Trade finance products tip: Information is gold


2006-10-11

By Alexander R. Malaket

Traditionally, trade finance which is mostly in the short-to medium term, involves three pillars or core activities: payment facilitation, risk mitigation and financing. Whether we speak of facilitating a straight-through payment in an open account transaction or a complex, ECA-backed structured transaction, these components remain core.

More recently, however, a fourth ?pillar? ? information ? is increasingly critical and increasingly a key element of the value proposition for leading trade bankers.

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Traditional, credit-based product offerings have become near-commodities, especially given the current high levels of liquidity across the globe. Large corporates are far more interested in risk distribution options and clarity (i.e. information) across their international transactions and across their global supply chains. In fact, just as the term ?financial supply chain? has become mainstream, we are now hearing references to an ?Information Supply Chain?.

Large corporates, especially global retailers, have supply chain management and logistics capabilities that rival those of the most advanced military forces. These same retailers drive trade volumes and help define market expectations related to trade banking services.

The implications (and opportunities) for trade bankers are significant.

Reliance on correspondent banking relationships to verify the legitimacy of a trade counterparty is no longer sufficient; trade banks wishing to advise an export letter of credit may be called upon to obtain and provide information about the overseas counterparty as a result of increasingly stringent compliance regimes.

At the transactional level, customers are expecting (and demanding) near real-time tracking of shipments, shipping documents and the related financial flows. Taking a few days to ?check with the foreign bank and get back to you? is no longer an acceptable response.

Such responsiveness requires the appropriate investment in technology, both at the backend in transaction processing, and at the client-facing side, with web-enabled solutions providing a suite of information-rich and customizable reporting. Increasingly, clients are demanding the ability to view their portfolio of trade transactions across multiple banks.

Information quality and access are critical value-adds for corporate and commercial clients, and for banks seeking to remain key partners in international trade.

As trade shifts away gradually but inexorably from traditional products such as letters of credit, to open account, the value proposition brought by trade bankers will need to be redefined and repackaged. Information ? clarity ? will be a critical component of that renewed value proposition.

Timely and accurate information about the exact status of the product, paper and financial flows related to import/export will provide leading trade banks with the opportunity to identify ? quickly ? the points at which financing solutions, risk mitigation options, or even advisory services, can be offered to trade clients.

The critical role of information also has clear implications for trade finance groups within banks. Given the speed with which reactions and decisions are required, trade operations groups (frequently the ?closest? at the transactional level) ought to work increasingly closely and in coordination with trade finance and relationship specialists, to ensue that information can be collected, validated, communicated internally, AND be made available to clients as a value-added service.

The quality and timeliness of information, as well as its collection and storage, will also be increasingly critical under Basel II, since the existence of baseline/historical transactional information will assist banks in meeting regulatory requirements, and may even allow banks to decrease capital usage (through lower adequacy thresholds) for clients, based on the quality of the historical data accessible to the banks.

Leading-edge information-gathering, management and communication capabilities will affect all aspects of the trade operations of tomorrow, and may even drive such fundamental decisions as whether to maintain internal capabilities, or simply outsource the operational component of a bank?s trade business.

Payment, financing and risk mitigation capabilities are the price of entry into the business of trade banking.

Information is Gold.