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Multipolar trade-services landscape driving electronic transactions

18th September 2015

By: Schalk Burger

Creamer Media Senior Deputy Editor

  

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Increasing digital trade services and nonbank funders are presenting a challenge for banks, as they have to adapt to declining paper-based trade services and adopt new technologies to gain new clients and revenue, says financial services software company Misys transactional banking head Jeremy Cross.

Banks should extend their existing digital services, which now commonly include electronic bills of lading and electronic letters of credit, to improve access for customers who want to use digital trade services, he says.

Digitisation is expanding and is impacting on the revenue from traditional sources for banks. However, improved flows of information enable banks to have a much more intricate and real-time view of payment conditions and can thus assess risks and opportunities more effectively and quickly.

“Data need to flow from sellers to their banks, then to the buyers and the buyers’ banks. This makes trade financing and services sophisticated and complex, which can now be done electronically while involving many parties within a supply chain.”

This information also enables banks to provide financing services for various parts of a supply chain, as there is usually a need for financing in certain parts of a supply chain, even if this is not from the banks’ main clients, Cross adds.

Further, regulatory changes are driving changes in trade finance and supply chain finance. These include Basel III and the anti-money-laundering legislation from the UK, besides others.

“A key issue when considering trade financing is the high cost of compliance, which absorbs a goodly portion of investment returns. This is one of the drivers of the shift towards digital services and self-service.”

Many trade-finance transactions are open- account transactions – transactions that take place between parties in a trusted relationship – and, while this eliminates demand for the traditional trade services provided by banks, it does not preclude the provision of financing for various parts of a supply chain, he explains.

Further, globalisation of trade financing is changing the trade environment, and new trade lines, particularly North–South trade lines, are becoming increasingly prevalent, not only adding to the complexity but also increasing the addressable markets available to banks.

Banks must also develop and improve relationships with all parties in a customer’s supply chain, including international supply chains, to assess buyer and seller risks, and determine bank payment obligations (BPOs).

The International Chamber of Commerce has developed new standards for BPOs, and work continues to define additional standards for components of supply chain financing, notes Cross.

He adds that customers often feel that banks are failing to provide aggregated financial information and appropriate delivery channels for services and customer self-service, especially for trusted, open-account transactions.

“Thus, banks have to develop and update their business and financial instrument workflows because, even with digital transactions, the approval processes and workflows must be fully defined for the customer.”

However, using digital transaction services depends on the technological maturity of the bank customer, and the need for traditional finance services remains, even as the use of digital services grows, he concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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