This article presents a multi-pronged strategy that can fast track Trade Services Utility (TSU) adoption.
Over the past decade, the international trade has undergone a metamorphosis. The volume of trade transactions under letters of credit (L/Cs) has stagnated. Transactions under open account trade have grown exponentially in correspondence with the growth in world trade. Many studies have shown that open account trade currently accounts for more than 80% of all international trade transactions. The ‘Collective Trade Snapshot Report’, prepared by SWIFT in November 2009, confirms this trend. The reported total market share of L/Cs and collections on SWIFT by value is approximately 11% of the World Trade Organisation (WTO) 2008 world merchandise trade figures.
In open account trade, the buyer and supplier deal with each other directly. Banks come into the picture only in processing the payment instructions. SWIFT held extensive consultations with major global banks on open account trade. The outcome was the Trade Services Utility (TSU) introduced in April 2007. Its aim is to help banks re-intermediate across the value chain between the buyer and supplier indulging in open account trade and provide them additional value.
Core Features of TSU
TSU is a workflow and matching engine. Banks, acting on behalf of the buyer and/or supplier, can use TSU to exchange electronic documents. TSU works on SWIFT’s messaging infrastructure, SWIFTNet. The electronic documents that are exchanged conform to the ISO 20022 XML message standards. SWIFT has also introduced a new financial instrument, bank payment obligation (BPO) in 2009 to mitigate the payment risk in open account trade. BPO is an irrevocable conditional undertaking provided by one bank to another, undertaking to pay the amount of matched documents on the due date. Hence, it is similar to L/Cs.
Figure 1 provides details of process flow and potential services based on the TSU ecosystem during the pre-shipment stage of the open account trade.
Figure 2 provides details of process flow and potential services based on the TSU ecosystem during the post-shipment stage of the open account trade.
As can be seen from the above, the TSU enables reduced cycle times, improved straight-through processing (STP), timely financing options and payments. Currently more than 100 financial institutions subscribe to TSU.
Unfulfilled Promises
TSU promises to bring process standardisation and simplification to the buyers and suppliers. But they are looking for additional value before they invest in process and system changes to comply with the messaging standards and other operational guidelines. Hence, the adoption rate has been low. This has resulted in TSU not being able to fulfil its other promise of helping the banks to garner more business by getting engaged with the buyers and suppliers in a more holistic way across the open account trade value chain.
SWIFT has not yet published data on the transaction/message volumes flowing through TSU. However, the various documents published by SWIFT lead to the inference that TSU has not yet made a significant impact.
This article examines some of the major challenges to TSU adoption and suggests possible options to address them.
Challenges to Adoption
Bank proprietary systems
Currently many of the major banks offering trade finance services have proprietary systems that enable the buyer and supplier to create and exchange electronic trade documents. Hence, the corporate users do not find a significant advantage in moving to TSU.
Enterprise resource planning (ERP) systems not TSU-compliant
Major corporate customers are not in a position to generate electronic documents compliant to the ISO 20022 TSU message standards, as none of the ERP systems are SWIFT TSU ready.
Third party platforms
Many online supply chain finance portals provide a platform for the buyer and supplier to create and upload electronic documents. They have also collaborated with financial institutions to arrange for supplier finance facilities.
Concerns regarding data secrecy
The buyers and suppliers are also reluctant to engage any third party service providers for creating the electronic documents as per IS0 20022 standards, as they are concerned about the leakage of sensitive commercial data.
Fax transmission
Currently many buyers and suppliers exchange trade documents directly over fax and they do not see a compelling reason to change their systems and procedures.
Drawbacks of BPO
The introduction of BPO has not provided the needed incentive to the buyer and supplier to adapt to TSU. The reasons are not far to seek. BPO is a modified avatar of the L/C. The buyer’s bank that provides BPO has to follow similar credit appraisal norms as those for the L/C issue. Additionally, there are no universally accepted practices for BPO similar to UCPDC 600 for L/Cs. With these uncertainties, banks may find it difficult to drive acceptance by the buyer and supplier. They may also fear cannibalising the services offered to their L/C clients.
Unfavourable Basel III regulations
Under the Basel III regulations, the risk weights for trade finance instruments such as L/Cs, standby L/Cs and BPO, which are off-balance sheet items, are set to increase from 20% to 100%. This may lead to expansion of the open account trade. Banks may not be able to price BPO attractively and attract customers to the TSU facility.
Enabling environment not available
The advantages of electronic documents are not fully realised by the buyer and supplier, as an enabling environment is not available. For complying with statutory regulations, they have to submit paper documents to entities such as customs and health authorities and inspection agencies. They also need to handle paper documents for bill of lading and insurance certificates, as the electronic document submitted through TSU cannot be the basis for taking delivery of the goods or submitting any insurance claims. Hence, the buyer and supplier do not find any incentive to go the electronic way.
Positioning of TSU
TSU is viewed as a collaborative effort between SWIFT and the banking community primarily aimed at increasing the intermediation of banks in the open account trade. Trade Services Advisory Group (TSAG) comprising of major global banks has been actively involved in evangelising the benefits of TSU to their corporate customers. However, the benefits to the buyer and supplier are not yet fully understood and accepted.
The Way Forward
Enhancements to bank proprietary systems
Existing banking systems used by the buyers and suppliers can be enhanced in such a way that without making major changes to the user interface, they are enabled to generate electronic documents in compliance with the ISO 20022 TSU standards. These electronic documents can then be exchanged through TSU for matching. The investments needed for enhancement of the existing systems are expected to be lower compared to building a new platform for providing TSU services.
Proprietary format conversions
ERP system vendors will invest in complying with TSU standards, only if they are confident of the adoption. SWIFT and the major banks can initiate discussions with the leading ERP system vendors. They can also encourage their corporate customers to contact the vendors directly.
Banks can examine the feasibility of providing to their corporate customers system adapters that can convert proprietary message formats to the ISO 20022 TSU standards. Banks can also provide data conversion, enrichment and repair as value added services.
Address competition from third party platforms
Banks can use the increased visibility provided by the message flows through TSU to identify opportunities for providing finance and other services to the buyer and/or supplier. This can be done at competitive rates, as the banks can better manage their risks with analysis of data available from the TSU message flows.
New process adoption
Banks can directly get the fax documents from the buyers/suppliers. Banks can use imaging software to convert fax documents into electronic messages compliant to TSU standards. This will entail additional cost to the customer, but can ease the resistance to change. This solution can also address the concerns regarding data privacy.
Advantages of BPOs over L/Cs
Many of the buyers and suppliers opt for open account trade, as they find that more than 50% of the documents under L/C are rejected on first presentment by the banks. However, as the number of fields used for matching by TSU is less and pre-matching and matching are automated, the process is expected to be hassle-free. If the payment guarantee provided under BPO is taken into account, the buyer and supplier will have greater incentive to avail TSU and BPO facilities. The move by SWIFT to get the endorsement of International Chamber of Commerce (ICC) for the BPO concept can pave the way for adoption of uniform standards and wider acceptance. It can thus address the concerns about legal compliance and enforceability of contracts.
Basel III
Banking industry associations have already represented that trade finance instruments, such as L/Cs, BPOs, etc, that keep the wheels of world trade moving be not clubbed with other off-balance sheet items for risk related provisioning. This will increase the financing costs delaying the world economic recovery.
Establishment of electronic documents registry
SWIFT is in a unique position to establish and manage an electronic documents registry that can form the backbone of a fully dematerialised process for trade documents. SWIFT can initially engage with the transport providers and insurance companies to establish such a registry. The government and inspection agencies can also be subsequently roped in. It can provide secure electronic document storage, transmission with authentication and non-repudiation features. The buyer and supplier will immensely benefit, if they can seamlessly leverage the TSU and proposed electronic document registry facilities. Such a facility can also be used to handle electronic documents under L/C under eUCP guidelines.
Benefits to the buyer and supplier
Banks can evaluate the creditworthiness of the buyer based on the TSU transaction flows. They can thus enable the suppliers to manage their risks better. TSU can also help in reducing supplier fraud, as the goods supplied and remaining order balances are tracked at the item level.
The standardisation of the messages can help in better STP and reduce costs. The corporate customers who have already been part of the SWIFT for Corporates network can use their infrastructure to send TSU messages to the banks.
TSU will be particularly useful in situations of trade between neighbouring countries, where currently the goods reach their destinations faster than the documents handled manually. TSU will help in the synchronisation of cycle times in the physical and financial supply chains.
The buyer and supplier will also benefit from the timely credit that the banks can offer at better rates through the increased transaction state visibility available to them and thus can manage their working capital better.
These benefits need to be better articulated for wider acceptance among the user community.
Conclusion
A multi-pronged strategy involving the options discussed in this article can fast track TSU adoption. The first three options listed above can be implemented in the short term (about 12 months) at a relatively lower cost. Option 4 that involves developing an image-based solution is a medium-term (about 12 to 24 months) option. SWIFT and the TSAG need to focus on getting ICC endorsement for BPO and ironing out any legal wrinkles within the next 12 months. Establishment of an electronic documents registry and its integration with the TSU platform need to be given top priority. TSU adoption will receive a big boost, if this major initiative can be fully accomplished within the next three years. Banks need to make the needed investments keeping in mind the long-term benefits of TSU. Competition among banks can keep the costs down.
SWIFT, with its vast experience of driving message harmonisation and providing a secure underlying infrastructure, can certainly make the TSU initiative successful over the next 24 months working with major banks and other stakeholders in a collaborative way.
0 comments:
Post a Comment