Treasury Today Country Profiles in association with Citi

The compelling rise of multi-bank trade finance

Five connection wires

Whereas multi-bank trade finance was once the preserve of a small number of large global corporations, today the market is growing rapidly and it is becoming available for an increasing number of corporates.

There are drivers on the bank and corporate side for this development, while technology vendors in the area have seen a boom from both sets of market participants keen to use an independent portal for their multi-bank trade finance needs.

In fact, the major trend in multi-bank trade finance is quite simply the fact that it is so popular. The relevance behind that is, if you go back around five years, the default model was that banks wanted their corporate customers to use their own proprietary portals and were very resistant to any concept of a multi-bank trade finance solution. That has changed dramatically. Partly it has changed because of the environment, post-Lehman Brothers, where the spreading of risk is imperative.

Another reason for the change is the reality of the day – corporates no longer accept the ‘constraints’ that previously existed, while the need for full visibility and consolidation is a major factor. There is also now an acceptance that multi-banking for trade finance is here to stay, and banks are – if not fully – reluctantly accepting that. As a result, they are also doing something to arm themselves for the new world.

Corporate drivers

The corporate drivers to engage in multi-bank trade finance obviously depend upon the individual company and the type of business that it is in. However, certain broad drivers exist that will resonate with many corporates. The first, mentioned previously, is global visibility or consolidation. This is particularly applicable for large decentralised corporates – the ability to view, visualise and control singularly and globally, consolidating the management of letters of credit (LCs) or guarantees, for example, is a significant benefit.

A second driver for corporates is the process efficiencies and cost reductions that multi-bank trade finance can bring. There can be a huge amount of waste cost in trade finance, in terms of fees and administration. Additionally, corporates can face internal costs when dealing with banks on an individual basis. Time delays and the knock-on effects of bottlenecks in the supply chain tend to relate to the old ways of doing things. Processes may be largely paper-based and individual to each bank, while the corporate can lack visibility into their true position at any specific time.

The third driver for corporates relates to a very current concern – the reduction in time to cash. This is particularly critical for exporters. It is well known that the number of presentations that the banks accept clean first time is very small, particularly with LCs. This relates to the difficulty in gaining compliance documents, as well as the inefficiencies of the process – getting documents approved by the banks. An increasing number of corporates are now looking at multi-bank trade finance as a way of significantly reducing the discrepancies involved in the documents that are being presented. The ‘holy grail’ is to significantly reduce the time it takes to present the documents and for them to be approved by the banks for payment, and doing that across all banks rather than merely a single bank.

A fourth driver for corporates is a well-discussed topic: general working capital management and credit line management. If a corporate does not have a clear view of their current cash and trade position, it is likely that they are not using their credit lines or working capital very effectively. If you flip this around the other way, one of the big benefits of multi-banking is that it allows you to control and manage both working capital and credit lines.

“I think all four of those are the drivers as to why corporates are seeking to do this, and are not going away when banks have pushed back,” explains Arthur Voncheck, CEO of Bolero. “They realise that these are really big benefits that they have to go and get, particularly in today’s challenging markets. It has raised its profile from being nice to have to being almost an essential technology for a large corporate.”

Another trend within corporate organisations is that treasurers are not just focusing purely on the financial aspect. They are also looking at the commercial viability for the business as well. When banks and corporates are meeting to discuss multi-bank trade finance, the commercial side of the corporate business is usually well represented. This means that when the banks start coming together in order to find what is an appropriate financial solution, they have a much wider remit to fulfil. That is why the multi-bank formula tends to work well, as different banks offer different areas of expertise.

An example of different business units working with treasury on multi-bank trade finance can be seen in the real desire to streamline the presentation of documents for payment. That stretches very much into the main organisation and not just treasury. Procurement and the global logistics group within the organisation will all benefit from this. Third parties also benefit – for the carrier itself there is a reduction in delays, loss and fraud. Efficiencies through multi-bank trade finance offer benefits for the organisation beyond treasury.

Bank drivers

At a high level, there are a couple of major drivers that are bringing the banks round to the concept of multi-bank trade finance. One of these is simply recognising the demand from their major corporate customers globally. Secondly, everyone now understands that you have to spread risk. Looking back five years, most of the large banks were talking about ‘one-stop shopping’ – being the only bank their corporate clients would ever need. Today this is not the case, with banks wanting to spread risk instead. Corporates also want to spread risk. All this points to the need for a solution that incorporates other banks, and therefore is open, neutral, and multi-bank.

Bank essentials of multi-bank trade finance

  1. It has to be the right finance solution to meet the customer’s needs.

  2. You have to have a secure means of communication, both between the customer and their banking partners, and between the banks in the group.

  3. It has to be operationally viable for all parties involved. That might make reference to the technology platforms that you may or may not be using.

  4. It has to be scalable – you have to have the ability, both from a transactional volume perspective, and from a credit perspective, to be able to move as that customer grows.

Source: Deborah Ford, Senior Manager, Supply Chain Finance at Lloyds Banking Group

If you look at the banks, most have very similar product suites and offer the same kind of services (albeit under different names). Some are better than others in different aspects but there is a lot of competition out there, and indeed competition is growing. So multi-bank trade finance is a good way of everyone having a small piece of the pie, working together to fulfil a company’s requirements.

Many banks today will preach of an ethos of relationship banking to their customers, which is the way that they prefer to focus. Having built those relationships with their corporate customers, the banks then have to ensure that they are delivering the services that they have promised they will deliver. In many ways, the corporate can drive the multi-bank trade finance process.

There are some corporates who will be very prescriptive about how they want something in the multi-bank trade finance space to be provided to them. Something that is increasingly happening is that the corporate will pick a lead bank. They will identify the bank that they wish to lead the trade finance solution, but then will also inform the lead bank that they are happy for this to be opened out and for it to go wider.

Part of the reason for this is that it actually makes a much more effective use of the banks in their pool. It allows the corporate to keep all banks engaged in their pool, without having to deal with multiple relationships on an ongoing basis. They will nominate the lead bank, and then, if they are being prescriptive, let them know that they are happy for them to work with bank X, bank Y, and bank Z. Other times they will be happy for the lead bank to make recommendations of which banks they would like to include.

From the corporate’s perspective, they are looking for the way it is handled to be efficient, obviously looking to reduce costs, and they do not want the disruption of having to deal with multiple banks on a daily basis. Of course, they also want the right financial solution to be found for them.

It may come as a shock to some in the corporate world, but the banks do actually talk to each other anyway. They all have their own relationships with other banks and people in the trade finance roles across those banks. Bankers in this field will also get to know which are the banks that they work well with and/or are likeminded across a number of areas. A lead bank looking to put a multi-bank facility in place will put a call out to ask others if they are interested or if it is something that other banks are looking to do.

Sometimes the lead bank will provide greater detail of the specific project, depending on how far down the road with the process they are. The enquiry by the lead bank will assess whether the pool banks they contact have the credit appetite for the particular deal, type of business, and the structure they are broadly going to work towards. This will be co-ordinated across the various banks – each of the banks will have their own part to play, and will have to define how they add value to that relationship. Ultimately, the lead bank will decide how many and who they want to work with on the corporate’s behalf.

The role of third party vendors

Technology providers are also seeing their role in this area grow. They tend to position themselves to function as a neutral intermediary between the banks and their corporate customers. Most provide an open platform that allows the corporate to have a single consolidation application for trade finance that can link in a standardised way to all of its banks.

At the same time, these vendors can provide the banks with a single standardised multi-bank channel to get to all of its corporates without requiring any proprietary technology to be used. “We often describe ourselves as fulfilling a role like Esperanto,” says Bolero’s Voncheck. “We’re not a standard, we’re a common language. We’re neutral – we are neither a corporate app or a bank app and we have customers from both sides.”

“We see ourselves fitting in as the platform for a bank that is looking to white label a product,” explains Phillip Kerle, CEO of Demica. “What we offer to a bank is the speed to get to market – if you have to develop your own product from scratch it can be a painful and lengthy exercise. We can provide that product to the bank.”

Some sophisticated corporates will select an independent platform in order to bring in different banks in different jurisdictions. If the bank has its own platform, it will tend to push this. Corporates may have concerns that if they end up using a bank’s platform then the bank may have undue influence.

A corporate that does select an independent third-party platform will probably tend to be highly rated. They will have banks eager to sell them products so they are in a position to dictate terms – they can say that they want an independent platform, and they can state that they want to bring in different players in different parts of the world.

A regional example

A number of ‘tier 2’ western European banks are looking specifically at bringing in suppliers in eastern Europe into multi-bank trade finance programmes. Eastern Europe is a good market because the Western bank may not have a footprint in the region, whereas other regional banks do, so they would look to try and work with those banks.

“There has been a situation where we have seen a big global corporate that went out with an RFI on a supply chain finance programme, and they ended up being quite specific in their choice of banks in different regions,” says Kerle. “So they looked at a bank that had a footprint across all of eastern Europe, and that particular bank ended up getting that component of the programme. I know this is also true in Africa, and to some extent in Asia as well.”

Here to stay

Multi-bank trade finance will likely continue to build on what is already starting to take off at the moment. “I think the interest in multi-bank trade finance will continue to be at this high level until the current crisis in Europe is resolved. Who knows when that may be,” says Demica’s Kerle. The crisis has made funding more scarce, which will continue to boost multi-bank trade finance and other diversified funding instruments.

“We increasingly see that, rather than us going out and educating the market, we see more demand coming to us,” says Bolero’s Voncheck. “We see pretty much all the banks acknowledging that this is part of a strategy that they need to take forward. There are a lot of initiatives that are starting in this area. If you look at the banking world they have been doing some things themselves, and they’ve also been doing some things with SWIFT to position it as a potential technology for multi-banking. All of that is raising the profile and giving credibility to the fact that this is a problem that needs to be solved.”

This is an exciting market opportunity – particularly when you look beyond simply dealing with administration and efficiencies, and start moving up the value chain to look at reductions in time to cash and the high level value that multi-bank trade finance delivers.

As the market grows, the focus on quality of product will also increase. “It will be important to ensure that multi-bank trade finance solutions are being delivered to the right quality and standard that is expected,” says Deborah Ford, Senior Manager, Supply Chain Finance at Lloyds Banking Group.

“In some cases I think we will also be looking deeper into the technology. Banks have very large legacy banking systems in place. The difficulty with moving that on, to a large extent, is that it can be cost prohibitive and quite a long process. While this can be done, and you can buy third-party software to enable you to do it, when you consider the complexities of the financial solutions that are put in place you have to be able to link into your existing banking system to make that work. It is all about the end-to-end process.”