Common communication platforms and standardised messaging are required to ensure effective information flows between banks and corporates when arranging supply chain finance. Liz Salecka reports.
To date, accessing timely financial supply chain information has proved difficult for both banks and corporates – not least because such transactions involve a number of disparate and geographically-divided parties.
Moreover, information flows in letter of credit-based trade and financing have been hindered by a huge reliance on paper-based documentation and processes.
“A lot of companies moved away from letters of credit to open account trading because it involved less manual administrative work,” says Jon Richman, global product head, trade and financial supply chain, global transaction banking, Deutsche Bank.
“A supply chain can involve several third parties from customs to shipping, insurance, transport and governments. There is clearly a movement towards digitising information flows – although for certain countries, and certain entities, this may prove more difficult in the near term.”
Open account issues
The movement towards open account trading has, however, created a number of new issues when arranging finance.
Although many large corporate buyers are increasingly seeking to offer supply chain finance (SCF), banks are no longer as privy to the sort of information they relied on in the past.
“There has been a major shift from the use of letters of credit to open account transactions and, in this new model, buyers and sellers are exchanging trade details on a bilateral basis – not through the banks,” explains Andre Casterman, head of trade and supply chain, Swift, who points out that about 85% of trade is now open account-based.
“The question that arises here is how can banks provide SCF for transactions where purchase orders and invoices are exchanged directly between buyers and sellers and do not go through the banking system?”
Swift believes that the answer lies in providing banks with the same level of supply chain information and guarantees that they have been used to in the past – but in a more efficient and automated way.
It is promoting the Bank Payment Obligation (BPO), a rules-based instrument, which funding banks can use to secure an unconditional undertaking to pay from correspondent banks, and the Trade Services Utility (TSU), a common communications platform which these banks can use to share information.
Swift claims that the BPO, which was launched in April 2009, can perform much the same role as letters of credit – providing banks with the security they need to offer finance for open account-based transactions.
“The BPO provides all the banks involved in supply chain finance with a common set of rules, which are recognised by trade organisations, and that will have legal force in 2011,” says Casterman. “Banks which use the BPO to offer supply chain funding can benefit from lower costs, reduced risks and greater efficiency.”
The TSU, meanwhile, serves as a common platform via which funding banks and correspondent banks can exchange information on purchase orders, shipping documents, invoices and other documents when arranging SCF.
“The TSU also matches information, enabling the finance provider to, for example, authenticate information held in a purchase order with correspondent banks. All this is done automatically via the TSU,” says Casterman, pointing out that more than 100 banks are now registered to the new platform. “The TSU can be used in simple transactions, as well as more complex transactions, which involve the provision of syndicated finance.”
A number of banks have already signalled their full support for the TSU.
“One area that we are working on in particular now is automating information flows with third parties, such as other banks, and this is where Swift’s TSU comes into the picture as it provides a single infrastructure for multi-bank trade activity,” says Richman, pointing out that Deutsche Bank is about to go live with one client in this space, and that others are discussing it.
“We fully support Swift’s TSU concept and are trying to convince our customers to use the service,” adds Markus Wohlgeschaffen, head of global trade finance and services, UniCredit Group, which is currently working on pilot projects. “However, there is some reluctance from smaller banks, particularly in certain emerging markets, for which it is difficult to make the technological investment required. To overcome this, we might have to develop bank-proprietary solutions.”
Similar efforts are being made to improve bank-to-corporate and corporate-to-bank communications.
Many corporates are struggling to manage information flows with multiple banks via multiple channels – particularly when it comes to traditional letters of credit. But solutions are becoming available.
A key player in this space is Bolero, which offers corporates an open multi-bank platform that uses Bolero’s own multi-bank messaging infrastructure for a range of automated trade finance services.
“The supply chain lifecycle involves letters of credit, shipment documents, bank guarantees and other documents, which are still paper-based,” explains Arthur Vonchek, CEO, Bolero. “We can automate their management completely by providing a single standard platform, which eliminates the need for paper, removes the need for data re-entry and also provides corporates with visibility into global trade positions via an open multi-bank platform.”
Swift moves in
Swift itself is also taking its “common communications” philosophy into the corporate world with a potential industry-wide messaging standard – Trade for Corporates (MT 798) for all bank/corporate trade communications.
Corporates that have deployed internal trade applications can use the standard to send and receive documentary credit information to and from all the banks they deal with.
“The MT 798 messaging standard enables corporates to use a common language when interacting with their banks, regardless of whether they are connected to Swift or not,” Casterman says. “Effectively, it gives them a common communications format, which they can use for all their banking partners.
“Banks have been very active in providing their corporate clients with web portals for such communications, and are likely to continue doing so, but corporates which have their own internal applications are likely to prefer using a single messaging standard and channel.
“Much will depend on a corporate’s requirements,” he continues, adding that smaller corporates working with fewer banks may prefer to use banks’ individual web portals.
“Corporates, which are looking to centralise data such as treasury, can now centralise their trade information too, and this will further help them to improve their working capital, which is a key business benefit. By rationalising the channels they use they can reduce costs and increase efficiency.”
There is already an accreditation label for technology companies that want to implement Trade for Corporates into their solutions. Misys is one major player which is committed to its use.
“At Sibos 2010, we will announce that we have full service bureau status with Swift,” says Olivier Berthier, solutions director, transaction banking, Misys, pointing out that his company’s Trade Portal for Multi-Bank (MTP for Multi-Bank) solution will have at least four Swift labels this year, including Swift Trade for Corporates.
“What Swift is bringing to the corporate community is a standardised way of exchanging data with banks. It is already doing this for banks, with bank-to-bank communications based on Swift standardised messaging formats, and now it has devised a defacto standard for corporate-to-bank communications.”
The standard of the future
Swift believes that Trade for Corporates will eventually become the main standard for all bank/corporate trade communications.
“We want this to become the main standard for bank-to-corporate and corporate-to-bank trade communications, and plan to continue to invest in it,” says Casterman, who points out that Swift is enhancing MT 798 on an ongoing basis.
“At present, most trade messages contain much free text data but we continue to upgrade them to improve the granularity of data, starting with guaranteed messages,” he says. “We are also making efforts to extend the character sets used by, for example, Chinese and Japanese characters which many Asian domestic banks still use for domestic transactions.”
However, there are still some qualms about using a common Swift standard in this space.
“About 18 months ago, Swift looked at trade messaging and ended up with MT 798. However this is not a standard – it’s like an envelope that you put data into and only provides a series of guidelines,” says Bolero’s Vonchek. “There are still many issues with it.”
“There are different service providers, which offer different messaging types and they are building on different standards,” adds Ashutosh Kumar, global head of trade product management, Standard Chartered.
“However, it is very important for banks and corporates to have a choice of service providers so that there is competition. Competition is very healthy in this industry as it leads to improvements in the level of services offered.”
If, for instance, Swift is the best route forward, Kumar argues that corporates need to be involved and participate in the movement towards deciding on a standardised messaging format.
Dominic Broom, managing director, treasury services, Bank of New York Mellon, believes that Swift could be the best route forward.
“Swift as a provider of messaging services is a co-operative owned by its users. The way it is run and operated would suggest that there is little likelihood that it will get involved in an activity that is not beneficial to its users,” he says.
“Swift’s payment messaging standard has been very successful, and illustrates the benefits of having a global standard. But I am more sceptical of the adoption of these standards and norms in supply chain finance and working capital management solutions where there may be multiple interested parties involved, such as insurance companies, investors and local, regional and central governments, linked to the transaction.”
Likewise, Sanjay Dalmia, managing director of Fundtech India, points out that the real challenge lies in establishing a common framework for data exchange between the many trading partners involved in a corporate’s supply chain.
“Standardised messaging, if possible, can definitely resolve many information and reconciliation issues. The challenge is to define the standard. The information requirements of each industry and each corporate within an industry can vary.”
Many banks, however, are very supportive of the new standard.
“It certainly could be the standard for trade messaging in the future, but like all other things, it takes time to build critical mass. Once enough people start using it, we are likely to see a snowball effect,” says Deutsche Bank’s Richman. “There are a few competing alternatives in the industry that provide multi-bank capabilities.” GTR