Planet earth – still open for business Thoughts Worldwide trade - this truly global phenomenon is also a true global opportunity (for banks with the right offerings and capabilities and for their clients) to drive additional top line revenue growth whilst reducing risk exposure. Planet earth – still open for business By Bernd Richter and Yves Bettan, Partners In spite of the problems that continue to face the mature economies, the wider global economic picture is very dynamic. Both the BRIC1 economies and the ‘Next 11’2 continue to produce very strong growth. As a result, truly global trade, as opposed to purely northern hemisphere activity, is increasing at astonishingly prolific rates. Banks offering the right trade services, delivered through up-to-date and cost-effective instruments, have real opportunities to build client wallet share, revenues and profits. Overview Firstly, servicing and encouraging this expansion through the finance supply chain is nothing less than In a challenging time for the mature markets, it is a phenomenal source of revenue and profit. perhaps tempting to be skeptical about the sheer scale of the wider opportunities. However, the numbers Secondly, servicing the opportunity with out-dated quickly dispel any doubts as to the status of global instruments and technologies will only lead to trade as a huge and very dynamic phenomenon3. customer dissatisfaction, sub-optimal revenues and excessive, unsustainable strain on existing The opportunities for banks to provide more support infrastructures. – in more targeted and effective forms - across supply chain finance are enormous. There now exist Thirdly, therefore, successful pursuit of the global innovative payment instruments that are much better trade opportunity requires cutting-edge knowledge of suited to the conditions of rapid trade growth in the available payment instruments and technologies. exotic markets. Meanwhile, from Iran to Vietnam, The technical knowledge must be combined with a whole new areas of opportunity are emerging. clear understanding of the markets and of those customer profiles where demand for trade services Their clients are busy trading. Banks need now will be highest. Then, building on up-to-date to understand the context, the scale of the knowledge and insight, banks must show opportunities, and the operational structures that commitment to getting it right with their service must be in place to support clients’ supply chain offerings and their management of underlying risks. finance most effectively. For the institutions that commit to understanding the needs of clients, This is certainly not an area where banks can ‘wander and then deliver appropriate solutions, there are into’ their next stage of development. It requires well substantial new sources of profitable business thought through and committed policy. Equally, after and revenue waiting to be exploited. thorough review, some institutions may feel that their best course of action is to leave the payments market, for good strategic and operational reasons. But whatever the final decision, it should be made definitively and on an informed basis. This is an opportunity banks cannot afford to ignore There are some very strong reasons why no bank can afford to be indifferent to the opportunities and challenges of global trade expansion. 2 Contract Order processing Seller During the purchase ordering process „preshipment finance“ and „payment assurance“ could be managed / served via a BPO „Post-shipment finance“ would also be an new service during the shipping and invoicing procedure „Timely payments“ would be a new service within the common SCF by BPO Common SFC: e-invoicing, factoring, reverse factoring, payment processing Production E. trade date E. trade date Documents Shipping Invoicing BPO obligor bank Typical OA service Electronic trade data exchange Payment Typical LC service BPO recipient bank Payment & cash management Service for LC & OA Figure 1. BPO (bank payment obligation) key flows and advantages 3 New BPO services Buyer BPO enables SCF to also cover purchase order-based services Common SCF BPO enhances OA business with risk mitigation from LCs Apart from global growth, what else is changing in trade services? support all the key financial and practical/logistical aspects of global trade. There are at least two additional key change drivers. Driver one, significant developments with existing Is BPO the “next big thing” in trade services? trade services: buy and sell side are both resisting the costs associated with traditional trade service products. Letter of Credit – LC-related business has declined substantially in the face of the Open Account Yes, although it is not entirely a ‘newcomer’. There is – OA. LC usage is still prolific, but it is a high touch currently a reasonable level of BPO awareness within business that is vulnerable to re-working as a result the banking community. But utilization among of discrepancies. businesses is still much lower than it could be. This instrument has the potential however to change Driver two, emergence of an important new global trade servicing very significantly. In fact, BPO instrument: although not a ‘secret’, the Bank Payment is nothing less than an opportunity “to re-invent the Obligation – BPO – is still in a relatively early stage of LC business”. market uptake. BPO has significant potential to enable and encourage trade with BRIC and N11 economies, on account of its ability to provide ‘safety’. In a little more detail - what are the BPO USPs? This innovative instrument offers the risk free characteristics of an LC, combined with the ‘cheap and fast’ attributes of the OA. BPO is not a passing BPO – finally – takes supply chain finance to the ‘next novelty. Its provenance is impressive: it is offered level’ in a fast growing global trade environment. In under SWIFT auspices and has the full backing of slightly more detailed terms, these are the “killer apps”: the world’s 19 most important banks. • Margin improvements for service providers. BPO (enhancement of the Trade Services Utility TSU) not only improves the SCF service but also BPO – how does it work? supports banks in improving their margins See the schematic on page for an overview of key exclusively on low-margin services (invoice (addressing cost pressures) by not focusing processing / discounting). functionality and advantages. • Facilitation of the finance supply chain, through In summary, BPO represents a supply chain finance – cost-effective risk mitigation. Electronic trade SCF - instrument that is fully fit for purpose. It data exchange by BPO delivers the following provides a range of timely and relevant services to advantages - transaction visibility, structured data, data authentication, cost effectiveness and 4 Technology Relationship manager and ITF sales team Upgrade to web enabled front-end Current offering In-house run ASP Use current Upgrade Implement new integrated web-based application (in-house run) Outsource application (ASP) Operations Customer interaction – Middle office Current back office Target operating model changes to back office Offshore back office capability Upgrade to web front-end in-house run Target operating model Buy web front-end software from a software vendor Host the application in the bank’s data centres Integrate the web front-end with the bank’s existing back end software Upgrade to web front-end ASP Outsource back office Move to an operating model with clearly delineated middle and back office functions Operate the back-office from a single onshore location Offshore back office capability Buy the right to use a “white label” web front-end from an other financial institution Have the financial institution run the application for the bank on an ASP basis Integrate the web front-end into existing back end software Move core back office functions to a offshore location Using a bank’s captive off-shoring vehicle Outsource back office Implement new integrated web-based application in-house run Buy new, integrated application software from a software company that offers both a web front-end capability and a back office capability to replace existing back office software Host the application in bank’s data centre Integrate application with bank’s general ledger, swift interfaces, risk systems etc. Move back office functions to another organization Use either a dedicated service company of another financial institution, operating onshore or offshore Outsource application (ASP – application service provider) Buy the right to use a new, integrated, “white label” application from a software company or a financial institution that offers both a web front-end capability and a back office capability to replace existing software Have the financial institution or software vendor run the application for the bank on an ASP basis Integrate application with the bank’s general ledger, swift interfaces, risk systems etc. Figure 2. BPO technology and operations implementation challenges 5 Banks and BPO – what are the implementation challenges? flexibility. “BPO brings mitigation of payment risk and offers financing opportunities on open account transactions” (SWIFT). 19 banks have so far adapted BPO to be rolled-out in 2012/13. UCP BPO is a highly attractive offer, potentially. But in rules are expected by 2013. order to realize the potential, banks must fulfill certain • Ability to offer a real and attractive alternative infrastructure and operational capability to traditional instruments. Even though BPO’s requirements. In many cases, it is likely that existing primary focus is on banks rather than their in-house back office infrastructure will be inadequate customers, expectation is high that resistance to for the new tasks and demands created by BPO. usage of traditional products – such as LC or OA - Thorough case-by-case audit will reveal the current will grow. Through uptake of BPO, banks will be situation, as well as the extent of any gaps preventing leveraging their electronic transactions within the successful implementation. TSU, offering a cost-effective service to their customers and at the same time providing the In many cases, it is likely that the front and middle standards of risk mitigation of an LC. office approaches will remain substantially unchanged. It is in the back office and technology areas that change will impact. Anything from some mix and match to major reconfiguration is likely to be needed, in order to meet the BPO challenge. Will bank customers choose BPO? Some of the key issues and potential outcomes are Yes. In fact, led by large and sophisticated global identified in the schematic on page . operations with their own in-house treasury/trade service functions, they will come to demand it. The mix of LC scope and functionality with the greater flexibility and cost-effectiveness of OA will prove to be a powerfully attractive combination. What is the operational bottom line? Take one example we know of - BRIC-based (Russian) The new BPO approach will likely demand a fresh businesses with trading interests in economies such operating model and a new approach to IT. The goal as Iran and Egypt. As yet, they have been unable to should be to analyze and then transform the current ‘join up’ their operations, because of SCF-related IT TS (trade services) platform - to an integrated barriers. As the benefits of BPO are made clear to model, leveraging a robust TSU platform to enable them - and to many other similar profiles of customer BPO business. wanting to do more international business more Banks will need to review the operating model in terms easily - exponential BPO uptake will follow. of across the product range improvements (financing aspects, pooling of resources, reduction of archiving, 6 Business strategy development 1. 2. 3. Business strategy development Client segmentation Product design 5. Pricing and revenue capture review Market entry strategy 3. Market entry strategy 4. New proposition strategy 4. New proposition strategy Target operating model design 6. Target operating model design (covering all 3 areas below) Organizational transformation Operational transformation IT transformation 7. 9. LEAN evaluation 10. Onshore/offshore model and 11. IT architecture and roadmap 8. Client servicing model development Organizational model development sourcing opportunity identification Vendor selection & implementation 12. Sourcing provider & technology evaluation and selection process (RFI/RFP) Figure 3. Key areas for trade transformation 7 optimizing transfer of documents, etc.). They will involved, banks should make certain that it has the need to look at product-specific changes (actively expertise and track record to deliver in the key areas managing their Trade Services pricing, clear roles, detailed in the figure on page . responsibilities, automatic confirmation responses, fewer manual workarounds, etc). They should also review their possible sourcing scenarios. Conclusion BPO’s potential is transformational. For banks that What are the next steps? take on the challenge however, clarity of planning and quality of execution will be vital. From business No bank should undertake what is nothing short of strategy development through to vendor selection the ‘reinvention of trade services’ in an unplanned and implementation, the goal must be delivery of a manner. The immediate next step should be a full flawless SCF offering with BPO as a major review of the current approach to trade services and differentiator. When that goal is achieved, a growing the value of this business segment to the bank. This share of revenues from enabling SCF for the global will inform the fundamental decision whether to stay trade phenomenon will be the prize. or go, and then how best either to exit the market or to remain and succeed. There are some clear areas for detailed consideration – see the schematic below: Strategy Opportunities Exit business Minimize financial impact Address cost structure Operating cost control Operating cost leadership Investment cost reduction Address revenue issues Revenue maximization Increased sales volumes Footnotes New market entry Changing client needs 1. BRIC – Brazil, Russia, India, China. 2. The Next Eleven (N11) are the eleven countries—Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam—identified as having a high potential of becoming, along with the BRICs, the world's largest economies in the 21st century. 3. Forecasts indicate a growth in world trade of 73% in the next 15 years – predicted merchandise volume by 2025: $48.5 trillion (SWIFT). Much of the growth is coming from ‘unfamiliar’ economies, with star performances from countries such as Vietnam. Financial institutions – new propositions Corporates – new propositions Each of these areas will give rise to a requirement for expertise and support that may exceed internal experience and resources. If external counsel is 8 Bernd Richter is a Partner in Thanks also to Marcel Wasbauer, Kersten Martin Meyer, Capco’s Banking area, where he Dr Ralf Klein and Maximilian Stikel for their insight and focuses on the transformation of analysis in preparing this document. corporate and transaction Marcel Wasbauer is a Frankfurt-based Managing Principal. banking and private /wealth He brings over two decades of leadership capabilities in management. Bernd has specific product development and delivery in transaction banking. He experience and expertise in areas has extensive experience leading large, international teams such as: market-entry & growth both within cash management and trade finance. Marcel has strategy, product development also successfully advised many corporates and financial and pricing, pre-merger institutions on operating model efficiency and optimization. management and post-merger integration. He has deep He specializes in (interim) management, sourcing solutions domain knowledge in areas such as international payments, and implementation of new financial services. cash management, trade services/finance and financial Kersten Martin Meyer is a Principal Consultant in the supply chain management, and cards (acquiring/issuing). Capital Markets and Banking practices at Capco. He has [email protected] over 13 years of experience in the financial services industry and focuses on client initiatives involving business strategy and target operating models, process optimization, postmerger integration and best practices. Dr Ralf Klein is a Principal Consultant in the Banking practice, based in Capco’s Frankfurt office. He has particular Yves Bettan is a Paris-based experience in business and operational strategy, as well as in Partner at Capco, leading the organizational and procedural design and change banking domain. Yves management. His previous experience includes managing specializes in the areas of finance process efficiency projects and a post-merger integration in and operational excellence, from the trade finance domain. definition of strategy through to Maximilian Stikel is an Associate Consultant at Capco in the large-scale restructuring. With Capital Markets domain. He has sustainable experience in over 20 years’ experience in the fields of business and process analysis. management consulting and core focus on retail and corporate banking, he has successfully delivered a number of consulting engagements covering areas such as international transversal business line reorganization; mortgages, consumer loan and trade finance dealing with post-merger integration; centralization; offshoring and outsourcing. [email protected] 9 About Capco Capco, a global business and technology consultancy dedicated solely to the financial services industry. We work in this sector only. We recognize and understand the opportunities and the challenges our clients face. We apply focus, insight and determination to consulting, technology and transformation. We overcome complexity. We remove obstacles. We help our clients realize their potential for increasing success. 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