Published: September 06, 2013
Trade finance solutions are essential for multinational corporations to mitigate risks that are inherent in the import and export process. Before the financial crisis of 2008, we saw a decline in the use of traditional trade instruments in favour of open account structures, as there was a widespread perception that cross-border risk was becoming less prevalent, and that banks could take a subordinate role within the structure of the transaction. It was also perceived that open account brings advantages in that transactions can be conducted more quickly and with higher levels of automation. The crisis illustrated, however, that managing trade risk remains an essential task for treasurers and finance managers of businesses that import or export goods, particularly to or from emerging markets where less credit information may be readily available, or regions that are politically or economically volatile. Today, however, the introduction of Corporate-to-Bank SWIFT Message Type 798 (MT798) marks an important step in providing a similar degree of automation and efficiency for trade transactions as open account.
An ongoing dilemma for treasurers and finance managers leveraging trade instruments such as letters of credit (LCs) is how to automate and streamline bank communication and integrate processes with internal systems. This is particularly complex bearing in mind the amount of documentation that is typically required to support a trade transaction, and the diversity found in the front-end systems in their partner banks.
We have seen two parallel developments in recent years to support more efficient trade processing: internal centralisation and innovations in bank communications. Internally, many companies have centralised and standardised their trade processing, which is often a vital first step in resolving the challenge of fragmented processes and formats within the business. In tandem, we have been working with our trade finance partners in developing innovations in corporate-to-bank communication for trade. Forty years ago, a physical letter had to be signed by an officer of the company and countersigned by the bank. Mailed letters were then replaced by telex communications, fax and email. More recently, leading banks and vendors have invested considerably in online platforms to automate and streamline international trade, and support closer integration with customers’ internal systems.
Despite the often considerable sophistication of these solutions, such as Deutsche Bank’s front-end system, db direct internet, companies that work with multiple banks typically need to work with multiple platforms, maintain separate interfaces with their in-house systems, undertake separate approval processes and manage different security profiles. This results in fragmented processes, higher costs and operational risk.
The bank-to-bank communication platform offered by SWIFT has become widely accepted as a platform for bank-to-corporate communication in recent years. Unlike traditional bank proprietary systems, corporations can connect with multiple banking partners through a single channel. This streamlines integration and communication, facilitates standardised processes and reduces operational risk. Furthermore, as a bank-neutral platform, corporations are less reliant on individual banking partners and can introduce new banks easily without the need for additional technology. Although SWIFT was originally chosen by the largest multinational corporations that often had a very large number of banking partners, the spectrum of businesses adopting SWIFT has now expanded substantially, encouraged by growth of service bureaus, who provide SWIFT connectivity services without the need for the company to invest in these skills, and SWIFT’s introduction of Alliance Lite and Alliance Lite2, web-based solutions that have further lowered the barriers to entry.
In most cases, corporations have used SWIFT to exchange cash-related information such as urgent and bulk payments and bank account statements. Earlier this year, SWIFT introduced MT798, a new message type for trade-related messages, including import and export documentary credits, standby LCs and demand guarantees (see Box above). The MT798 message is effectively an ‘envelope’ into which all actions and information related to a transaction can be included and exchanged with the relevant banking partner, whether or not a corporation is the issuer or receiver of an LC or other trade instrument.[[[PAGE]]]
There is a range of advantages to using SWIFT for trade finance communications. In many cases, a company may already be using SWIFT for cash-related activities, in which case adding another service is relatively straightforward. Equally, however, the need to transact trade transactions in a more efficient, streamlined and bank-agnostic way may also be a driver to implement SWIFT for the first time. Some of these advantages include the following:
MT798 brings substantial opportunities for international importers and exporters, particularly those that have multiple banking partners. A number of high profile pilot projects are pending completion, so we anticipate rolling out MT798 capabilities more widely from September 2013. Clearly the time and effort required for implementation will depend on whether an organisation already has SWIFT in place, but we anticipate rapid adoption among our multinational corporate customer base.
This is the first step in automating and streamlining international trade through SWIFT. In addition to increasing adoption, we expect to see a wider range of services emerging in the future. For example, a lead bank arrangement offers the potential for a company to communicate with one bank, which then sends on LC requests to other banks, avoiding the need to communicate with multiple partners. This is likely to be particularly useful when working in more remote regions where not all banks are connected to SWIFT.
For businesses with a limited number of transactions, or that have only one trade bank, proprietary solutions such as Deutsche Bank’s db direct internet will continue to fulfil a valuable role in their operations, and this solution will continue to be an integral part of our solutions portfolio. However, MT798 through SWIFT is an important next step in Deutsche Bank’s journey with our customers to optimise their experience of doing business with us, including providing the highest possible levels of efficiency, control and innovation.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
