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
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