Racing to transform

Feature | 30 May 2017

Online marketplaces have the potential to overtake the trade digitisation trend and reinvent trade finance practices along the way, says André Casterman

Corporates started to adopt digital technologies to operate their business-to-business supply chain activities several decades ago. The use of corporate-to-corporate electronic data interchange (EDI) links was initially used by automotive and retail businesses, and later expanded into manufacturing, healthcare, pharmaceutical, utility and construction companies.

As digitisation demonstrated its benefits in the business-to-business (B2B) space, trade-related innovations were, however, slower to materialise in the corporate-to-bank and bank-to-bank spaces, despite various industry initiatives and commercial ventures designed to modernise trade finance practices through increased use of technology.

In the meantime, the use of electronic communication continued to increase in the B2B space and extended to e-invoicing. Acknowledging the benefits of digital communication, several governments around the world have encouraged (sometimes even mandated) the use of e-invoicing over the last seven years. This has further increased digitisation in the B2B space involving millions of SMEs.

Some of the e-invoicing platforms that were launched before the financial crisis have become prominent players, such as those on Gartner's 'Magic Quadrant' on purchase-to-payment1. A plethora of domestic e-invoicing platforms are now in business and helping corporates of all sizes digitise invoices, usually focusing on the high volume national markets.

Whereas the corporate-to-corporate space was actively moving (and moving fast) towards digital processes, the corporate-to-bank and bank-to-bank spaces camped safely on their established paper practices. The only notable development was about banks starting to roll out their own single-bank portals to address their clients' needs for online trade services.

Figure 1: The B2B space was first to digitise trade flows as banks coninued to use paper


Transforming trade

Fast forward to 2017 and the situation is very different as technology has invaded all three spaces - corporate-to-corporate, corporate-to-bank, and bank-to-bank.

  • In the corporate-to-bank space, large corporates have increasingly adopted multi-bank trade software solutions. Such offerings help treasurers and trade managers maintain all types of trade finance flows such as demand guarantees, collections, letters of credit, bank payment obligations and sometimes receivables financing. Multi-banked corporations operating substantial volumes of transactional flows are those attracted by such multi-banking trade finance offerings. Global Trade Corporation (GTC) is active in the space, also working with SWIFT's multi-banking messaging services (FIN and FileAct) and trade standards (MT 798).

  • On the B2B shipping and logistics side of the market, a very limited number of platforms (two, actually) took on the challenge to digitise shipping documentation and are engaging with a growing number of banks. I am referring here to essDOCS and Bolero. essDOCS serves 18,000+ clients to help them digitise their trade and finance documents and processes.

  • The very paper-intensive inter-bank space is also attempting to digitise trade flows as the ICC rolled out eUCP as well as an ISO 20022-based settlement instrument known as the Bank Payment Obligation (BPO). Use of those legal schemes is still limited to a small number of trade banks. In this same space, banks are piloting the use of blockchain technology to digitise inter-bank trade flows but most attempts are limited to glorified trials. Bank's appetite for digitising the bank-to-bank trade flows only started recently and has been very slow to move along given the legal complexities and IT investments required. Yet they have proven critical for early adopter banks wishing to respond to demanding clients. The Bank of Tokyo-Mitsubishi, UniCredit and Commerzbank have been very active on the BPO, primarily in the chemicals and car industries.

Most of the innovations mentioned above have so far transformed paper-based information flows into electronic equivalents. When doing so, counterparties maintain (or slightly adapt) their established legal and business practices and gradually move information flows to technology-based processes and software applications. This approach is bringing immediate benefits in terms of cost efficiency and speed, but it also limits the value proposition.

Among recent product launches, multi-bank online market places have emerged in both origination and distribution spaces with the aim to provide superior value propositions by reinventing trade processes.

The value of online market places

A new way to roll out technology-based business innovations has recently emerged in trade finance, with a focus on enhanced interaction and collaboration among transactional parties. They are often referred to as online market places. Some even describe themselves as exchanges. In such centrally managed services, all players involved in a transaction process are connected to and interact with a central counter-party acting as a trusted intermediary. This is providing users with a very different experience compared to the previous digitisation model, where players continue to use bilateral business practices. Figure 1 compares
the two models.

The benefits of such platforms are plentiful as their users (which include clients) work collaboratively on an end-to-end transactional process. Users are quickly onboarded given the limited impact on their internal back office applications. The initial cost to join such a platform is very low as usage-based pricing is often applied.

The value propositions are superior compared to previous digitisation attempts, as the platform owner defines and operates the full business process and can therefore have stronger control on the evolution of the transaction (automated decision-making and artificial intelligence at transaction level, for example). Such marketplaces also offer a superior level of added value as the end-to-end business process is often completely re-invented. Evolving user needs can be quickly accommodated. The following table compares the two innovation models.

There are two types of online marketplace witnessing early success in trade finance:

  • In the corporate-to-bank origination space, new request-for-quotation (RFQ) platforms are emerging to provide corporates with streamlined access to their trade finance banks at sourcing level. Two new multi-bank origination bidding platforms located in Europe and the Middle East, Mitigram and Trade Asset Exchange (TAEX) seem to have enjoyed successful product launches; and

  • In the investors' space, a new form of auctioning platform is enabling corporates to sell their trade receivables to a wider range of investors. In Germany, two large banks have recently partnered and invested in the new exchange2. TrustBills is the first online auction platform for selling and buying national and international trade receivables in a true sale.

The trade ecosystem has also found new avenues to innovate as well as new players to engage with
- I am referring here to institutional investors.

Entry of capital market

As trade finance has suffered under the new regulatory requirements imposed on banks, capital constraints have started to become a priority. Trade banks have identified the need to position their business as an attractive asset class towards capital markets, also called the buy-side. This trend was triggered as post-crisis regulatory requirements increased the cost of capital. Balance sheet management became a priority for most trade banks and selling down assets became critical to release regulatory capital, and manage their balance sheets.

This market development has led to a series of advances aimed at bridging trade banks with asset management firms. Bringing more liquidity into the trade space was until now only possible through various intermediaries structuring securitisation programmes. It is now also achievable through specialised market places, bridging the trade space to capital markets.

Two global innovations being rolled out in the second quarter of 2017 stand out:

  • TrustBills combines the efficiency benefits of an online market place and the access to institutional investors. This new exchange provides a new, cost-effective way for the buy side to access a highly profitable market with an attractive risk profile and short-term self-liquidation. TrustBills offers sellers of trade receivables (unconfirmed or confirmed) several benefits such as speed, pricing fairness, convenience and KYC/compliance; and

  • Capital and Credit Risk Manager (CCRManager) facilitates the distribution of trade finance and working capital obligations between financial institutions. CCRManager is offered to banks, non-bank financial institutions, and institutional investors only.

Figure 2: Bilateral business vs. online marketplace

Untapped potential?

Digitising trade and trade finance is a very long journey. Early digitisation attempts in trade have delivered tangible value to the industry, and corporates have been much faster than banks to realise the benefits, which have mainly been used to automate their trading processes.

Whereas the initial digitisation wave helped the market migrate away from paper-based practices to digital ones, we now see a second wave of innovations bringing collaborative market places through which corporates, banks and investors can operate transactions collaboratively, and use as much automated processes as possible.

Online market places bring superior value propositions as they overhaul business processes and deliver more than digitisation. They also connect all parties through a complete transactional workflow, and can therefore reinvent trade finance practices and overtake the digitisation trend.

André Casterman is chief marketing officer at INTIX and an independent fintech consultant

  1. Gartner, Magic Quadrant for Procure-to-Pay Suites:

  2. See TrustBills' announcements with DZ Bank and Deutsche Bank:

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