Core Systems

10:46 AM
Dominic Broom, European Head of Global Trade Services, Bank of New York Mellon
Dominic Broom, European Head of Global Trade Services, Bank of New York Mellon
Commentary
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SWIFT’s TSU Could Bring Benefits to Local Banks

Local banks can benefit from the SWIFTNet's Trade Services Utility and avoid outsourcing to rivals.

The SWIFTNet Trade Services Utility (TSU) was launched in 2007 as a collaborative, centralized matching utility designed to help banks meet the supply chain challenge. Banks that are on board are using the system to offer open account trade services to their corporate clients, in addition to traditional documentary credits. Yet one of the less obvious benefits of the TSU is the way that smaller banks can use it to fortify their positions in local markets.

Until recently, local banks — especially in the emerging markets — have been threatened by the confluence of the growth of open account trading, which bypasses their traditional role, and the march of the megabanks, which have been trying to reach community banks' traditional clientele. As a standardized electronic infrastructure, the TSU repositions local banks inside the trades, which they previously saw as simple payments traffic. The utility allows banks to firmly fasten their positions in the supply chain, enabling them to offer pre- and post-shipment financing, liquidity management and specialist services.

With open account trading now accounting for around 80 percent of world trade — and virtually all the growth — this is a major step up from where local banks found themselves prior to the TSU's introduction. Accessing open account trades would have then been the privilege of the very few megabanks able to develop proprietary electronic systems. The only alternative for smaller banks was to outsource this capability to those megabanks, which were also potential rivals for the local customer.

In fact, when local banks benefit from the TSU, there is a positive impact on the entire trade services arena. Most emerging market importers and exporters retain strong loyalties to their local banks and, for many reasons, they continue to use paper-based trade services regardless of the level of sophistication of other elements in the supply chain. This is particularly true among the small and midsize importer and exporter entities — a factor that is significant given that the value of the average import letter of credit is just $40,000, with the average open account trade likely to be even smaller.

The TSU is designed to help all trade services banks meet challenges associated with physical and financial supply chain management. The utility enables users — suppliers, customers and banks — to compare standardized and reusable data elements quickly and accurately. Each transaction first establishes a baseline through matched data — typically from purchase orders or commercial invoices — using both the buyer's and the seller's banks as sources. Subsequently, commercial and transport data sets are compared, and a report is generated that provides regular status updates throughout the transaction's life cycle. As such, local banks can propagate modern trade finance techniques against open account trades.

As a neutral vendor, SWIFT's system enables the smaller banks to bypass the proprietary risk management and payments messaging systems offered by the outsourcing megabanks. For local banks sourcing supply chain solutions, therefore, the watchword is now "collaboration" — replacing the "outsourcing" buzzword of recent years. Many are teaming up with partner supply chain specialists, such as the Bank of New York Mellon. Indeed, some banks have created customized platforms — such as BNYM's Trade Workstation — that supply local banks with a tailored interface with the TSU.

The collaboration ethos along the supply chain is now stretching to cover both buyer- and supplier-oriented trade services institutions, as well as third parties such as finance providers and logistics companies — all of which reverses the trend of the past 10 years by putting more power in the hands of the local banks.

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