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Five years on from chaos

 

Five years on from calling the electronic trade market “chaotic”, Paul Simpson, JPMorgan Chase Trade Business Executive, looks back to that time and argues that banks – individually or in partnership – must continue to lead the charge, and that some may be more ready than others.
In the premiere issue of GTR five years ago, I characterised the electronic trade market as “chaotic” and called on banks to take the lead “through the quagmire of uncertainty” as trade finance, logistics and processing converged and markets began to raise their expectations of providers.

 

Five years have passed, and while considerable progress has been made towards integrating products and services, there is still plenty of work to be done, and even less time in which to do it. I would argue that banks – individually or in partnership – must continue to lead the charge, and that some may be more ready than others.
More demanding than ever
While there has been significant advancement in the past five years, the prevailing trend in the trade and logistics global marketplace continues to be rapid change. Banks are challenged to meet the current and evolving needs of clients who have never demanded more from us than they do now.

 

New emerging markets, geopolitical risk, thickets of trade regulation, and the customer’s need to help keep cycles short and goods moving are keeping trade bankers permanently on their toes. We have also seen many changes in worldwide trade – including a huge shift from inter-regional to intra-regional trade flows.

 

Sourcing patterns have also changed significantly, as manufacturing and service providers move to less costly developing markets.

 

When I first wrote for this publication, the internet, globalisation and an understanding of the value of information were driving CFOs and corporate treasurers towards tools that would allow them to better manage risk and working capital.

 

Providers understood that web-enabled trade would help companies meet the challenge of intense competition, rising costs, and after September 11, significant new security, information and regulatory requirements.

 

Logistics, finance, information and processing were rapidly converging as companies looked to maximise working capital efficiency. Non-traditional trade players assumed new roles, while non-bank providers were acting as both partners and competitors.

 

The complexity of the global trade environment and an urgent sense of “time as money” pushed companies to sell increasingly under open account and third party protocols rather than via classical trade instruments. The resulting efficiencies were intended to help manage the cash conversion cycle and all of the information related to it in an internet-enabled convergence of cash, trade and treasury operations.

 

In the last year or two, increasingly sophisticated clients have demanded integrated offerings from trade providers. Convergence is no longer theoretical – it has happened; and buyers and sellers have been forced to turn theory to practice as buying patterns and global trends increase the need for breaking away from the traditional non-integrated approach.

 

Supply chain integration has assumed a broad importance in today’s commercial world, with corporate treasurers, government agencies, technology providers, bankers and logistics professionals all holding major stakes in the worldwide flow of goods and services.
Keeping treasurers happy
Corporate treasurers see the positive financial impact of efficient supply chain management. Operational inefficiencies drain cash from firms as they handle their daily business of producing, distributing and selling core products.

 

The financial survival of many companies depends on their ability to focus on executing against their key operating benchmarks. Five years ago, cost reduction, process outsourcing and real-time management of financial information were the responsibility of operations staff. Now treasurers are operations people, too.

 

For a long time, banks have been involved in the financial aspects of supply chain management. As the providers of commercial letters of credit, steamship guarantees and pre-export loans, they have addressed some of the financing and settlement needs of buyers and sellers in cross-border transactions.

 

Over the past several years, banks have been called upon to engage in a much wider range of world trade facilitation – namely, integration of their financing and information technology with the physical aspects of global commerce.

 

In 2002, I wrote that banks would have to take the lead in developing supply chain solutions, since they are involved in many components of the supply chain. Their involvement drives knowledge and transparency across many of the physical and financial flows. This knowledge facilitates the creation of the technology and processes that allows seamless integration of multiple partners.

 

Today’s financial institutions have been pushed by their customers to integrate their trade services vertically and enable more interoperability across the whole range of industry participants. What is needed, they are telling their bankers, is a comprehensive commercial management programme.

 

While banks are no closer to undertaking the actual physical aspects of trade – loading planes, piloting freighters – they can increasingly play a crucial intermediary role between their customers and all the participants in the ever-lengthening global supply chain, including freight forwarders, customs brokers, and inspection firms. This role requires broad knowledge and operational skills not normally associated with financial institutions, as well as commitment to understanding the specific logistical and regulatory business needs of clients in different industries.

 

The opportunity for banks is real, but only for those firms willing to make the necessary long-term investments in people and technology.
Logistical pressures
Meanwhile, logistics companies – the businesses that actually arrange, coordinate and execute the physical movement of materials and finished goods around the world – are feeling a push to integrate as well.

 

In an atmosphere of relentless competition and pressure to reduce costs, various providers are struggling to provide a quicker and more customised client service. Some are even beginning to combine the physical and financial supply chains through the acquisition of banking licences – thereby giving their customers access to end-to-end trade services.

 

Barriers to entry across the supply chain spectrum are falling rapidly, and the trend seems to be accelerating.

 

Banks and other trade providers continue to be asked the question: “what are you doing to adjust to this rapidly changing marketplace

  • ”. Clearly, some are further along than others, but no firm is unaware of the radical change taking place in their business models.

 

 

Banks have become very proficient at the financial aspects of the trade business. However, it is obvious in 2007 that our customers – who actually engage in all the commercial transactions that we facilitate – are demanding that we approach the trade business just the way they do: as an integrated assembly of the disparate products and services they require to operate successful in the global marketplace.

 

At JPMorgan Chase, which acquired Vastera’s global logistics business in 2004, end-to-end solutions that integrate the financial and physical aspects of supply chain management are provided to companies ranging from small US-based equipment manufacturers to energy companies and big-box retailers.

 

The decision to acquire logistics and managed trade services capabilities was made when we realised the necessity of understanding the details of our client’s business flows, and anticipating emerging requirements across their operational spectrum.

 

Bank providers with this understanding will receive an increasing share of the treasurer’s trade wallet; banks that don’t understand, or fail to respond to changing customer supply chain needs, are going to experience continuing price pressure and a commoditisation of their products and services.

 

In 2002, I wrote: “If financial institutions are not able to bring innovative, efficient, risk mitigating products to their clients, the clients should be significantly questioning the value provided by their bankers”.

 

This is happening now. Bankers and other key stakeholders must challenge each other continually to re-examine their contribution to the business value chain. Integrated solutions, which are the product of a climate of innovation and partnership, are critical to bringing us all the transparency and efficiency so critical to success.

 

Five years from now, it will be very apparent which firms and institutions have achieved this integration.