The subject of our meeting was supposed to be trade finance. So how did we end up talking about core banking systems?
The executives of this mid-sized bank worried that their modest trade finance operation was not up to the growing global needs of their corporate customers. How, they asked, can we compete to retain these customers as they go global, if we don’t offer superior trade finance support?
It was the right question. Trade finance is rapidly emerging as a huge opportunity for mid-sized banks to add value, for large banks to perform more efficiently – and for vendors to support. But the right question quickly led down a familiar, wrong path. Like too many other new product discussions before it, it became a line-of-business challenge – a siloed discussion, as though Trade Finance was not part of a whole enterprise already replete with solutions for corporate customers, including those in need of trade finance. That path would no doubt lead to a serviceable system, but at great cost in time, redundant functionality, custom interfaces, and lost opportunity.
The right path for such a discussion leads straight to the core – the bank’s core systems, that is. Where do we already possess the functionality that trade finance customers need? What IT components do we already have that we can leverage on behalf of Trade Finance? Certainly, Trade Finance has its unique challenges, but many powerfully echo those already solved elsewhere in many banks, such as:
Paper-intensity: Trade Finance has always been one of the most paper-heavy functions in the bank, requiring costly physical transportation of fat files of sales contracts, bills of lading, customs forms, shipping forms, etc. But paper-to-image conversions are a huge success story these days in other areas of the bank: massive check and other archives reduced to a hosted solution in the cloud, branch courier elimination, loan mod documents captured at first touch and handed back to the customer. Surely they can be leveraged to capture trade finance docs.
Country Variations: Every country involved in a particular trade finance transaction increases the risk exponentially because of differences between each country’s rules, processes, currencies, providers and associations. But any bank handling global payments has already dealt with these country-to-country variations. The standard is a global payments engine where all the platforms are common and integrated; only the non-standard details need to be handled one-off.
Compliance: Compliance is a serious consideration for trade finance, posing as it does risk to importer, exporter, their banks and intermediaries. Protecting all parties has led to reams of laws and regulations, and like currency and customs, these vary from country to country. But for many U.S. banks, driven by a torrent of new domestic laws in recent years, compliance is already a core competence. For Trade Finance, compliance challenges resemble those of anti-money-laundering, and AML technology has already made many technological advances.
Efficiency: Traditionally in trade finance, weeks can elapse between the time an importer initiates a transaction and the time goods are received and payment is made to the exporter. In the past that was tolerable, but today two weeks is an eternity when a factory might be idle, a customer lost for want of a shipment or any of the other exigencies that demand speed and efficiency. Here again, banks have made remarkable advances, like getting average check collection time down from days to less than a day. They have driven changes that make electronic documents legally valid. They have shipped whole departments of work to India and still gained speed. They have leveraged workflow systems that enable disparate parties from remote locations to access the same files.
Revenue: There’s only one reason for banks to strengthen their trade finance function in the first place and it’s not efficiency or compliance. It’s revenue. If getting better at trade finance doesn’t take more revenue to the bottom line, it’s time and money wasted. In recent years many banks have made huge investments in driving revenue: sales and service behavioral change, CRM software and processes, customer databases and customer analytics and so on. It is critical that trade finance efforts draw on that experience and those advances.
It’s not that trade finance issues should be a snap to solve. But the first step in seeking solutions should involve plumbing the enterprise’s IT portfolio and core for paid-for systems that already work and are intended to be leveraged. The stubborn truth is that the majority of enterprise systems are rarely rolled out beyond one or two lines of business. Why is that so, despite all of today’s rhetoric about “the enterprise”?
We put that basic question to core vendors we have worked with over the years: What prevents you from delivering more of your value to a client bank? Here is what, in essence, they told us:
Procurement: “Procurement makes us do our deals business line by line and we know they are incented to get us as cheaply as possible. So there goes any chance of making an even better deal for the bank, with favorable pricing on an enterprise deal.”
Politics: “If we’re installing for the retail guy and ask him to take us to the commercial guy, he is reluctant for fear it will stall or dilute our effort for him. Later, when we do get in with Commercial, we quickly see where our first solution could have been designed differently to accommodate both groups. Then we’re both unhappy.”
Collaboration Edicts: “We appreciate a good collaboration, but if they tell us to get with another vendor and bring them a combined solution without knowing our business strategy, they can put us or the other vendor in an impossible position. You get reluctant compliance, not genuine collaboration.”
Information/Risk: “If they ask us to make a firm bid without letting us do a thorough assessment, it’s really risky, so the deal we offer has to cover that risk. The devil is in the detailed requirements.”
So that’s from the vendors’ side of it. What about you and your bank? Are you making the most of earlier investments that have left enterprise value on the table intended for future use?
Here is a quick self-assessment you can do: In your last major installation, can you name at least three instances where core systems were significantly leveraged? In looking at your IT portfolio, how often does each main vendor appear? How many unused enterprise licenses are you paying for? Have you ever rushed to deploy a bunch of them in the last few months of their life? Is Procurement incented on cost savings alone or also value gained? Do you fully understand the horizontal capabilities of your core vendor(s)? When was the last time Procurement sat down with your core vendor(s) and asked them what you can do to ensure their ongoing success?
A dense, flexible core is a bank survival issue. In ten years, no bank will be able to afford the redundancies and inefficiencies of today’s IT infrastructure, where each business line and each IT support group buys, directs, and governs its own IT portfolio, without knowing the cost and revenue impact to the enterprise. Vendors must help solve this problem, and banks must facilitate their doing so. Trade finance offers the perfect opportunity to look for core leverage opportunities.
Mr. Stuart is managing partner of Irving, Tex.-based ABeam Consulting USA. He can be reached at email@example.com. Mr. Lund is chairman and CEO of Dallas-based eGistics Inc. and can be reached at firstname.lastname@example.org.
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