SWIFT trade initiative cuts through complexity and increases security


Simplifying Complexity

With financial institutions and corporates equally looking into reducing complexity in order to improve their efficiency and effectiveness in more challenging markets and difficult economic conditions, SWIFT's ambitious trade initiative, the Trade Services Utility (TSU), might just be the right tool at the right time.

RBS has a long history of involvement with the TSU. Since the launch of the TSU in 2007 RBS representatives have been part of the influential Trade Services Advisory Group. With more than 100 banks now on board, Madhav Goparaju, global head, Trade Channels, RBS, says TSU is gaining momentum and has the potential to reshape global trade.

Trade Applications

SWIFT, the Brussels-based financial institution co-operative launched the Trade Services Utility (TSU) in 2007. It was the culmination of a consultative process involving many financial institutions that faced declining trade revenues as their corporate clients shifted from traditional documentary credits to open account terms.

TSU helps to optimise working capital

The TSU provides a framework for broader bank participation in open account trade, which now accounts for 85% of all global trade activity. It opens the door to processing open account transactions from their inception and holds promise for new supply chain finance and management services that will help companies enhance liquidity management.

Bank-to-bank application

At its core, the TSU is a bank-to-bank application for the exchange and matching of purchase order, invoice, shipping, insurance and certificate information in a standardised and secure environment. It leverages SWIFT's technology infrastructure, SWIFT Net, and uses the universally recognised ISO 20022 standard for XML messages. Unlike Trade for Corporates, a separate SWIFT initiative, the TSU focuses exclusively on bank collaboration for open account transactions. It does not venture into companies’ back-office processes or how they interact with their banks.

In many respects, the TSU mirrors the initial introduction of SWIFT messaging in the 1980s, when banks had to adjust to standard message types, straight-through processing (STP) and electronic data mapping. SWIFT messaging represented a major shift in the way banks conducted business with each other and their clients, which led to the demise of telex messages and reduced the use of paper-based Letters of Credit (LoC).

Trade Applications

One standard, more flexibility, less complexity

The TSU also corresponds with greater demand among companies for the exchange of trade transactions through non-bank trade platforms in order to achieve a single data standard across multiple banking partners. The introduction of more third-party platforms only compounds the problem of non-standard trade data as each solution uses a proprietary data format that does not communicate with other proprietary systems.

The TSU provides a starting point for banks to agree on a data format and achieves the same results – data standardisation that permits STP with little or no manual intervention.

While some global trade banks have already built proprietary systems for open account, supply chain finance and data mapping services, companies can still benefit from the TSU.

TSU facilitates global trade

RBS anticipates that the TSU will facilitate and expand global trade. Currently, if a company sells on open account terms, it may have to deal with multiple proprietary banking systems. But if the company’s bank is a registered TSU user, the company can just continue to work with that bank while its buyers work with their banks, with the TSU acting as a connection point for the exchange of information.

While the TSU may preclude the need for multiple banking systems, it will not eliminate them altogether. Large companies that want to push data directly from their back-office systems can interact with a variety of banks without having to use proprietary or multi-bank solutions through a mapping exercise. A company with fewer trade transactions may instead opt to use a proprietary channel and not perform any mapping, yet still avail itself of its bank’s TSU services. The data standards employed by SWIFT through the TSU will make it easier for banks and ultimately their clients to exchange data without imposing the additional expense to manipulate files once the investment to establish TSU services is made.

A new trade instrument manages risk more efficiently

The TSU’s second release in 2009 featured the Bank Payment Obligation (BPO), an irrevocable obligation by a buyer’s bank to pay a specified amount to a seller’s (beneficiary) bank when there is a data match or when all financial institutions involved in a transaction agree to waive a discrepancy. The TSU mitigates risk between buyer and seller by involving banks in a transaction. Banks undertake KYC (know your customer) compliance and, to a certain extent, payment risk is mitigated because buyers and seller have some assurance that transactions will be paid if they are compliant.

Payment risk, however, is fully mitigated if a BPO covers a TSU transaction and shipping data matches the baseline (purchase order). For this reason, the BPO is considered the open account equivalent of a traditional LoC.

For companies that want to do business on an open account basis, the BPO provides an extra level of protection that was formerly not available. Together, the TSU and BPO provide a framework that will enable banks, as the custodians of these information flows, to offer a variety of value added services and alternative forms of financing, including pre-shipment and post-shipment, earlier in the transaction lifecycle.

Improved Working Capital Management

Because the TSU captures data elements specific to the physical and financial supply chain, it provides more transparency into the transaction lifecycle and allows for more informed decision making. With information passing through their banks, companies will obtain a more comprehensive picture of their outstanding payables and receivables, which will, in turn, simplify working capital management.

Pre-shipment financing

By using data matching to assure payment, the TSU and BPO enable a seller’s bank to provide pre-shipment financing for the production and shipment of goods. In this way, the TSU restores a vital financing tool for exporters in emerging markets – pre-shipment financing – which was lost in the transition from LoC to open account trade.

Vendor performance management

Electronic matching creates an unprecedented level of transaction accuracy. Discrepancies can be identified and corrected at an earlier stage, while supplier fraud can be averted.

Proactive management of foreign exchange risks

Better monitoring of delivery and payment deadlines allows for more pro-active management of exchange rate risk.

Payment reconciliation

Standardisation of message formats facilitates the reconciliation of payments.

Post-shipment financing

Financing can be predicated on the seller’s limits/lines or upon a commercial match, in which case it is discounted with recourse to the seller. The TSU will improve the interoperability of banks and may very well usher in a new era of correspondent banking in the open account space. For example, a third bank may guarantee a BPO obligor’s payment much as it would when confirming a LoC. There may be opportunities for shared, and possibly syndicated, financing between a buyer’s bank and a seller’s bank. In the case of pre-shipment finance, financing could be based on a BPO baseline match and risk would rest with the buyer’s bank. In the case of post-shipment financing, risk would be booked on the obligor bank.

‘Big Bang’ launch of TSU can streamline front- and back-office processing

Many of the world’s biggest banks have participated at the Trade Services Advisory Board level, undertaken various collaborative projects, including legal and accounting research, and shared their findings and recommendations.

Independently, banks are developing their own TSU value propositions, with some deciding to take a ‘Big Bang’ approach by connecting their front- and back-office systems to achieve STP from the outset, while others take a more conservative approach of running the application in a manual mode.

As they develop their commercialisation strategies, banks are grappling with how the TSU should be addressed in the context of credit, risk, finance, accounting, Basel II and even marketing. Additionally, a number of liability issues that are not addressed by the TSU Rule Book require time to research and resolve. It is a complex internal process that must be worked through.

New financial regulations and the overall tightening of credit favour a cautious approach, but we will get there. Many regional and second-tier banks, hesitant to make the costly investment to integrate the TSU into their back-office processes, are taking a wait-and-see approach. Other banks are exploring possible alliances that leverage a TSU-registered bank’s interface and processing capabilities on a white label basis. Many of our financial institution clients have approached us for further information and guidance.

Common set of guidelines required

Adoption of the TSU and the BPO, however, has been stalled by the lack of industry rules and standards outside of SWIFT's TSU Rule Book. In the absence of a universal regulatory and accounting opinion on the treatment of BPO, some banks are drafting agreements with other banks on which rules will apply, resulting in multiple disparate legal agreements that threaten to complicate and delay adoption.

Banks, on the whole, are looking to the International Chamber of Commerce (ICC) for BPO validation. The ICC’s Uniform Customs and Practice for Documentary Credits, also known as the UCP 600, sets forth the universally accepted rules that govern global trade under documentary credits. ICC’s endorsement of the Bank Payment Obligation concept would establish a foundation for adoption of a common set of guidelines and dispute resolution that would make the BPO a legally binding, valid and enforceable trade instrument. ICC accreditation would clearly be a catalyst for widespread BPO adoption.

Simplifying global information management

Among the 102 TSU-registered banks around the world, Asia has assumed a leading role in both the adoption and adaptation of the TSU. Indeed, the first live BPO transaction was issued by a leading Chinese bank last April. The bank is using the BPO to foster more domestic inter-bank trade. Historically, intra-bank L/Cs dominated domestic trade due to the lack of a unified telecommunications platform. The bank’s decision to use the BPO was further supported by the TSU’s local language capabilities, which support the input, transmission and matching of information in Chinese characters. Looking ahead, the banks plans to use the BPO as a framework for pre-shipment and post-shipment finance.

TSU as a vital tool to increase efficiency and decrease complexity

RBS expects broader adoption of the TSU and BPO in the next 12-16 months, partly because SWIFT is recognised as a trusted and respected provider to banks worldwide. Our first priority is to promote awareness and understanding of the advantages of TSU and BPO among our customers.

The TSU can help tackle some of the most important challenges all of us are facing in today’s markets: simplifying complexity, improving risk management and optimising liquidity management. Once companies begin to understand how the TSU and BPO provide a more secure alternative for open account trade, establish buyer credit and reduce supplier fraud, and how it can streamline transaction processes there should be greater uptake. Moreover, once a regulatory framework is established, more companies will embrace the TSU/BPO, as they will understand how to account for it and treat it on their books.

Should the large corporates that have the SWIFT infrastructure in place for cash management and payment services leverage it for trade messages, they will gain from lower costs, greater STP and more accurate data transmission. This might also drive a new wave of standardisation and messaging tailored to companies’ reporting requirements with a new corporate interface for open account transactions.


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