Justin Pugsley introduces our extensive look into the latest trends, innovations and issues in the world of trade services and the supply chain.
Raising ambitions is the perfect theme for this year’s Sibos conference as the industry faces a period of transformation posing both threats and opportunities. Meeting those challenges will indeed require both ambition and courage.
However, with some 5,500 executives and technology specialists under one roof, at one time, it is an excellent chance to exchange ideas. Attendees can get a snapshot of the latest technologies and solutions on offer. They can debate about some of the best ways to take advantage of the changes underway in the trade finance arena.
Technology will undoubtedly play a key role in meeting those challenges. Indeed, failure to meet this transformation head on could see some trade finance banks being relegated to the fringes. For the more visionary players the current changes could herald a rare opportunity to steal a big march on rivals. It is not often that a way of doing business is turned on its head in this way.
Supply chains are extending further and deeper into the economy and increasing the pace of business. Meanwhile, corporates, which make up these networks, are on a constant quest to slash costs wherever they can.
Competition is intense and raw material costs have risen dramatically, which puts profit margins under pressure. Stock market investors, on the other hand, expect the companies they own to deliver a steady stream of increasing profits.
And then there’s the geopolitical situation. It’s spurring an avalanche of anti-terrorism and anti-money laundering rules across the world. It sometimes appears that red tape is threatening to snarl up the entire trading process. This creates a plethora of compliance and risk issues and of course extra costs for trading communities.
Naturally, banking relationships are also under scrutiny. Corporates want to merge the physical and financial supply chains to make financing more efficient. In fact, many aspects of trade finance are steadily merging with treasury functions.
For the corporate ‘efficient’s ideally translates into lower margins on borrowings, shorter loan periods and a faster and cheaper turn around on documentation.
Going against the grain
For banks accommodating those demands it is often counter-intuitive. Shorter lending periods and lower margins equates to less business and fewer profits. Banks, quite naturally, also want to get the lion’s share of the business from a large corporate. They have generally been focusing on providing them with their own proprietary IT solution with maybe unique functionalities.
However, the very large corporates, which may have relationships with over 20 or more banks, want to deal with all of them from the same platform. This makes their life much easier and enables them to arrange finance and documentation more quickly. It obviates the need to log into each bank’s separate system.
For banks, being on an open platform creates the fear of having their customer relationships undermined. This in turn spells commoditisation of their services and lower profit margins on trade finance business. However, banks are beginning to accept that is the way big corporates want to do business with them.
The big question for banks is how to develop profitable business models around this transformation and how to avoid competing almost purely on price.
The jury is still out, but some banks are responding by using trade finance as a platform to market other more profitable services. These include marketing hedging services such as innovative derivatives products or cash management solutions. Other banks see it as imperative to become embedded in the supply chain. Having the transparency to see what is happening is an opportunity to offer appropriate services as the transaction progresses through its life cycle.
Indeed, being deeply involved in a client’s supply chain may open up opportunities to turn their suppliers into customers as well. Innovative solutions exist that can enable those suppliers to get lower cost funding on the basis of a buyer’s stronger credit rating.
Yet another is to offer outsourcing services. Banks are after all administratively intensive organisations and are likely to have spent considerable time studying ways to be more efficient.
A manufacturing company, on the other hand, will be more focused on squeezing savings out of its manufacturing processes, which is its core activity. The administrative side is usually more neglected.
In exchange for lower costs and greater processing accuracy, a manufacturer may be willing to hand over the administration of its trade finance activities to a specialist bank. For manufacturers, outsourcing has been a way of life for decades. Most already outsource large parts of their IT systems to save money and gain extra competencies. Some are already outsourcing parts or all of the administration linked to doing trade documentation and finance.
This is basically business process outsourcing as it goes beyond just farming out IT. Specialised banks with economies of scale can do this well. This can even go as far as outsourcing the management of the customer’s relationships with other banks. In a sense this is only a step away from creating multi-banking platforms.
Oracle thinks the best way for banks to meet the multi-banking challenge is to be the one to offer the solution. The reasoning goes that it is going to happen anyway, it is just a question of whether the banks take the initiative or the corporates do. Those banks which ‘own’s the platform may have an edge over those that merely populate it. Such a move may well cement the relationship with the corporate, which sees its main bank as playing a key role in improving the finance side of the supply chain.
Oracle is keen to offer banks the technology to roll out white labelled multi-banking solutions. For Oracle, it is merely an extension of the vast range of banking, supply chain and database related solutions, which it markets.
In the meantime, some of the outsourcing banks are also providing trade finance outsourcing solutions to other banks. Pure technology providers also offer a range of outsourcing solutions.
For smaller banks with more modest IT budgets, outsourcing is an excellent way to stay in the game. With others taking care of complex IT systems, they can better focus on perfecting and marketing their speciality whether it be industry, region or country specific. These smaller players play a valuable role in the niches they operate in. To lose them would be keenly felt by corporates, which rely on their expertise for certain markets.
Meanwhile, SWIFT has been developing its TSU (Trade Service Utility) initiative with the help of a select group of banks and technology companies. It’s designed to bring about a common infrastructure for inter-bank data exchanges in the trade finance area. The banks in turn collect that data from their clients with their own applications.
TSU is basically a data matching and workflow engine. It is very much aimed at helping banks offer corporate customers open account related services. Banks are then free to develop their own offerings around this infrastructure.
Indeed, letters of credit, a traditionally profitable area for banks, are failing to keep pace with the growth in world trade. Again, it comes back to supply chains. Trusted trading communities increasingly do business on open account, it is cheaper and easier for them. The challenge for banks is to offer new compelling services based around open accounts and the supply chain, which is where the real growth is at the moment.
SWIFT is probably the only organisation in a position to bring about a common standard as it represents the industry as a whole. Its solution is therefore more likely to be adopted across the board.
A new breed of player
In the meantime, new types of players have been entering the market with a different perspective to traditional trade finance banks. They have emerged to fill gaps in the market left open by the traditional players. Indeed, any major shift in the way business is done usually lets in a new breed. For example, with the advent of the internet new types of low cost stockbrokers could emerge such as E-trade, or eBay in auctions or Amazon in consumables.
Sometimes, these show the way to established incumbents. Also, they are often free of legacy structures the old incumbents are sometimes burdened with.
In the case of trade finance, the offerings of these new players are generally heavily technology based, which helps them in developing unique competitive edges.
For example, there’s the logistic suppliers. IT and supply chains are natural to them and they see merging physical and financial supply chains as a business opportunity. In fact, their business models are designed around these new realities. They recognise the need for information to flow seamlessly and efficiently where it is needed.
In a bid to help clients manage time and money more efficiently, these logistics companies have bolted on their own trade finance banks. One example includes UPS Capital. For the traditional logistics company, trade finance is a value-added offering. It is an opportunity to provide bundled solutions to the corporate client and act as a one-stop shop. In many cases that might mean taking a role in managing the client’s banking relationships.
Another interesting player is EZD Global, which describes itself as linking “the movement of goods in one direction with the flow of money in the other, creating an entirely new source of working capital”.
And another type of specialist is PrimeRevenue. This company takes different pieces of information and applies technology to iron out inefficiencies in the supply chain. It seeks to provide greater visibility to all participants in a trade. The focus here is very much on optimising the use of capital.
Orbian literally brands itself as a supply chain finance company. It also makes extensive use of technology to provide optimised trade finance. Its offering facilitates collaboration between buyers and suppliers. Many traditional trade finance banks are still a long way behind these companies in terms of providing finance solutions around the supply chain. However, is it possible that banks may buy out one of these players to quickly gain competitive edge
Within the technology segment itself, consolidation is likely to accelerate. Technology vendors are keen to offer a wider range of solutions to clients. And those clients are tending to consolidate. Rather than dealing with a wide range of disparate technology vendors, some prefer to deal with solution providers, which have a complete product range to tackle a particular need.
Other technology providers simply want to grab market share. Often the fastest way to achieve these various goals is through acquisition. Indeed, industry sources expect a lot more takeovers. The sector remains fragmented with many small specialist companies with unique technologies.
Then there’s the ERP (enterprise resource planning) vendors, such as Oracle, which are working their way up the supply chain. For smaller technology companies this may present a golden opportunity for collaboration or to be taken over. Some of these IT giants are likely to go down the acquisition route to quickly fill the gaps in their product ranges.
The area of supply chain finance is still in a state of flux. Many banks are still unsure on how to proceed. Others think they have more or less figured it out and are pushing on with what they consider to be the best strategy.