Treasury can simplify the management of its trade-related activities using a web-based, multi-bank platform
By Jacob Katsman
Over the last seven years, trade banks have developed web-based front-end systems to capture information from their corporate clients, such as an import letter-of-credit application, and deliver the information from a bankís back-office system to clients, such as advice of payment details. At best, such front-end systems are fully integrated into the bankís back office. Information flows seamlessly from the corporate customer to the bank without manual intervention from the bankís staff. At worst, some systems just capture the information from the corporate via a web form; the bankís processing staff then has to cut and paste this information into the bankís system or systems.
With such solutions, banks hoped to replace telex, fax, phone, and courier communication. For corporate customers that dealt only with one bank, a one-to-one front end works fine.† But for corporate customers with multiple banking relationships, dealing with different bank systems is inefficient. Staff need different training in each system and different user names and passwords. To view the organizationís overall outstanding position across all banks in terms of liability, credit availability, risk exposure and bank charges, they have to enter data manually, every day, into their own ERP system or spreadsheets. They have to reconcile this information with the data provided by each bank, each with a different service level, reporting format, and reporting period. Some banks send information via e-mail, others by fax or regular mail. Among other things, the resulting inefficiencies hinder an organizations ability to make decisions and comply with regulations.
Many of the top 20 global banks have undertaken financial supply chain (FSC) initiatives to take a more active role in their multinational clientsí trading activities, including collaboration with logistics providers and import and export counterparties. Some have given global product and sales responsibilities to their cash-management, foreign-exchange and trade departments, standardizing systems, products, and sales coverage. Others continue with regional trade product experts and dedicated staff focused on specific customer segments.
Meanwhile, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the industry-owned co-operative that supplies messaging services and interface software to thousands of financial institutions in hundreds of countries, has completed its Trade Service Utility (TSU) pilot to provide standards, messaging and matching engine for banks and is preparing to go live with global financial institutions. The TSU project is designed to expand SWIFTís focus from traditional trade instruments to supporting bank services across the entire corporate supply chain. TSU itself does not enable corporations to connect to banks through a single application, but it serves as a technical and standards foundation on which banks can build their own applications for various financial supply-chain needs.
†††††††† (c) SWIFT, 2006††††††
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Many banks are now in the process of building proprietary applications with only limited multi-bank capabilities. For example, a bank may prepare documents for export letters of credit and present them to the confirming bank.
With a truly multi-bank platform, the corporate client directs information electronically, in a standard format, to any bank in its banking group, and receives information electronically, in a standard format, from any bank in its bank group. Participation in such a platform is not restricted by price or the need for special hardware or software. Access is open and secure to meet banking standards.
The benefits of such a system affect many areas of an organization. Finance and logistics staff preparing export letters of credit, for example, can now prepare compliant documents while reducing errors that could lead to discrepancies and late payments. The treasury department can reduce Day Sales Outstanding (DSO) through collaborative electronic document preparation and remote printing of documents at the bank. In addition, the treasurer and CFO have access to real-time information on utilization of credit lines and risk exposure to various countries and counterparties. While some of these benefits such as DSO and cost savings can be quantified, others related to visibility and real-time information are less tangible but equally important.
Our research has shown that corporates prefer to purchase Application Service Provider (ASP) trade-service solutions from banks rather than from software vendors for reasons involving business continuity and compliance. Corporates regard banks as trusted third parties and see less risk of business failure or data loss or theft when dealing with a financial institution. They even prefer hosting a technology solution within a bank rather than internally to reduce costs.† The bank can also offer a package deal of technology products and traditional trade services. Meanwhile, the corporate client occupies the centre of the platform and can improve communication not only with all its banks but also internally.
HypoVereinsbank, the third largest private bank in Germany, introduced such a multi-bank platform, called GlobalTrade, last year, as a multi-bank and multi-entity application that facilitates the uniform, real-time, and secured exchange of information between all parties. HVB hosts the platform for its customers and supports a full range of trade services as well as agent services for guarantee facilities. In 2005, the European Aeronautic Defense and Space Company (EADS), the world's second-largest contractor for civil and military aircraft, with revenues of EUR 34.2 billion in 2005, adopted the platform in connection with its EUR 2.9-billion Letter of Guarantee (L/G) Umbrella Facility. HVB now acts as agent for EADSís 36 subsidiaries and as service provider for the 22 banks participating in this transaction.
Previously, each subsidiary managed its own L/G activities. L/G exposure was spread over 47 banks, and 52 subsidiaries applied independently for the issuance of L/Gs. Reconciliation of L/G data by EADSís head-office treasury was time-consuming and inefficient. Treasury monitored the terms and the availability of L/G facilities and the allocation of business to the banks.
In adopting a multi-bank platform, EADSís primary objectives were:
Since May 2006 EADSís head office and subsidiaries have used the platform to:
All fees and commissions are settled by HVB on behalf of EADS to the banks through a single consolidated fee account, and a system of individually assigned reference numbers allows the automated allocation of fees and commissions to each subsidiary through its inter-company account. The platform provides tailor-made user administration and password handling for EADS and the banks and automated file transfer to EADS' reporting systems.
Before accepting the solution, EADS subsidiaries wanted reassurance about safeguarding operational and financial flexibility. To this end, collaborative technology allowed the central treasury department to intervene in the process only in cases that required exception processing.† Meanwhile, consolidating the information available from all banks in one web-based system reduced complexity and considerably eased the task of monitoring and control for treasury and finance personnel within subsidiaries and central treasury.
HVB and EADSís guarantee platform project has proven that multi-bank platforms can reduce costs and improve processes. It remains to be seen how quickly true multi-bank platforms will be adopted in markets outside Europe and by smaller organizations. Many banks are now going through the challenge of positioning themselves in the landscape of financial supply-chain services. They are looking for ways to differentiate themselves from the competition, but most important they want to create additional revenue streams. Doing this without the link to cheap credit is proving difficult.
Jacob Katsman is Chairman & CEO of GlobalTrade Corporation (www.globaltradecorp.com), a software developer and applications service provider, and Executive Director of the International Trade & Banking Institute (www.itbi.net).
BOTH SIDES NOW
The benefits of a multi-bank trading platform affect banks and their customers, in different ways.
Corporate benefits from using a multi-bank platform for processing guarantee and standby letter of credit transactions include:
The technology that facilitates these benefits could be purchased by the corporate. Banks would then be invited to participate. Alternatively, a bank could offer a hosted multi-bank solution to its clients.
For banks, a multi-bank platform presents the following benefits: