01 July 2007 Comments

 

Potential benefits of the Swift TSU solution

Adi Bachar-Reske, Misys Banking Systems

Let’s remind ourselves, the Swift TSU solution was the result of an initiative started by the banks. Twelve banks, among them some of the most influential players in the trade services space, decided to form the Trade Services Advisory Group and work with Swift on a solution that would help them get back into the loop of trade transactions. Much ground had been lost by the majority of banks as the trade finance industry moved from a Letter of Credit basis to one based on open account transactions. These banks wanted to take more of a proactive role in the early stages of a transaction, so that they could exploit opportunities to cross sell other products, e.g. financing and FX. These days, open account transactions are increasingly popular (the consensus seems to be around 80% of today’s global trade) and most banks know about a transaction only when a payment is required – too late to offer any value added services, too late to make any money on it.

It is very straightforward: when the economy is relatively good, LCs (however secure they are) tend to be out of fashion. The internet has aided the unpopularity of LCs as well. When a buyer can run a simple check on the supplier over the internet and lower the risk of the transaction, who needs clunky and expensive LCs? This is just one of the many reasons quoted to explain why they are being used less and less.

That’s not to say that LCs are dead. The developing world, and its booming trade activities, is still very keen on the traditional instruments such as LCs and will probably continue to be for years to come. Even in the US, which arguably has the most wide-spread use of open account business, a recent survey by Bank of America of US manufacturers and their chief financial officers has reported that the bank products used most frequently by CFOs include cash management and LCs, both at 66%.

The problem is that the move to open account transactions has left banks with no real revenue-earning solutions. Trade transactions can be divided into traditional trade (LCs, collections, etc.) and open account (which has no real product).

What about open account and the TSU? Phase one of Swift’s TSU project provides tools to enable banks to respond to the trend towards open account trading via a collaborative, centralised data matching and workflow engine. In order to maximise it, banks need to build upon this new technology-based bank-to-bank service to offer value-add purchase orders and invoices management capabilities, not only in the context of LCs but also to support open account transactions. By offering services relying on the TSU behind the scenes as part of the online facilities, banks ensure that all trade transactions, whether LCs or open account transactions, are directed to them. Corporates get the benefit of using one tool to automate both their LCs and open account transactions.

So why do some banks remain sceptical? For once, banks do not necessarily have the right skills set to handle corporate-oriented supply chain issues. This is changing, as more financial institutions recruit people from traditional supply chain players such as logistics and transportation companies to help them handle this new trend, but acquiring this expertise is going to take time. These skills are crucial in managing the new relationships banks need to have with their clients.

Banks need to have a deep understanding of their corporates’ needs; they need to understand how their customers work and what their actual financial supply chain needs are. It may involve a change of mind set as well, with more customer-focused operations building value add services that would suit their clients’ needs on the one hand and generate revenue for them, on the other. But more than anything in these fairly early days, banks need to pilot their new services with some of their customers – then test, learn and start again.

Adi Bachar-Reske, product marketing manager, Misys Banking Systems