A SWIFT Exchange

84% of companies regard improvement in the global trade process as one of their top five corporate initiatives. For many, the ability to improve global sourcing and selling will determine revenue growth and profitability. Estimates suggest that a $1bn company can free up between $10m and $40m in cash by better controlling basic trade processes.

The main barrier is uncertainty - delayed or incomplete shipments, freight charges, customs duties, foreign currency fluctuations, customer charge-backs, all of which create budget overruns and cash flow challenges.

Uncertainty can be addressed by the exchange of information. The SWIFTNet Trade Services Utility (TSU) is an effective vehicle to support that exchange of information, increasing visibility and confidence and providing banks with a springboard to support the supply chain needs and ambitions of their corporate customers.

CHANGING MARKET DYNAMICS

The value of global trade has grown from $2tn in 1985 to more than $7tn in 2005. More than 80% of the volume is cross-border, with over two thirds involving at least one Asian counterparty.

At the same time, the nature of the market for trade services is changing globally. The accepted norm of traditional instruments such as letters of credit and collections continues to give way to increased use of open account, threatening banks with a potential loss of revenue and possible disintermediation.

The challenge for banks is to design and deliver financial supply chain solutions that enable the corporate customer to manage more accurately the receivables and payables functions and ultimately reduce working capital requirements.

VALUE-ADDED SERVICES

The financial supply chain runs in parallel with the physical supply chain; the common denominator is information. Along the way there are points at which the physical and financial supply chains intersect. These intersections are the trigger points that offer banks the opportunity to extend value-added transaction and financing services related to cash flow, from the buyer's initial order through reconciliation and ultimately payment to the seller.

The timely and accurate availability and exchange of information enables banks to deliver competitive services that will help corporate customers reduce costs and optimise liquidity. This can result in significant benefits for both buyers and sellers.

For a bank to truly enable its corporate clients to achieve these benefits it needs to attain greater knowledge of the whole of the client's organisation. It is no longer sufficient to interact with the treasurer; contact is necessary with the trade, logistics, IT and other departments. The bank effectively needs to become a specialist management consultant.

To date, only major global banks have really engaged in the provision of financial supply solutions.

Big banks have the investment capacity to acquire the expertise and technology, while also having the global network, balance sheet strength and economies of scale to serve their clients.

However, this is insufficient unless all parties in the chain are supported. No single bank can achieve this on its own. They all need to rely on their correspondent banking networks.

SWIFTNET TSU

SWIFT is a long-standing asset of the financial community, with over 30 years' experience in standardising and automating financial communication. SWIFT's role in the financial supply chain is to clearly define the boundary between collaborative and competitive spaces. The goal is to level the playing field, with shared investment in infrastructure and common standards, allowing banks to engage with each other, but leaving room for competition.

The SWIFTNet TSU is SWIFT's response to the supply chain challenge, developed with more than 125 banking participants. The solution is currently in pilot with 18 banks and will have its commercial launch at Sibos in Sydney in October.

RESOLVING DISCREPANCIES

The TSU is a central data matching and workflow engine that utilises standardised reusable computer-readable data elements from commercial documents to increase automation of data checking. It matches commercial data at the origin of the transaction - the purchase order - which results in fewer discrepancies later on, thereby increasing the timeliness of access to funds for the corporate. It receives data from one bank and matches it against data received from the counterparty bank, generating reports to both banks in the process.

This dual party transaction authentication increases comfort for the bank, thereby reducing risks and increasing bank appetite for additional services, such as transaction-based credit facilities. This should result in a better price and/or a higher credit limit for the corporate. It enables information trigger points at the intersection of the physical and financial supply chains by monitoring and reporting on steps in the transactions, such as purchase order, invoice and transportation. This provides the bank and the corporate with more visibility for improving their risk and cash flow management capabilities.

VISIBILITY OF INFORMATION

Traditional trade finance, typically involving the issuance of a letter of credit or a documentary collection, has historically given banks broad access to and clear visibility of transaction data. These long-established business practices have, in turn, enabled banks to extend a comprehensive range of financing, risk mitigation, settlement and information services to their corporate customers. The move to open account reduces the visibility of this transaction data, and consequently, the banks' ability to offer competitive value-added services. The risk to the corporate has increased, while bank revenues have fallen.

The SWIFTNet TSU recreates access to and visibility of information within the banking system but also enhances the value of information through the process of data matching. It delivers value to the banks and to both counterparties by enhancing the reliability of the data, reducing the overall risk profile and creating opportunities for banks to develop services based on trigger-point visibility.

Using the TSU, banks have the opportunity first to strengthen existing service offerings and then potentially to develop and deliver new supply chain business solutions aligned with:

• The efficient processing of trade documents
• Alternative forms of financing
• Integration with cash and treasury applications

The bank can develop their services in small steps utilising the TSU, starting with services that require little additional functionality or investment beyond the TSU, such as document checking, up to a comprehensive portfolio described below.

INFORMATION SERVICES

The TSU will track activities and notify events such as amendments, approvals or delays, which helps trading partners keep track of individual transactions and provides an effective early warning system for the management of disputes. In addition, the matching of data throughout the transaction life cycle enables corporate treasurers to predict with greater accuracy their cash flow movements and liquidity requirements.

The ability to manage cash more efficiently reduces the cost of funding and avoids excessive holdings of cash reserves.

Liquidity can be enhanced through a combination of intra-day and overnight sweeps, intra-group netting and cross-border pooling. The provision of consistently reliable information will assist the cash forecasting and liquidity management processes.

RISK MITIGATION

The matching of purchase order data will increase the visibility of the forecast payment date and increase accordingly the comfort of future payments as document discrepancies should be reduced with automated checking.

Risk is also reduced as the trade documentation can be more easily reconciled with the payment. Other benefits include the hedging of foreign exchange exposure or credit insurance. Consolidated data can be mined to offer reports on the performance of a corporate counterparty over a given time period. Matched data can also be fed into the bank's compliance engine in order to satisfy regulatory requirements.

INSOURCING

There are several opportunities for the bank to insource business processes from the corporate utilising the TSU, including the physical checking of data. Although open account eliminates processing and service fees, it introduces an additional administrative burden in document processing, previously undertaken by banks, such as matching commercial invoices and transport documents to purchase orders.

In addition to data checking, the bank may manage the document preparation process based on data sets provided. Further on in the transaction life cycle, the bank may provide reconciliation services on both accounts payable and accounts receivable. In a recent survey, 63% of companies indicated that they either outsource their accounts payable and billing functions or plan to do so within the next two years in order to reduce operating costs.

VENDOR FINANCING

The strength of the importer's balance sheet may be utilised to provide funding for the vendor who does not have the same access to cash/credit. This can be achieved through the direct provision of vendor financing or via the securitisation of facilities by the importer's bank to the benefit of the exporter's bank, simplifying exporter documentary requirements.

At the same time, the importer may be able to negotiate a better price or demand extended payment terms. Vendor financing facilities may be matched to various trigger points in the supply chain, pre- and post-shipment.

The TSU can support vendor financing at different stages in the transaction with authenticated shared data, automated document checking, notification of satisfaction of agreed actions and future required activities.

SO WHAT'S CHANGED?

Hasn't the industry been here before? Supply chain initiatives, by any other name, have come and gone. Why should the TSU be any different? SWIFT begins with an enviable advantage; it is an existing bank-owned community of 7,800 financial institutions.

Supply chain services depend on this type of correspondent global network. Over 60% of the trade services market today is concentrated across less than 40 market players worldwide. Already a significant number of these players have shown commitment to the TSU project with human and financial support in its definition, development, piloting and rollout.

The TSU is a bank-to-bank offering. This means that only banks need to utilise the common infrastructure and standards; all other parties in the supply chain are not required to participate. This seeks to respect existing corporate business practices and places the change requirements on the banks and not the corporates.

The TSU allows banks to start small and offer services to their clients with limited investment, growing their product portfolio as they learn and earn. Probably the most important element is that SWIFT is a cooperative that has the ability to stay the course and is trusted by its customers - who just happen to be its owners.