REVALIDATING THE SUPPLY CHAIN

By Bruce Proctor, Global Trade Services, JPMorgan Chase, New York

For much of the past ten years, a key philosophy underlying developments in the trade finance world has been that of ‘dematerialisation’. Advances in communications technology and a related re-examination of the role played by financial service providers in trade, have led to widespread acceptance that the future direction of the business would be predicated upon the ability of firms to drastically reduce the amount of paper documents used in their day-to-day servicing and financing activities.

To the credit of all involved, tremendous progress has been made in this area. The resulting efficiencies have allowed goods to flow more freely through global channels of commerce, while providing market participants with access to more accurate and useful data on a timelier basis. Fortuitously, these enhanced capabilities have also permitted banks and corporations to more easily comply with the strengthened post-9/11 regulatory environment, which requires a much higher level of due diligence and transactional awareness.

As market functionality has progressed, an equally important development has resulted from this impressive leap in the generation and dissemination of value-bearing information. In general, the transparency of global trade has increased greatly, thereby highlighting the many inefficiencies that have long been a product of the complicated system of discrete service providers, each occupied with a specific portion of the global supply chain.

Financial institutions, customs brokers, freight forwarders, insurers, inspection firms, and ocean and air carriers all play a role in the end-to-end movement of goods across the world's markets. Unfortunately, the linkages among these players are often poorly developed in the eyes of a typical buyer or seller, who must navigate through those sections of the supply chain that are needed to expedite their transactional flows. Attempts have been made by some of these providers – primarily the carriers – to build broader logistics structures that can encompass several links in the chain. But the desired melding of the physical and financial elements of the process has so far proven difficult to accomplish.

Interestingly enough, it may be some of the leading financial side providers which now have a strong opportunity to ‘rematerialise’ cross-border trade flows, as they increasingly focus on integrating the underlying components. Building upon their historical functions of transactional settlement and financing, major international banks offer access to detailed information flows and unparalleled risk mitigation capabilities. In turn, these functionalities form the basis of an expanded suite of value-added product offerings for corporate importers and exporters, ranging from preferential goods classification to duty minimisation to the management of global freight rates to restricted party screening procedures.

These services can be provided directly to the banks' clients, or can form part of a broad outsourcing programme – an area where the financial services industry has developed extensive expertise. Further synergies are available to corporate clients through the development and delivery of focused software applications that combine the trade finance and logistics spheres. This is in addition to strategic consulting assistance on a range of topics, from streamlining a firm's logistics arrangements to working with national customs authorities on more efficient port clearance and excise collections. Occupying the role of a key third-party provider gives banks an ability to adopt a more holistic approach to clearing supply chain bottlenecks while helping to bridge the historical gap between the operational and financial data flows required to complete the order/procurement/fulfilment/payment cycle in merchandise trade.

The challenge of mastering this proposition is an obvious one, and it is anticipated that only those institutions with a long-term commitment to the creation and maintenance of a comprehensive end-to-end trade structure will be able to deliver against heightened market expectations. Demand for such integrated programmes is very strong and growing rapidly, with almost no limitations posed by geography, type of transaction, or size of the trading counterparties. Domestic, inter-regional and international transactions are all available for these re-intermediation initiatives. Trade is an obvious candidate for this kind of synergistic enhancement, with potentially enormous benefits to be obtained in the areas of timeliness, accuracy, cost and operational consistency.

We are still in the first stages of this market convergence. But the critical role to be played by financial side providers is rapidly coming into focus. Those that move decisively to execute against these opportunities will certainly be leading players in the future of global trade.