01 Jul 2015
At the top end of that scale, institutional businesses across the world dealing with cross-border payments are being transformed as customers look to digital instruments like bank payment obligations (BPO) to gain a competitive advantage.
"The use of paper in cross-border trade has been going on for centuries and those habits – not to mention ingrained processes all along the value chain – are hard to break."
Hariramchakraborthy Janakiraman, Head of global core trade product | ANZ
Yet in an increasingly digitised world there's still sizeable support for traditional methods in trade finance. So while digital trade finance is not new, adoption has been slow.
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Many banks are cautious about investing as the use of paper in cross-border trade has been going on for centuries and those habits – not to mention ingrained processes all along the value chain – are hard to break.
The question then is whether the inevitable digitisation will create new competition for banks in the same way we have seen with the emergence of non-bank niche providers in personal lending? Or will it prove to be another avenue for banks to ply their trade?
It's not that the old system is broke, either: paper-based transactions still meet the objectives of all parties. But the shift to digital – using electronic documents (or eDocumentation) – will streamline a process involving invoices, certificates of origin and independent inspection certificates, to name just a few.
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It will also digitise one of the key processes in international trade: the transmission of the bill of lading, which exporters use to control goods until receipt of payment from the importer.
Demand for digitisation in the corporate sector is primarily driven by large groups in the commodity industry like mining and agriculture. These companies are chasing reduced costs through increased efficiencies and working capital improvements through the quicker processing of payments.
Additionally, the increased visibility of all information provided by the process reduces the risk of fraud. eDocuments also provide more security given everyone who played a role in the transaction chain can be determined and located.
Despite these improvements the process creates some unique challenges. Unlike other transactions, trade finance needs a lot of people at the table including shipping companies, chambers of commerce, insurance companies, customs authorities, inspection companies and more.
Going completely digital requires significant infrastructure investment to get everyone connected. In certain pockets, this has started but there is a long way to go before everyone is at speed.
A lack of services offered by financial institutions has played a role in keeping the take-up of digital trade financing at low levels but has also provided an opportunity for new industry players.
For banks, the digitisation of the sector offers similar advantages and disadvantages as it does for customers.
The main benefits of the digitisation for banks are increased efficiency and a reduced risk of fraud. The fall-out from last year's claims over scam 'repo' deals (metals-backed sale and repurchase transactions) involving warehouses in Qingdao and Penglai provides a strong case for this.
By going digital, banks will also have increased visibility over the end-to-and physical and financial supply chain. This would make it possible to intermediate in the chain at a much earlier stage than what happens today, giving them a greater role in the process – and profits.
For example, a bank may be much more comfortable to provide pre-shipment financing if they can see the creation and acceptance of a purchase order. A next step could be that banks extend trade-finance services to customers in locations where the bank does not have a physical presence.
On the downside, banks will also be required to invest in technology. While current volumes in digital trade do not justify large technology investment, it will be necessary when volumes increase. Other impacts for banks include changes to legal documentation, operational processes and staff training.
Additionally, various companies may not want to be tied to a single bank system and therefore prefer third party multi-bank solution providers when utilising digital trade. Banks will need to become comfortable in partnering with third-party vendors who provide eDocumentation services or risk being squeezed out of the process entirely.
Last year, ANZ was the only Australian bank to be BPO enabled – a process whereby payment is guaranteed by electronic data matching – and is still one of just a few banks globally with the ability to combine BPO transactions with eDocumentation and data files.
BPOs are irrevocable undertakings given between banks stating payment will be made at specified times after specified events (such as goods delivery) has taken place. Companies are provided with increased risk coverage and improved working capital cycles while banks can participate earlier in the supply chain, by offering services from the establishment of the sales contract.
The below infographic shows how BPO provides a real-time payment option compared to more traditional forms of cross-border payment.
In June, ANZ completed a pioneering a BPO transaction for an iron ore shipment from Australia to China worth $A12 million.
The transaction involved Cargill and BHP Billiton as buyer and seller respectively, with ANZ as the obligor bank. It marked the first use of BPO coupled with an electronic bill of lading and digitised commercial invoices.
This groundbreaking solution reflects ANZ's ambition to be a leading innovator in Asia-Pacific trade finance and the Australia-China corridor.
View the full graphic.
While it won't be a game changer in the short term, the ability to handle BPO transactions will be vital for any serious trade financier.
For banks, despite the attractions of digitisation there is unlikely to be a rush of new competition. Expertise in trade finance cannot be easily replaced. Additionally, banks have the balance sheets to lend and mitigate risks on a large scale.
What is likely though is the emergence of new providers offering eDocument and data transmission services between companies and banks. So, here as elsewhere, the real way to fight off disruptors is to work closely with them.
Hariramchakraborthy (Hari) Janakiraman is head of global core trade product at ANZ.
Illustration: Chris Kelly. Corporate caricatures & illustrations.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
01 Jul 2015
02 Jul 2015