14 September 2008 Comments

 

Comment: Collaboration takes centre-stage

Michael Burkie, The Bank of New York Mellon

Collaboration is the new watch-word in trade finance - replacing outsourcing as the word most often heard at trade finance gatherings. By collaboration, practitioners mean the creation of a one-stop-shop for the management of the physical and financial supply chain under an umbrella that brings in trade services institutions - at both the buyer and supplier ends - funders and logistics companies.

Why collaborate? Because collaboration brings a far greater number of players into the process on a collegiate basis than would be the case with outsourcing, which usually involves just a single megabank. It also widens the potential circle of usage for modern trade finance techniques considerably - creating capabilities within small and medium-sized import and export entities, as well as their respective banks. This is important - considering that the value of the average import letter of credit is just $40,000, with the average open account trade likely to be even smaller.

Indeed, SMEs can often feel excluded from the modernisation of trade services, despite making up the bulk of activity in trade - especially in the emerging markets. Yet a key issue in securing SME engagement in supply chain solutions - especially in the emerging markets - is the fact most smaller companies bank locally, using small local banks currently unable to provide the electronic infrastructure used by larger banks in the developed world.

Of course, many smaller companies have been courted by the global megabanks. Some have been won over; although most remain loyal to their small-town provincial banks - at least for now. Yet the question posed by developed-world trade services operators should not be how can the megabanks wrestle the remaining clients from the local banks? Rather, the trade services community beyond the monoliths should be looking for ways to bring the local banks into the fold. Collaboration is the key.

Certainly, local export/import companies would prefer to retain their long-standing local banking relationships. Meanwhile, many of these local banks increasingly recognise the need to develop electronic processing platforms for trade documentation - something many of them seem a long way from achieving. Few can afford the outlay - forcing many to outsource to the very megabanks currently attacking their client base.

Yet these, often thinly-veiled, white-labelled offerings are far from perfect. Local bank clients are frequently forced to adopt standardised trading practices that have been created to suit the giant flow-business machines located in regional hubs - a change in practice that the bank has to impose on its SME client.

TSU facilitates collaboration

Collaboration removes this dilemma for local banks - thanks to the SWIFTNet Trade Services Utility (better known as the TSU). The TSU has revolutionised the prospects for local banks with respect to retaining trade services business with their local commercial clients.

The TSU is shared infrastructure - "a standard failsafe channel" according to SWIFT - that compares and matches standardised and reusable data elements received from corporates - whether purchase orders, commercial invoices and/or transportation documents. And from November 2008 it will include insurance and certificates among the documents it can match.

Launched on 2 April 2007, the TSU is already making its mark. There are now 42 banks from 20 countries signed up to the TSU, with the number growing all the time. The TSU supports traditional trade risk mitigation such as documentary credits. But it can also support a broader range of services that allow banks to tap into open account trades, which now account for an estimated 80% of world trades. The result locks banks firmly onto the supply chain, which allows for pre- and post-shipment financing and liquidity management. It also allows different providers to offer their specialist elements to the process, without the need for a megabank's processing capability.

This is achieved through the creation of common standards - an essential aspect of open account trading. The TSU's standardised matching data processes help identify discrepancies, which aids authentication. This gives institutions in the chain the confidence to collaborate with local banks - thereby increasing comfort levels and therefore increasing risk appetite. It also increases visibility of the supply chain - allowing banks to identify trigger points for the extension of value-added risk and financial services and products related to cash flow efficiency.

Additionally, the re-usable data within the TSU increases regulatory comfort, allowing banks a previously unattainable level of compliance against their clients (important for Know Your Client and Anti-Money Laundering needs), as well as helping banks meet Basel II stipulations.

Increasing bank involvement

The TSU increases the number of banks able to offer integrated electronic payments messaging to their commercial clients - circumventing their need to develop (or adopt) expensive proprietary systems. This is especially the case in the emerging markets that still bank the vast majority of export/import entities. Local banks in markets such as Central and Eastern Europe and the BRIC countries have lost commercial business to the megabanks - either directly through a loss of business, or indirectly as they have felt obliged to outsource to the global giants. Collaboration using the TSU can reverse this trend.

It is worth pausing on this point as every move in trade services in the past 10 years has tended to favour the big banks - whether that be in the creation of giant flow-business processing machines, the centralisation of processing centres into regional hubs, or the more general development of open account trading that reduced the traditional documentary role of the local banks. The TSU is the first development to run against this tide, creating an enormous opportunity for banks of all shapes and sizes to collaborate with non-competing trade processors at the other end of the trade - hence the new buzzword.

With the TSU in place between supplier and buyer banks, third parties can also be brought in to create a one-stop-shop. These include logistics companies, allowing the physical and financial supply chains to be fully aligned. Again, the leading banks have been pursuing these collaborations for some time. The TSU, however, allows local banks to develop their own solutions - most efficiently in partnership with non-competing financial supply chain bankers. Indeed, specialist banks such as The Bank of New York Mellon have developed their own platforms (which in the case of The Bank of New York Mellon is called Trade Workstation) that can be outsourced to provide local banks with a tailored interface to the TSU.

Michael Burkie, head of European Cash Management, Business Development at The Bank of New York Mellon