversary. MIT’s main product CREDOC – the computer system for handling documentary credit operations -was launched two years later and is an advanced trade finance back office software product developed for the banking sector. CREDOC has been used by many banks in Switzerland and elsewhere in the European market. We’ve also developed references in the Middle East through our focus on trade finance.
More recently, in 2010 MIT launched a middle office trade finance system called Trade Risk Active Control, aka TRAC, which supports collateral management in the frame of structured commodity finance activities. This was an area where there was much to do as most banks were using Excel spreadsheets to monitor credit facilities, many with multimillion credit facilities that were handling select customers into trade finance. So we developed that software, TRAC, in partnership with local Swiss bank, Banque Cantonale de Geneve (BCGE), which is active in commodity finance and was already a user of CREDOC.
TRAC has proved quite successful for the company as we found our fifth customer this year for the product and we launched the product officially in 2010. In addition to BCGE, our second customer which issued a request for proposal (RFP) was French bank Natixis and here we’re talking of worldwide deployment, with branches in Asia, America and the head office in Paris using the software. Then we found National Bank of Abu Dhabi (NBAD) here in Geneva, which also was already using CREDOC and added TRAC. Last year, we added a major contract for TRAC with Switzerland’s UBS, which is just going live now with the system via a one-year project.
Most recently, we’ve found a Russian bank based in Zurich, although at this point I’m now yet authorised to reveal their name, but it brings the total number of customers for this new product to five.
So the company is doing well with two product lines that are complementary. Although independent, both can be used as an integrated solution. MIT is starting to see competitors for the TRAC system and there is strong competition in the back-end, but no other firm has both or is able to similarly provide an integrated solution. It’s amazing that it’s still the case and certainly won’t last forever, but it’s a fact. So that gives us a strong message to convey to the market.
The bank that MIT mostly recently signed up for TRAC also bought CREDOC to provide them with an integrated solution. So sometimes we can sell CREDOC all alone, sometimes TRAC all alone, or both as an integrated solution, giving us different options in the market.
As for the company’s positioning in the market, MIT might be a small company but also a successful one that is working with prestigious banks. The names include Intesa SanPaolo, Natixis, NBAD in Switzerland and also, further afield, banks in the Middle East. We’re working with UBS and all the prestigious cantonal banks in Switzerland, including the Zurich Cantonal Bank which is particularly highly-rated bank.
Turning to the trade finance market, what have been the most fundamental changes over the 30 years since MIT was established?
That’s a good question. There have been many initiatives going around the markets over that time, especially in the exchange of information between corporates and banks. Nice initiatives and new formats, including messages format and some substantial investments – especially by the technology vendors. Now we’re talking about the SWIFT project called Bank Payment Obligation (BPOs) and supply chain finance. Always there is something that’s just been a quite interesting initiative, all of the time difficult to pick up.
Among the key aspects for me was whether to invest heavily in technology, for example on a nice format message, if it’s unclear if or when I’ll eventually see a return on that investment. What I saw, for instance, in commodity finance, was a specific need for banks. Most banks have the problem of monitoring their customers using the Excel spreadsheets, so we designed the TRAC application. The success we have with that application justified my assumption that we would get a quick return on investment if we invested in that area – and we were right.
Bearing in mind the political instability now prevalent in many different areas of the world, is trade finance always available – albeit at a price – or is it simply not offered in the worst-affected regions?
Well, if you look at the plain vanilla instruments offered, trade finance is basically things like letter of credits (LCs), guarantees and collections – they’re quite heavy financial instruments. Of course, these instruments are very popular, including in those markets that might be defined as risky. LCs are very popular in the Middle East and they also remain heavily used in both Africa and Asia.
So you would have these financial instruments used for this these market regions whether from local banks or banks in Western Europe and North America that would also deal in LCs for only these regions. Naturally, an LC would seldom be used where a European company is selling to a European buyer.
So then what role does technology play in developing the more sophisticated trade finance solutions?
It’s true that the more your volumes increase, the riskier it is to do trade finance if you’re lacking the proper technology to monitor your activities – because of the nature of the administration load involved in dealing with these activities.
So, of course, technology helps build the nation. It helps the standardisation needed between corporates and banks, and, of course it helps to speed the execution of operation in the frame of trade finance transaction because without technology – or sometimes less sophisticated technology – the operation may take a few days more and today time is money.
When China’s economy was booming – along with those of the other ‘BRIC’ (Brazil, China, India and Russia) members – commodity prices were extremely volatile. Is this still the case, or have things calmed down a little more recently?
They are still highly volatile and, therefore, in commodity finance the bank needs to monitor the price – maybe not like a trader who monitors price to the last second, but let’s say on a daily basis. Banks needs to monitor the volatility of commodity prices because basically the traders are playing with the bank’s money that they lent. So the bankers need to understand the trading transaction they are financing. They need to finance the commodities because, for instance, if you lend €100m to a trader who buys goods and resells them and then goes bankrupt midway through a transaction, the bank is left with the goods and has to resell them.
If the price of the commodity collapses, your €100m suddenly becomes €70m so you’ve lost 30%. So the goal of a bank is to lend €100m, recuperate €100m and make money on the risks they all find by lending the money. That is why the bank needs to thoroughly monitor the evolution of commodity prices.
What about the recent concerns from the volatile currencies of some of the emerging markets (EMs), such as India and Turkey?
Well it can be the volatility of currency, the volatility of the commodity or the country’s political instability. These are all factors in assessing the quality of the counterparty and all these elements enter into consideration when analysing the risks.
So then how do you assess specific countries and how good or bad a trade risk each one represents?
I’m supplying the technology rather than doing the underwriting, so it’s hard for me to assess that, but each bank in their own country would make their own assessments of the country they are being asked to underwrite. I recently spoke with a bank that was interested in our product on what was a multi-branch basis. It was amusing to see that that the bank had its headquarter in one country, while its operation in another country was highly interested by the software, and they were telling me that the country where the branch is very badly rated is the country where the headquarters are located. So that was interesting. It was just to explain that each bank had a rating for the country, and that rating depends on many factors.
What is MIT planning for Sibos this year?
Sibos 2014 is in North America, a market we are keen to develop in the future. It is interesting to see that Natixis is just about to go-live live with TRAC in New York. So we hope to capitalise on this success.
You’ve been in business 30 years. How do you see it trade finance changing in the next 30? Do you think countries such as Mexico will start using it as they become more important?
Well, a lot of ‘experts’ have been predicting the death of LCs for the past 30 years, and they are still widely used although approximately 80% of world trade is conducted via open account according to research generally accepted in the field. So documentary operations account for approximately 10 to 20% of world trade and this percentage has been quite stable, although we must bear in mind that world trade volumes have grown exponentially over the past 30 years.
From what I’ve seen in the market, 10 years ago trade finance was seen a bit as a has-been discipline in banking. Somehow the recent political crisis has put trade finance back in the loop, since it is in practice a fairly low-risk activity while big money has been lost in other areas of banking. Furthermore, we see many banks wanting to develop commodity finance, and take market share from some western European banks – historically the key players in this field.
Lastly, is there anything else that you would like to add or any points that you wish to highlight?
I think that the introduction of technology in trade finance over the past 30 years has strongly helped banks and corporates in managing their volume growths and enhance their efficiencies when processing and exchanging information.
Whether technology can radically change the way trade finance is conducted remains to be seen. It will be interesting to see if SWIFT’s BPO will pick up. While the LC is a bank’s commitment to pay upon reception of goods related documents, BPO is a commitment to pay based on data matching. BPO has all the ingredients of a game changer in trade finance. But again, is BPO bound to succeed and perhaps reduce strongly the use of plain vanilla trade finance instruments? Highly difficult to predict…