A Series of Very Fortunate Trade Events - Trade Frinace
Thursday, May 11, 2017
A Series of Very Fortunate Trade Events
For everyone outside of the secular world of Trade and for those living Trade everyday it is clear that Trade is in resurgence, even a renaissance, could we be already in the dawning of the golden age for trade. Yes, I know that for many in trade the golden age may be synonymous with the pre-computer age. When in back rooms with little light and big tables the trade technician poured over individual piles of paper, making notes and cross checking each document many of which seemed to be made of tissue paper. Yes, my friend, those were the good old days, but that was not the golden age of trade. Today the doors are open, the lights are on bright and trade is front and center with industry, governments and even the banks.
Let’s start out with a Series of Unfortunate Events - The Bad Beginning; starting with the Housing Bubble, into the Great Recession, followed by the Liquidity Crisis, caused a significant reduction in trade globally. This was due to a lack of credit availability which reduced not the demand but the ability for consumers and industry to buy goods. While the Great Recession impacted the financial system negatively and many of us personally, in many ways it was good for trade.
My experience talking with many banks globally during this time was that their trade business remained profitable and although there was a reduction in volume this was due to lack of credit availability rather than issues within the banks business of trade. We did see a rise in claimed discrepancies which can mostly be attributed to the buyer’s inability to pay due to loss or restriction of their bank credit lines. Still the actual loss rate remained well below .05%.
This brings us to the benefits trade enjoyed as the world started to step out into the light after the dark days of September 2008. First, it is globally recognized that Global Trade was the driver to jump start the world economy as evidenced by the multitude of governmental offerings to inject capital and guarantees into the financing of trade. Additionally, top bank management noticed that their trade business remained steady and profitable with very manageable risk. This new view of trade as a bright spot in the bank has led to investment in trade solution where most banks have been using 20 year old technology applications. Like a Perfect Storm, in trade today you have three main drivers for trade system investment; Technology, Business, and Market:
Technology: Much of the applications sold today and in use today at banks are at their core are built in old coding languages. This make them hard to maintain, hard to enhance and unable to respond to the changing dynamics of today’s trade business. Today there is available technology that benefits the business; Java for independence, SOA for flexibility, BPEL for workflows, xml and ESB for messaging and integration, and cloud provided applications with the potential to lower the total cost of ownership. Now add to that Blockchain for security and distribution of data, with a potential to be a game changer in banking based on the amount of POC’s and Pilots in process as I write this.
Business: Processing for trade is changing from the paper based world to electronic documentation. Innovative approaches to provide Supply Chain Finance has opened new bank-fintech-corporate interaction requiring specific applications for financing open account transactions. The move to including all parties of the transaction, (buyer, seller, 3pls and banks) necessitates flexible collaborative platforms.
Market: The Great Recession has forever changed the view of trade. The importance of liquidity in the market drove Governments and ECAs to inject tremendous amounts of capital to finance trade during the Great Recession. Corporations found that when their credit lines were reduced or withdrawn, that dependency on working capital lines left them without funding and they are now aggressively looking for alternatives ways to unlock the cash inside their supply chains.
A series of very fortunate trade events has pushed Trade into a Golden Age where new visions and innovations are taking hold. Inside the banks trade has new respect and is being rewarded with investment. Trade is the bright light of the banking image which has suffered as people now understand that the reason they have milk in the fridge or even the fridge is due to trade. Banks make that happen by providing the financial flows that industry is based on. Let’s take a peek at those visions and innovations that are driving trade today and the ones that likely will be coming on in the future:
Change Your Trade View - There has been a shift in how trade practitioners need to view their world of trade. It was gone from Importer/Exporter to Buyer/Seller as the focus is now both international and domestic sides of the business. Trade has expanded beyond Letters of Credit to Open Account transactions with the natural extension for Supply Chain Finance. Trade today requires the high level of technical transactional skills, with an understanding Cash Management practices as the name of the game is Capital Optimization for the banks clients. The new generation of trade practitioners will take their teachings from the past with an open mind to forge ahead with new ideas that will keep trade vibrant and growing.
Risk to Financing - Within Traditional Trade we have seen the volumes remain steady according the SWIFT messaging statistics, but going down in proportion to the growth of global trade. This has been influenced by the shift in usage of Letters of Credit from a primary role of risk mitigation to a tool used to obtain financing. This is a subtle change, but I believe will lead to additional usage in Letters of Credit as well as Standby’s and Guarantees underlining the value inside of the corporate supply chains.
Trade/Cash Convergence - Today corporations want a single view of all of their banking activities and with the same user experience globally. The rise in Transaction Banking groups within banking and the focus of corporations on a full portfolio view for risk and liquidity management is driving the convergence of Cash, Trade, FX and Payments. Banks that meet these new client requirements will succeed by providing a seamless view of all corporate activities and can present this view uniformly to every corporate user regardless of where they are located globally. Those banks will be competitive in their home footprint and can selectively present challenges to the global banks. This will take transformation of bank systems and entail the deployment of single global platforms integrated with Cash, Trade, FX and Payments.
1. Celent, Trends in Transaction Banking: A Global Survey, by Axel Pierron, Neil Katkov, PhD,
Big Trade needs Big Data - There is more value in the banks data then there is in the banks vault. Banks that can make use of this data will provide clients with intuitive experiences that can create stickiness to those relationships. A bank can look within its own client base and see those clients who have payments going to other bank clients and view this as an opportunity to offer buyer and seller financing. A bank could see different clients that ship or receive goods from similar destinations and organize a group with a shipping company client to offer preferred rates and terms to the members of such a group. Banks could push out information based on currency, country, industry, seasonal considerations, as well as advance the interaction between valued bank clients for additional business.
Customer Service, No; Customer Care, Yes - There is a new view of how customers want to interact today, which is more personal and at the same time more virtual. This may sound like a contradiction, personal and virtual, the fact is clear that today's clients need to be cared for in the way they prefer. Valued information pushed to the client in their manner of choice, or by multi- channels, when and where they want it. Sure alerts are valuable and these can be added to with notifications of industry events or selling opportunities within the bank's client base or local government programs. Customers are expecting a more proactive approach that is attuned to their business's needs and to have access to their information at their fingertips, delivered to a variety of devices in real time. Getting this right is a big task and likely a change in culture as customers are not to be just something serviced, but are there to be cared for and in doing so you are caring for your own business.
Physical and Financial Supply Chains - The time has come for the convergence of the Physical Supply Chain with the Financial Supply Chain. First, bankers must realize that the corporate’s greatest fear is not about money, it is Supply Chain Disruption. Second the value of information, available electronically, allows the corporations the visibility to see potential risks and act upon them. The corporations with initiatives such as JIT and Demand Management have gained most of the efficiencies from the physical supply chain and are now starting to focus on the inefficiencies of the financial supply chain. The pulling together of the three information flows, Commercial, Logistical and Financial to give a single view will help corporations reduce their risk by seeing where they may have capital locked up and where they may need to inject some
2. P4B – Platform for Business, Financial Supply Chain Management Whitepaper, by Chris Principe, September 2009
capital. This information available in real-time through glass pipes for anytime visibility shared between the corporation and the bank will enable strategic use of capital giving the banks a level of visibility comfort for financing that is not available today. Additionally, there is the opportunity for the banks to provide data back to the corporations of financial information that will allow for greater granularity of their product profitability at the moment of purchase.
South-South Trade - The trade flows are continuing to broaden and the movement of raw materials and goods between Asia to both Africa and South America is just the latest example. The dominance of the West is giving way to the surging East and we will see more dramatic changes to the trade flows as a result. The strengths of the BRICS countries and the growth of inter-Asian trade continues’ to develop and expand it will change the complexion of where capital will be located. As the continuation of capital moves from West to East and starts and stays in the East, that capital will flow back in different ways. Government to Government capital flows have been in effect for years as witnessed by the accumulation of U.S. debt by the Chinese. Starting is the expansion of Eastern banks into the markets of the West, first to service their local clients export needs. As the manufacturers continue to gain in size and strength they will look to purchase their buyers to maintain their ability to sell the goods they produce. Globally the areas of strong economic growth, could very well lead to the East financing the West.
Trade has never NOT had a Golden Age and for this golden age of trade, these are but a few of the ideas and directions that this business can go forward to bring greater interaction between bank, fintech and corporate. The opportunities are clearly there for those with the vision and ability to capitalize on the technical advances made in the usage and design of applications. The new capabilities fintech’s bring for delivery of products and services by the banks to their clients is creating easier opportunities to increase business while lowering costs, through Cloud-based offerings and the potential of Blockchain. Trade is like a beautiful butterfly emerging from a cocoon once again ready for resurgence in spite of being one the oldest forms of banking. This provides the valuable and necessary marriage of the banks, fintechs and corporate clients that the world depends on. So through a Series of Very Fortunate Events, trade will continue to be the engine that drives the world’s economies.