Planet earth still open for business Thoughts

Transcription

1 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.

2 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 BRIC 1 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 In a challenging time for the mature markets, it is perhaps tempting to be skeptical about the sheer scale of the wider opportunities. However, the numbers quickly dispel any doubts as to the status of global trade as a huge and very dynamic phenomenon 3. The opportunities for banks to provide more support in more targeted and effective forms - across supply chain finance are enormous. There now exist innovative payment instruments that are much better suited to the conditions of rapid trade growth in exotic markets. Meanwhile, from Iran to Vietnam, whole new areas of opportunity are emerging. Their clients are busy trading. Banks need now to understand the context, the scale of the opportunities, and the operational structures that must be in place to support clients supply chain finance most effectively. For the institutions that commit to understanding the needs of clients, and then deliver appropriate solutions, there are substantial new sources of profitable business and revenue waiting to be exploited. This is an opportunity banks cannot afford to ignore Firstly, servicing and encouraging this expansion through the finance supply chain is nothing less than a phenomenal source of revenue and profit. Secondly, servicing the opportunity with out-dated instruments and technologies will only lead to customer dissatisfaction, sub-optimal revenues and excessive, unsustainable strain on existing infrastructures. Thirdly, therefore, successful pursuit of the global trade opportunity requires cutting-edge knowledge of the available payment instruments and technologies. The technical knowledge must be combined with a clear understanding of the markets and of those customer profiles where demand for trade services will be highest. Then, building on up-to-date knowledge and insight, banks must show commitment to getting it right with their service offerings and their management of underlying risks. This is certainly not an area where banks can wander into their next stage of development. It requires well thought through and committed policy. Equally, after 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. There are some very strong reasons why no bank can afford to be indifferent to the opportunities and challenges of global trade expansion. 2

3 BPO enhances OA business with risk mitigation from LCs BPO enables SCF to also cover purchase order-based services Buyer E. trade date BPO obligor bank Contract Documents Electronic trade data exchange Payment Seller E. trade date BPO recipient bank Order processing Production Shipping Invoicing Payment & cash management 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 New BPO services Common SCF Typical OA service Typical LC service Service for LC & OA Figure 1. BPO (bank payment obligation) key flows and advantages 3

4 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 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 OA. LC usage is still prolific, but it is a high touch business that is vulnerable to re-working as a result of discrepancies. Driver two, emergence of an important new instrument: although not a secret, the Bank Payment Obligation BPO is still in a relatively early stage of market uptake. BPO has significant potential to enable and encourage trade with BRIC and N11 economies, on account of its ability to provide safety. 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 novelty. Its provenance is impressive: it is offered under SWIFT auspices and has the full backing of the world s 19 most important banks. BPO how does it work? See the schematic on page for an overview of key functionality and advantages. In summary, BPO represents a supply chain finance SCF - instrument that is fully fit for purpose. It provides a range of timely and relevant services to Is BPO the next big thing in trade services? Yes, although it is not entirely a newcomer. There is currently a reasonable level of BPO awareness within the banking community. But utilization among businesses is still much lower than it could be. This instrument has the potential however to change global trade servicing very significantly. In fact, BPO is nothing less than an opportunity to re-invent the LC business. In a little more detail - what are the BPO USPs? BPO finally takes supply chain finance to the next level in a fast growing global trade environment. In slightly more detailed terms, these are the killer apps : Margin improvements for service providers. BPO (enhancement of the Trade Services Utility - TSU) not only improves the SCF service but also supports banks in improving their margins (addressing cost pressures) by not focusing exclusively on low-margin services (invoice processing / discounting). Facilitation of the finance supply chain, through cost-effective risk mitigation. Electronic trade data exchange by BPO delivers the following advantages - transaction visibility, structured data, data authentication, cost effectiveness and 4

5 Relationship manager and ITF sales team Technology Current offering Upgrade to web enabled front-end In-house run ASP Use current Upgrade Implement new integrated web-based application (in-house run) Outsource application (ASP) Customer interaction Middle office Operations Current back office Target operating model changes to back office Offshore back office capability Outsource back office Upgrade to web front-end in-house run 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 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 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. Target operating model 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 Move core back office functions to a offshore location Using a bank s captive off-shoring vehicle Outsource back office 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

6 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 rules are expected by Ability to offer a real and attractive alternative to traditional instruments. Even though BPO s primary focus is on banks rather than their customers, expectation is high that resistance to usage of traditional products such as LC or OA - will grow. Through uptake of BPO, banks will be leveraging their electronic transactions within the TSU, offering a cost-effective service to their customers and at the same time providing the standards of risk mitigation of an LC. Will bank customers choose BPO? Yes. In fact, led by large and sophisticated global 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. Take one example we know of - BRIC-based (Russian) businesses with trading interests in economies such as Iran and Egypt. As yet, they have been unable to join up their operations, because of SCF-related barriers. As the benefits of BPO are made clear to them - and to many other similar profiles of customer wanting to do more international business more easily - exponential BPO uptake will follow. Banks and BPO what are the implementation challenges? BPO is a highly attractive offer, potentially. But in order to realize the potential, banks must fulfill certain infrastructure and operational capability requirements. In many cases, it is likely that existing in-house back office infrastructure will be inadequate for the new tasks and demands created by BPO. Thorough case-by-case audit will reveal the current situation, as well as the extent of any gaps preventing successful implementation. In many cases, it is likely that the front and middle 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. Some of the key issues and potential outcomes are identified in the schematic on page. What is the operational bottom line? The new BPO approach will likely demand a fresh operating model and a new approach to IT. The goal should be to analyze and then transform the current IT TS (trade services) platform - to an integrated model, leveraging a robust TSU platform to enable BPO business. Banks will need to review the operating model in terms of across the product range improvements (financing aspects, pooling of resources, reduction of archiving, 6

7 Business strategy development 1. Business strategy development 2. Client segmentation 3. Market entry strategy 3. Market entry strategy 4. New proposition strategy 4. New proposition strategy Product design 5. Pricing and revenue capture review Target operating model design 6. Target operating model design (covering all 3 areas below) Organizational transformation Operational transformation IT transformation 7. Client servicing model development 8. Organizational model development 9. LEAN evaluation 10. Onshore/offshore model and sourcing opportunity identification 11. IT architecture and roadmap Vendor selection & implementation 12. Sourcing provider & technology evaluation and selection process (RFI/RFP) Figure 3. Key areas for trade transformation 7

8 optimizing transfer of documents, etc.). They will need to look at product-specific changes (actively managing their Trade Services pricing, clear roles, responsibilities, automatic confirmation responses, fewer manual workarounds, etc). They should also review their possible sourcing scenarios. involved, banks should make certain that it has the expertise and track record to deliver in the key areas detailed in the figure on page. Conclusion What are the next steps? No bank should undertake what is nothing short of the reinvention of trade services in an unplanned manner. The immediate next step should be a full review of the current approach to trade services and the value of this business segment to the bank. This will inform the fundamental decision whether to stay or go, and then how best either to exit the market or to remain and succeed. BPO s potential is transformational. For banks that take on the challenge however, clarity of planning and quality of execution will be vital. From business strategy development through to vendor selection and implementation, the goal must be delivery of a flawless SCF offering with BPO as a major differentiator. When that goal is achieved, a growing share of revenues from enabling SCF for the global trade phenomenon will be the prize. There are some clear areas for detailed consideration see the schematic below: Strategy Exit business Address cost structure Address revenue issues Changing client needs Opportunities Minimize financial impact Operating cost control Operating cost leadership Investment cost reduction Revenue maximization Increased sales volumes New market entry 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 Footnotes 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. 8

9 Bernd Richter is a Partner in Capco s Banking area, where he focuses on the transformation of corporate and transaction banking and private /wealth management. Bernd has specific experience and expertise in areas such as: market-entry & growth strategy, product development and pricing, pre-merger management and post-merger integration. He has deep domain knowledge in areas such as international payments, cash management, trade services/finance and financial supply chain management, and cards (acquiring/issuing). bernd.richter@capco.com Yves Bettan is a Paris-based Partner at Capco, leading the banking domain. Yves specializes in the areas of finance and operational excellence, from definition of strategy through to large-scale restructuring. With over 20 years experience in 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. yves.bettan@capco.com Thanks also to Marcel Wasbauer, Kersten Martin Meyer, Dr Ralf Klein and Maximilian Stikel for their insight and analysis in preparing this document. Marcel Wasbauer is a Frankfurt-based Managing Principal. He brings over two decades of leadership capabilities in product development and delivery in transaction banking. He has extensive experience leading large, international teams both within cash management and trade finance. Marcel has also successfully advised many corporates and financial institutions on operating model efficiency and optimization. He specializes in (interim) management, sourcing solutions and implementation of new financial services. Kersten Martin Meyer is a Principal Consultant in the Capital Markets and Banking practices at Capco. He has 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 experience in business and operational strategy, as well as in organizational and procedural design and change management. His previous experience includes managing process efficiency projects and a post-merger integration in the trade finance domain. Maximilian Stikel is an Associate Consultant at Capco in the Capital Markets domain. He has sustainable experience in the fields of business and process analysis. 9

10 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. The value we create, the insights we contribute and the skills of our people mean we are more than consultants. We are a true participant in the industry. Together with our clients we are forming the future of finance. We serve our clients from offices in leading financial centers across North America, Europe, Africa and Asia. Worldwide offices Amsterdam Antwerp Bangalore Bratislava Chicago Düsseldorf Frankfurt Geneva Johannesburg London New York Paris San Francisco Toronto Washington DC Zürich To learn more, contact us at ( from outside the United States or Canada), or visit our website at CAPCO.COM The Capital Markets Company NV. All rights reserved. T EU