Next Generation Trends in Trade & Supply Chain
The trade instrument, Letter of Credit has not changed much ever since it's been first used during the 13th Century AD. Trade finance has basically been the business of financing international trade, predominantly through the use of letters of credit, though perhaps the processes and regulations that have increased over time have tightened much more to curb frauds and uncertainties. However, the spread of digital technologies is now transforming all types of global trade flows in terms of goods, services, financial, people and data & communication. The pace of digitization for trade transactions was a bit slow until the past decade but now it has acquired the right momentum especially in the method of communication between partners, product innovation and in the area of mobility. The world is moving towards paperless trade and accepting global standards to communicate in a unique and consistent way. Banks cannot shy away from this deliberate attempt to achieve digitization, perhaps they should be aggressive to fuel their further growth and stay relevant in the market.
Let us understand some of the remarkable innovations that have changed the face of trade and supply chain industry in the past few years, which would revolutionize the business in the near future as well:
1. Introduction of Bank Payment Obligation TSU - BPO; an automated alternative to Letter of Credit
Bank payment obligation (BPO) works like automated Letter of credit where no manual intervention is involved. The trade transactions are electronically matched through a trade service utility (TSU) which is primarily a centralized matching and workflow engine. What this means is that the TSU helps banks and customers interact on a single platform and helps banks create irrevocable payment obligations which can be an alternative for Letter of Credit transactions. As TSU platforms are SWIFT enabled, end-to-end transactions and related communications can be electronically controlled and managed. This mechanism helps banks and customers achieve paperless trade, faster turnaround time and a seamless automated transaction flow. Global banks like CITI, JP Morgan are the frontrunners in implementing this instrument, but now many other tier1 banks across the globe are also implementing BPO aggressively.
2. MT 798 - The Envelope Message Standard from SWIFT
SWIFT has come up with another initiative - automating the current transaction flows through envelope messages (MT79).This message type handles the entire LCs, Guarantees, Standby LCs and Common Group messages by effectively linking importers, banks and exporters - i.e.an end-to-end connection. The result is again - improved process capabilities, paperless trade and reduction of process hassles without compromising on security.
3. Exchange for Receivables - A market place for Hedging Trade Instruments
Receivables exchange is an electronic platform to auction receivables. Companies, especially small and medium segment enterprises can improve their working capital by auctioning invoice(s) to a global network of institutional investors/ buyers who compete to buy invoice(s) in real-time via electronic marketplace. By connecting businesses with factoring agents, financing companies and a community of banks considering to purchase outstanding invoices, the receivables can be liquidated in as little as 24 hours for very marginal discounts. Sellers can use the exchange platform as often or as little as they wish. This online market place offers a lucrative solution for companies starving for adequate working capital.
4. Next Generation Portals, Dashboards and Mobile Banking Revolutions
With the advent of digitization, banks are taking a cautious but aggressive approach towards digitization. Next Generation Portals are offering a collaborative way of managing trade transactions. The new dashboards help customers analyze their positions, predict cash flows, interact with bank SMEs and track and monitor transaction flows online. Mobile banking capabilities are offered with payment facilities, transaction authorization and dashboard views.
Trade Finance has traditionally been an agreement to hold business. The short term nature of trade finance has often made it difficult to liquidate receivables due to excessive documentation and related processes. At this juncture, the need of the hour is to evolve new models of trade with the help of technology and innovation. There is also a growing need to source additional funding for trade flows as studies show that world trade is growing at double the rate of global GDP and soon there would be a liquidity crisis. As a solution to this problem, banks are starting to look towards non-traditional sources to ensure flexibility and consistency in their liquidity. Also from a technology standpoint, we foresee a deeper involvement of analytics, big data and mobility that would play significant role in demystifying the complexity of trade and supply chain transactions.
Technology has improved significantly and many commercial banks now have long term strategy in place to upgrade their trade finance capabilities to stay relevant in the constant dynamics of the market. This technology driven transformation is both an opportunity and threat at the same time, as early birds will have a higher chance of survival whereas those resting on past laurels may face the risk of extinction. Trade & Supply Chain Finance is undergoing a massive makeover, and it will surely catch the attention of many new players, unlike in the past!!!