The trade finance business is considered to be one of the most complex areas of wholesale banking, with as many as 12 parties getting involved at different points in an end-to-end transaction. With fluctuations and uncertainties in the global economy, banks are under immense pressure to perform and provide high quality service to their corporates clients. As a result, the trade finance business is moving towards processing paperless transactions with minimal manual intervention. To fulfil the dream, the deciding factor is the availability of high quality data, coupled with automation in banks, corporates and across all the entities participating in a transaction.
In practice, it is difficult to achieve 100% automation or straight-through processing (STP) across all the entities in a trade finance ecosystem. But it has become imperative for banks to have a certain level of automation, in order to reduce their overall cost, improve business processes, compress the physical and financial supply chains, and increase their market share. The top 20 banks in trade finance account for 55% of market share, while the remaining 45% is spread across another 400 banks.
Hence the question arises, what is the acceptable level of STP for banks participating in a trade finance transaction?
Current Trade Operations
A bank’s trade operation is an important department as a supporting line of business. Similar to cash management or foreign exchange (FX) departments, it is important for high-value corporate customers and their banking relationships.
The trade business has not changed much in the past hundred years and still involves various parties that work together to move goods and transfer funds around the world. Banks play a key role and act as intermediaries providing risk mitigation and settlement services, while ultimately striving for a competitive advantage over other banks.
For the majority of banks, the cost of having a trade finance department is high because of manual and inefficient workflow processes. Having multiple non-integrated trade finance systems, with old technologies that lack vendor support, further increases the cost.
Technological advancements have raised the expectation of corporate clients, who demand more from their banks and expect a high quality of service to match their individual needs. These customers now expect a ‘zero-latency environment’ to meet their demands for more information. The banks, while trying to reduce operating costs, are forced to improve efficiencies to meet customer demands. These may not be possible with old systems, but may be achievable with improved technology, which may also reduce the overall cost and processing time in the longer term.
Thus moving to an acceptable level of STP – instead of complete STP – seems to be the most favourable solution for banks to improve efficiencies and meet customer demands.
High-level Trade Finance Ecosystem
Figure 1 gives an idea of the different entities that form an integral part of the trade finance ecosystem, however there can be many more depending upon the complexity of the trade. At some point in the lifecycle of a successful trade transaction, most of these entities interact at least once, if not multiple times, with each other.
A typical trade finance department has multiple systems catering to specific products, for example one system may cater for documentary credits and guarantees only, whereas others would cater for collections only. Additionally, these multiple systems lack scalability and cannot be enhanced beyond a certain point because of inherent limitations. Hence, the bank finds it difficult to market new products to its corporates.
There are advantages and disadvantages of having multiple systems, but in the long run the cost of processing a trade transaction using these systems increases manifold, which at times can form a substantial part of the operating cost for a trade operations department. Additionally, these multiple trade systems have to interact with the legacy systems in the middle and back office, such as accounting systems, limits maintenance, static data maintenance, payment processing systems, etc. This in turn can increase data redundancies and errors caused by excessive manual intervention.
The whole setup becomes even more complex when the suite of trade finance systems needs to interact with a standard core banking platform in order to carry out daily settlement. This has an impact on the ledger balances and, ultimately, on the profit and loss (P&L) of the bank.
Hence, a bank needs to organise and integrate its existing infrastructure framework in order to improve overall efficiencies.
What is an Acceptable Level of STP?
A conceptualised infrastructure framework, when put into practice along with improved business processes and modern technology, would involve processing transactional data electronically across various systems from the point of initiation through post-execution to final settlement in real time (or near real time), with minimal manual intervention.
An ideal situation for a trade operation department would be to have all the trade data processed electronically, with the latest technology and without any manual intervention. This ideal situation may seem a distant dream, as it would involve time, resources and financial investment from all the entities participating in the end-to-end trade lifecycle. A modest setup, however, would mean that at least 80% of all the transaction are processed and settled electronically with minimal manual intervention and errors by all the parties in the trade lifecycle.
Due to advances in technology, which is responsible for raising the expectations of the corporate clients, banks are now expected to provide a cohesive and integrated service to suit individual customer needs. Many large corporates have implemented enterprise resource planning (ERP) solutions and are using electronic trade services to manage their trade finance transactions.
Another trend is that the banks and corporates are collectively extending their reach into the financial supply chain (FSC). On one hand, corporates are investing in ERP solutions and trying to automate their internal physical and FSC systems. On the other hand, banks have become a critical link in the FSC and are helping the corporates achieve efficiency in moving their data, documents and funds. Additionally, banks are now providing solutions that are enabling corporates to seamlessly connect to the bank in order to complete their international trade transactions requests and follow-up activities involved in the complete lifecycle of a trade.
Challenges in Implementing a Modest Level of STP
The basic question for a bank’s IT department is: what is exactly needed to implement a modest level of STP in a trade operations department?
One of the answers is to aim achieve the following:
- Implement an integrated solutions ecosystem.
- Improve the data integrity across many systems.
- Standardise business processes and information exchange protocols.
According to a study conducted by Forrester Consulting, a large number of banks indicate that the option to integrate existing systems internally is not effective enough to cater to growing business needs and ever-increasing regulatory requirements. Whereas implementing new and improved integration solutions can enable them to automate the manual processes and effectively provide new services. Additionally, the legacy/bespoke systems are not capable of providing real time (near real time) availability of information now demanded by customers.
Another challenge for banks is managing the data available in disparate systems. In situations where a bank has a large number of legacy and bespoke systems, the data integrity can be a major issue, along with the option of integrating the existing legacy systems. There is much dependency on the correctness of data, arising from the increase in volume and the complexity of transactions and infrastructure. A large amount of time, money and resources are used to resolve problems arising because of incomplete/incorrect data.
The final challenge for banks is to standardise the business processes and information exchange protocols, whereby the bank’s systems can interact efficiently internally, with corporate systems and other entity systems in the entire ecosystem.
Barriers to Implementing a Modest STP
The following are considered to be the main barriers to implementing a modest STP in a trade operations department:
- Increasing complexity and trade volumes in cross-border trades.
- A reliance on internal manual processes.
- A dependency on multiple fragmented and inflexible systems with incompatible technologies.
- Dependency on data available from many inflexible systems.
- Systems based on old technologies that lack vendor support and hence are difficult to integrate.
- Relatively small budgets for improving the overall processes, processing standards and workflow.
- Lack of improved settlement and reconciliation systems, which ultimately increases the cost of processing transactions.
- A greater dependency on multiple data exchange standards, which greatly affects the data flow (across entities, systems and networks), data delivery speed and data quality.
Creating Business Value Using Modest STP
In order to create value-add for the business and the banking industry as a whole, banks need to have a two-pronged approach:
- Short-term value: banks need to look at short-term initiatives and benefits that they can generate after enabling modest STP. This would effectively address the concerns relating to transaction speed and cost containment.
- Long-term value: leveraging short-term initiatives, banks can create a target operating model that will effectively address some of the issues relating to automating processes, improving and implementing industry standards, and ultimately helping the bank gear up to adapt to future STP initiatives.
Some initiatives that a bank can implement to create value-add for its trade finance operations and its customers are:
Internet-enabled order management
This ability would provide greater transparency and a seamless interaction between the corporate and its bank, whereby the purchase order (PO) data is received directly from the ERP system and made available to bank and other parties in the trade cycle. Additionally, a request for creating a new trade transaction, sent by the corporate (e.g. issuance of an import letter of credit (LC) or issuance of import guarantee, etc) are received and processed automatically by the bank’s trade finance system with minimal manual intervention. This in effect provides a real time (or near real time) information exchange between parties, thus reducing a lot on the time spent in manual entry, re-keying of erroneous data, etc.
Integrated and centralised operations
A bank with trade operation spread across the globe should consider a single integration solution, or try to integrate their existing suite of trade systems, so that the global trade data is available centrally. This will provide flexibility in transaction processing and management information system (MIS) reporting. A corporate would thus benefit by getting real-time information on the status of the transaction.
The following steps are necessary for integrated and centralised operations:
- Centralised IT support.
- Centralised procedures.
- Centralised risk management.
- Centralised users.
- Implementing standard formats.
There is little doubt that enabling a modest STP environment will revolutionise the trade operations in a bank. However, in order to make this more effective, banks and corporates need to adapt to new standards of data exchange. The banks need to work closely with corporates and SWIFT to implement XML and SWIFT messaging standards of corporate-to-bank (C2B) communication for trade data exchange. This would help the corporates submit data independent of their country of operation and transaction currency.
Trade transactions by nature are document intensive. Banks can look at the possibility of offering outsourced services and help various members of the FSC by managing their documents electronically. The banks with expertise in handling and checking trade document can store document details electronically (i.e. after reading a scanned document), carry out electronic data matching/checking, and provide reports to corporates and other members in the FSC ecosystem.
Other initiatives revolve around integrating the cash management and trade operations. Disparate systems can be pulled together into a central solution where the trade and financial data can be accessed, stored and reviewed in real time. These initiatives could be in the areas of managing electronic invoices (e-invoices) and payments and receivables management. Statistics show that around 27 billion invoices are issued in the EU each year and over 85% of those are in paper, which results in around €480bn being permanently tied up in working capital as a result of business process inefficiency.
A modest level of STP will deliver many benefits in the trade finance arena that will help banks turn their investments into profitable results. Additionally, it will also help banks become an integral part of the FSC by increasing their efficiency through a continuous rationalisation of infrastructure and operations.
Today in the global market, it is necessary that all the information related to a trade transaction is transmitted in electronic format, primarily to cut down the transaction lifecycle and reduce the risk associated with every trade. While implementing a modest STP may be challenging for banks, it is the only way forward for improving business efficiency.
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