With annual sales of 300bn kronor (SKK), or around US$46bn, and an 110,000-strong workforce, Volvo is a classic example of a multinational that needs an efficient and reliable global trade finance (TF) business management system. For more than a decade the Swedish manufacturer, whose product range spans trucks and buses to construction equipment, has sought to move its TF processes away from paper-based to electronic documentation.
In the early days there was no user-friendly system that offered 24/7 availability and the opportunity to continue decentralising its TF business. However, during the past ten years a lot has happened and there are now a number of solutions that can meet Volvo’s TF requirements.
The search was renewed at the start of 2013 and the company rounded out the year by selecting Swift for its TF messaging. Six months on and Volvo is enjoying the benefits of the financial messaging provider’s multi-bank messaging solution for documentary trade flows. The search for a new system that responded to the company’s goals to improve its TF operations ultimately led it to select the corporate-to-bank Swift Message Type (MT) 798, which is also dubbed ‘the Trade Envelope’.
“Swift was the obvious choice for Volvo as it can handle not only trade finance flows, but also payments, foreign exchange (FX) transactions and account statements, says Jörgen Holmgren, Volvo’s director of corporate finance. “Swift’s launch [in 2012] of its Alliance Lite2 cloud-based service proved to be a game-changer.”
“A few years ago, Swift appeared to be fairly expensive and mainly for banks rather than corporates,” continues Holmgren. “However, with Alliance Lite2, Swift hosts the system, so it’s not costly or complicated to install. This also makes it a practical means for smaller corporations to carry out transactions, although I suspect not all of them are aware of this.”
MT 798 Messaging Standard
As for MT 798, it was originally launched by Swift in 2008 and aims to give users a comprehensive view of trade-related exposures. An authenticated message type used to exchange trade data between corporate and the Swift system’s member banks, MT 798 provides a multibank gateway through a centralised, secure channel for companies working with two or more banks. Volvo’s adoption of this messaging standard means that it joins a select group of multinational corporations (MNCs), which have found that this Swift channel streamlines the management of their Letters of Credit (L/Cs) database and helps manage risk and meet country-specific legal demands.
For what types of organisation does MT 798 provide the best fit? Based on Nordea TFNS’s experience, those interested typically have international representation and are diverse both in their number of business areas and geographically.
While treasury operations are usually centralised, TF is more likely to be decentralised. The organisation is likely to have significant exports to and/or a significant presence in the emerging markets (EMs), with a high level of individual transactions and a correspondingly large number of L/Cs and guarantees. Additionally, it will probably have multiple TF banks.
A Tool to Expand Business
In Volvo’s case, the company has production facilities in 18 locations and sales in over 190 countries. The product range extends from truck and bus production, to manufacturing of construction equipment, marine and industrial drive systems. The group also provides financial services.
Volvo is now aiming to expand its international business as the finance department adopts a more proactive stance towards sales and customers by offering prices on L/C financing. China is fast rivalling the US as the company’s single biggest market, as was evidenced by the deal in early 2013 with China’s Donfeng Motor Group that established Volvo as the world’s largest heavy-duty truck manufacturer. In addition, the company is seeking to strengthen its presence in major emerging markets such as India and across Asia.
Holmgren adds that other departments across the company, such as IT, had input in the final choice of MT 798. He believes that it will boost Volvo’s efforts to win more business through competitive financing and improve its cash flow with more efficient operations and processes. The main efficiencies being sought by the company, for which it was decided that MT 798 was the best solution, were as follows:
- One common, globally standardised process for Volvo’s Letters of Credit (L/Cs), available 24/7.
- Improving the daily work conducted via electronic communication with the group’s banks and forwarders.
- Better coordination when utilising the banks that provide Volvo with trade finance products.
- Improving the internal service towards the group’s sales and customers.
- Reducing the lead time required for presenting correct documentation to the banks.
Project Overview: Initiating Change
The process that led Volvo to MT 798 messaging began at the start of 2013, when the group contacted Nordea to request input and references from the bank to assist its selection of a new TF business management system. “Nordea is one of about thirty banks that today can handle the SWIFT MT 798 messages and since they are one of our core banks it felt natural to ask them to be our pilot bank during the start-up phase,” says Holmgren.
Nordea was able to offer its own experiences of selecting such a system; in addition it connected Volvo with several other Nordic corporates willing to share their own selection processes.
In return, Volvo provided Nordea with information on the timeline, extension and pace of implementation, IT requirements and other factors that it hoped to achieve. This enabled the bank to align to Volvo’s plans. In this productive atmosphere and after a period of regular contact between the parties, Volvo completed a detailed request for proposal (RFP) process that went out to 12 potential providers.
The company eventually selected the Software-as-a-Service (SaaS) solution offered by GlobalTrade Corporation (GTC) from among the system vendors. The GlobalTrade platform enables Volvo to manage its trade flows with an unlimited number of banks via Swift’s cloud-based connectivity service Alliance Lite2. The company also decided to commit to a common multi banking interchange channel and opted for Swift MT 798 messaging.
A Key Milestone: Moving to Swift
Until relatively recently, trade finance has been characterised by often complex manual input for all of the parties involved. A channel such as MT 798 provides benefits for all in the form of speedier processes, real time reporting, user admin, authentication and security.
Following the implementation of MT 798, Volvo received its first message via Swift on 12 December 2013 and can now make both the finance check and issue documents based on the L/Cs received. The group is now working on fine-tuning the process and will be holding a workshop with Nordea to discuss the most efficient ways of handling electronic presentation.
Since last December the number of messages delivered subsequently has been limited, but it is still early days. By the end of 2014, Volvo expects to have completed training in MT 798 for its staff and the volume should then begin to rise sharply.
Holmgren described moving to Swift for the company’s export L/Cs as “a key milestone in our operations”, which he hopes will dramatically reduce the number of errors in its documentation. He is also confident that among the other resulting benefits, Volvo is poised to gain more business with more competitive financing, while making its operations and processes more efficient with a resulting improvement in cash flow.
While more than 20 banking groups are currently live with the MT 798 standard and over 30 more are in the process of adopting it, Volvo joins a relatively small group of corporates using MT 798 messaging, which is also well suited to utilities, major credit companies and large construction groups. It should be remembered that trade still represents a very small amount of all Swift messages, with much greater volumes generated by settlement and trades between banks in respect of securities, payments and FX.
The news of Volvo’s adoption of MT 798 sparked considerable interest from other corporates and financial institutions, with a number of European banks contacting Nordea to gain insights into the selection process. It can therefore be said that both Volvo and its banking partner Nordea have been trail blazers.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?
The benefits of an in-house bank are increasingly evident, but some treasury departments still hesitate to take the plunge. This article offers a step-by-step guide.