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Market Perspective
The
following is TradeEvolution's market perspective on the common trends
and challenges impacting today's Global Trade Banking business. This section of
our site will be updated on a frequent basis in order to provide a fresh
perspective on the market dynamics having a profound and growing impact on the industry’s landscape.
4
Financial Supply Chain Integration
4
Industry Consolidation
Financial Supply Chain
Integration
Simply stated, trade banks are becoming
increasingly involved, and even integrated, in their customer's supply chains. The forces driving this
are also driving the
integration of trading
parties up and down the supply chain.
Evolution of
Enterprise Supply Chains
Overall,
global trade is reacting to competitive, growth, and regulatory pressures for more
responsive, accurate, efficient, secure and less costly supply chains. Advanced
enterprises have begun deploying very sophisticated adaptive supply chains, that
is ones using demand management to track demand in near real time, and highly
integrated fact-based collaborative processes with their supply chain partners.
A larger group of less advanced enterprises are achieving significant supply
chain improvements by adopting new technologies and approaches that provide
increased visibility and collaboration, but don’t require a high degree of
sophistication throughout the supply chain. Yet most supply chains remain rudimentary, where paper, phones and faxes still prevail. Even there, new
internet based technologies with collaborative
business models are slowly gaining acceptance. And even further automation is
expected over time from new technologies such as RFID. There is no question that
enterprise supply chains are evolving at a quickening pace.
The
implications for trade banking are fundamental and transformational. For bankers
that persist with historical business models, these developments are a real and
imminent threat. Innovative and responsive trade bankers will recognize a
compelling opportunity to add value, and thereby generate new business. The
following diagram portrays the evolution of today's supply chains.
Physical versus
Financial Supply Chain
The supply
chain has two entwined chains of events. The physical supply chain is composed
of the elements of the supply chain that deal with the production, handling,
transport, storage and delivery of the physical goods. Most of the supply chain
improvement efforts, until recently, have been focused here as shown by industry
cost reductions statistics.
More
recently, enterprises are identifying the financial
supply chain as a separate and distinct chain of events within the supply chain. It is composed of the flow of financial documents and data across
the order-to-cash cycle that leads to payment. The financial supply chain, like
its physical counterpart, reaches across the trading parties. By implementing
collaborative, real-time, financial supply chain capabilities across the trading
parties, payment delaying problems can be immediately detected and resolved at
the source.
The objective, especially within the banking
community, is to synchronize the
financial supply chain with the physical supply chain. In so doing, the
documents and data of the financial supply chain accurately reflect the status
of the goods in the physical supply chain. Having correct documents and data at
the right place and right time leads to day sales outstanding
(DSO) reduction, labor savings, and expense savings. Additionally, the
fact-based granular data captured in the financial supply chain produces a
myriad of benefits, such as, improving working capital optimization, financial
forecasting, cash flow management and supporting external financing requests.
Driven by the pain experienced by CFOs resulting from poor visibility into their financial supply
chains, the adoption of the financial supply chain solutions is well
underway amongst the leading global trade enterprises.
Historically Banks
not Directly Involved in Customer’s Supply Chains
Trade
bankers have traditionally viewed the supply chain from the side lines,
executing payment orders, processing check payments, mitigating buyer risk with
letters of credit and collections, and financing with advances and acceptances.
Awareness of the supply chain was largely limited to handling the numerous
documents produced by supply chain participants and presented for payment or
acceptance.
Even this
has been limited to letters of credits and collections representing less than
20% of global trade. Open account trading accounts for the rest, only utilizing
the banks to make electronic or check payments after the fact. Hence,
most banks had little knowledge of their customer's overall supply chain processes.
Broader Role for
Banks Now
The
evolution of bank customer’s supply chains, especially attention to the
financial supply chains, is dramatically changing trade banking. The term “trade
banking” is deliberately used rather than “trade services” or “trade finance” to
connote the bank’s broader role in its customer’s financial supply chain. Banks
are no longer limited to letters of credit, collections, and associated
financing instruments, but are evolving into integrated partners in their
customer’s supply chains.
As
enterprises focus on the efficiency of their financial supply chain, traditional
methods of doing business are under scrutiny and new holistic approaches are
emerging. Each link in the chain is examined for its value, need to collaborate,
visibility, potential risks for payment delay, process efficiency, and costs.
This
creates new opportunities for trade banks who partner with customers to achieve
financial supply chain improvements. The following diagram portrays the
anticipated evolution from traditional trade finance to an evolving trade
banking model coined here as “Adaptive Trade Banking”.
Integrated Trade
Finance
From the
customer’s wide angle view of the financial supply chain, the order-to-cash
cycle flows through the bank’s letter of credit and collections processes, when
traditional trade finance products are involved. There is no doubt that these
processes impose a number of burdens on the payment process, in exchange for the
buyer risk mitigation and other benefits that they provide. Mitigating these
burdens are the first steps towards improving the customer’s financial supply
chain. Potential improvements:
-
Provide robust, image-enabled customer
portals to enable the customer to “self serve” many of his needs in a
real-time environment.
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Utilize workflow and imaging to drive streamlined processing throughout the
banks organization.
-
Use
interfaces with customers to download PO data for import origination and LC
advisement data uploads for export document preparation.
-
Offering collaborative document preparation systems, or document preparation
services, to make document preparation faster, more accurate, and less
costly.
-
Integrate electronic document presentation/representation from the document
preparation systems into the bank’s trade finance systems.
-
Use
image enabled examination processes. Provide annotated images of discrepant documents to exporter via the portal.
The most
significant goal is to shorten the order-to-cash cycle, that is, DSO reduction.
This translates directly into reductions of working capital utilization, which
can achieve major dollar savings for exporters. See our
Supply Chain Advisory
Service for more information.
Open Account
Services
Stepping
into the realm of open account services takes trade banks beyond the boundaries
of
traditional trade finance. If trade finance caters to the 20% of global trade
needing its buyer risk mitigation and other features, open account trading
encompasses the other 80% that don’t. In this environment where suppliers
provide buyers with invoices, who in turn pay by check or electronic payments,
the bank’s role was little more that payment processor. It is not surprising
then that the industry is still sorting out the best approach to this market.
New
trading models have been emerging, with bank support or participation, but none
have been dominant. Well conceived solutions such as Bolero, Tradecard, @GlobalTrade,
Identrus, etc. have found it difficult to gain significant market share and in
many cases have not been able to survive. The closed community model that most
of these share has apparently slowed adoption.
A global trade bank, JPMorganChase, is assembling and integrating software
components to support elements of the open account supply chain. Its recent
acquisition of Vastera for its compliance and other supply chain software is but
the most recent example.
ABN-AMRO
has launched a trade information service to become the conduit for trade
information and documents between trading parties. Transactions are expedited
by providing timely and needed information to necessary parties, even if the
transaction is not being settled by the bank.
Proponix,
the global trade banking ASP used by banks, including ANZ and BMO, is offering component’s of TradeBeam’s
internet-based collaborative supply chain solutions, such as Dashboard, PO
Management, Document Management, Approval to Pay (corporate LC), and
Reconciliation.
With just
this sampling, it is clear that no one strategy has emerged as the clear winner.
Some are betting on a bank-centric model that seeks to provide much of the
supply chain capability on proprietary banks systems, thus owning the process.
Another view is that
the global trade infrastructure will feature numerous “trade networks”. These
are technical and application infrastructures that underlie and integrate the
cross-enterprise supply chain processes employed by buyer/supplier communities.
A trade network may be custom built for a trading
community; third party provided pre-integrated GTM platforms like TradeBeam, or
bank provided integrated solution, as JPMorganChase plans to deliver.
Regardless
of how they came into being, communities of buyers and suppliers will have
created trade networks to enable collaboration, visibility, and workflow across
all the involved enterprises. Most enterprises will be drafted into one or more
trade networks by the dominant supply chain member in each network. For
instance, a supplier may belong to three trade networks each owned by one of its
buyers.
That view
of the world calls for an open-architecture approach, where the banks position
themselves as trade banking gateways, able to connect with any number of supply
chain networks. This permits the bank to become a member of their customer’s
supply chain networks, providing the products, operations and/or technology to
perform their role, for example reconciliation through Swift’s TSU, financing,
or payment services. The bank can also provide non-banking application services
through the gateway to other members of a trade network, including its
own customer’s. Alternately, external services can be accessed through the gateway
and integrated into the bank’s front-end for customer use.
Working Capital
Finance
Much of
the bottom-line financial benefits gained from supply chain automation, comes
from reductions in working capital utilization. This is accomplished by speeding
up the order-to-pay cycle, or reducing excesses in cash or inventory to cover
the risk of shortfalls, by providing better visibility and predictability.
Beyond that, the bank can further improve the working capital position of the
enterprise by financing accounts receivable, accounts payable, and inventory.
This is a macro approach to trade financing that allows the bank to identify
pools of assets or liabilities eligible for financing rather than on a
transaction basis.
Adaptive Trade
Banking
Adaptive
Trade Banking is an ideal state where trade banking reaches the level of real-time,
fact-based, collaborative supply chain participation that is characterized in
the Adaptive Supply Chains. Like the enterprises that are transforming
themselves to achieve the level customer value and efficiency that Adaptive
Supply Chains can provide, so too trade banking will also require similar
transformations.
Industry Consolidation
Consolidation of trade banking operations and technology is a fact of life.
It is
expected that the coming years will continue to see all but the largest trade
banks outsource their operations, technology or both. With the possible
exception of specialized niche players, smaller scale operations will not be
economically viable given the massive technology and infrastructure investments
required to stay competitive. By outsourcing, smaller banks can leverage an
insourcer’s investments and scale to stay efficient and current. Furthermore,
being freed from in-house technology projects and operational issues, smaller
banks (or banks who have decided that trade banking is not a core activity for
them) can focus on business development and service delivery.
Outsourcers
An
extensive 2003 outsourcing study of global trade banking found that 50% of North
American banks and 30% of all banks over 6 billion dollars in assets were
outsourcing some aspect of their trade banking business. 50% of those already
outsourcing planned to increase it in 2004. Of the non-outsourcers, 20%
indicated that they would start outsourcing within the next two years.[1]
Whether to
outsource, what to outsource, and with whom to outsource are decisions of major
consequence. It is crucial that they be made with full consideration of the
bank’s strategy, customer needs, technology needs, and cultural fit, as well
as cost and revenue considerations. Strategic alignment is particularly
important, since the outsourcing bank is largely dependent on their insourcer to
execute important elements required to achieve its strategy. See our
Outsourcing
Advisory Service for more information.
Insourcers
(Consolidators)
The
continuing consolidation of trade banking operations into the hands of a small
number of banks is dramatically reshaping the trade banking landscape. A two
tier industry structure is quickly developing. The top tier insourcing
banks will provide processing and technology services to the next tier, who in
effect become a reseller of those services. The second tier banks (outsourcers)
retain sales,
relationship management, and credit - basically a sales and customer facing organization. The top
tier banks have taken on a much larger and challenging role.
Predictably, the increased volume of transaction through-put will
increase stress on operations and technologies, requiring vigilance and constant
improvement. Allowing bottlenecks or poor performance will threaten service
level agreements and customer satisfaction, with the attendant negative impact
on reputation.
Operational excellence though is not enough, the
greater challenge will be one of leadership. The top tier banks, who are proven
industry leaders in their own right, now have growing communities of insourced
banks who have tied their banks future to their insourcer. To be successful the
insourcer must succeed as the leader of its community, meeting the needs of the
community's customers as well as its own.
The diagram below is a simplified depiction of the scope of the
top tier bank's responsibilities.
The trade banking business is reinventing itself to connect with its
customer’s rapidly transforming global supply chains. How successfully banks
are able to do
this, and then rapidly transmit the benefits to its insourcing customer’s
end-customers will directly influence the bank’s ability to attract and retain insourcing customers.
As leader of the community, the insourcing
bank retains ultimate ownership of the overall strategy, investment decisions,
processes, and technologies. But keeping the community involved and satisfied is
vitally important and non-trivial. Helpful models may be found in the user
groups and advisory boards employed by other services companies.
In its role as bank-to-bank trade banking service provider, there are
critical factors requiring
continual vigilance, especially as the insourcing business continues to scale
and mature.
Community
Relations
-
Governance – What structure and function
should community governance have? User
group, advisory board?
-
Product management – Understanding, aggregating, and prioritizing the
community’s and their customer’s needs.
-
Release Management – As new releases of the services are introduced
to the community, mechanisms will be needed to schedule the testing,
training and rollout.
-
Education – Provide sales training
for new/existing products, customer support training, general trade.
Application and Infrastructure
Technology
- Insource Capability – In
order to scale up an efficient insourcing business, a robust technical
platform architected for insourcing will be required in the long run.
- Flexibility – As the
business scales up to handle special cases, the
operational organization will need to evolve. The underlying technology will need the
flexibility to support any number of operational models, such as hub and spoke, factory
processing, isolated for customer, etc.
- White
Labeling –The application must be able to accommodate
branding for the insourced customer banks.
- Data
Isolation – It is absolutely mandatory that one insourced customer cannot
access the data of another insourced customer. Therefore, the application
must support impenetrable walls between customers.
-
Scalability – To avoid bottlenecks, restrictions, and limitations as banks
and transaction volumes are added to the insourcer’s technology platform,
vigilance must be maintained monitoring and improving performance.
-
Integration – Often automated interfaces to, and/or from the customer bank
are required to give the overall insourcing solution the efficiency it
requires. However, the interfacing infrastructure (middleware) of the insourcing bank, if not robust and flexible, can make these interfaces difficult and
expensive to implement and maintain.
-
Metrics – Accurate accounting for activities, events,
and timings
is essential for billing, SLA tracking, and operations efficiency tracking.
Operations
-
Organization – As operations scale up any number of factors could indicate
that new operational models/locations are needed. This requires periodic
review to determine whether the current configuration remains optimal.
-
Metrics – They are essential to understand the level of effort that is
required to support customer’s transactions and events to determine costs,
compliance with SLAs, and efficiency.
Insourcing
banks have assumed a challenging role as strategic leader, community leader, technology
provider, and operations owner. As the community scales, insourcing banks
must ensure that each of these dimensions stays efficient, effective, and
profitable.
Constant vigilance will be required to reap the benefits of scale without being
crushed under its weight.
TradeEvolution consultants have the experience and ability to provide advise and practical
assistance for all your insourcing needs. See our Insourcing Advisory Service
for more information on the services.
Contact us for more info
Tel: +1(866) 418-1401 |
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