MT798: A Solution for Trade Efficiency
by John Baranello, Head of Trade Finance Product Management Americas, Global Transaction Banking, Deutsche Bank, and Graham Warner, Head of Online, Mobile & Desktop Client Access Products, Global Transaction Banking, Deutsche Bank
Trade finance solutions are essential for multinational corporations to mitigate risks that are inherent in the import and export process. Before the financial crisis of 2008, we saw a decline in the use of traditional trade instruments in favour of open account structures, as there was a widespread perception that cross-border risk was becoming less prevalent, and that banks could take a subordinate role within the structure of the transaction. It was also perceived that open account brings advantages in that transactions can be conducted more quickly and with higher levels of automation. The crisis illustrated, however, that managing trade risk remains an essential task for treasurers and finance managers of businesses that import or export goods, particularly to or from emerging markets where less credit information may be readily available, or regions that are politically or economically volatile. Today, however, the introduction of Corporate-to-Bank SWIFT Message Type 798 (MT798) marks an important step in providing a similar degree of automation and efficiency for trade transactions as open account.
Evolution of bank communication for trade
An ongoing dilemma for treasurers and finance managers leveraging trade instruments such as letters of credit (LCs) is how to automate and streamline bank communication and integrate processes with internal systems. This is particularly complex bearing in mind the amount of documentation that is typically required to support a trade transaction, and the diversity found in the front-end systems in their partner banks.
We have seen two parallel developments in recent years to support more efficient trade processing: internal centralisation and innovations in bank communications. Internally, many companies have centralised and standardised their trade processing, which is often a vital first step in resolving the challenge of fragmented processes and formats within the business. In tandem, we have been working with our trade finance partners in developing innovations in corporate-to-bank communication for trade. Forty years ago, a physical letter had to be signed by an officer of the company and countersigned by the bank. Mailed letters were then replaced by telex communications, fax and email. More recently, leading banks and vendors have invested considerably in online platforms to automate and streamline international trade, and support closer integration with customers’ internal systems.
Despite the often considerable sophistication of these solutions, such as Deutsche Bank’s front-end system, db direct internet, companies that work with multiple banks typically need to work with multiple platforms, maintain separate interfaces with their in-house systems, undertake separate approval processes and manage different security profiles. This results in fragmented processes, higher costs and operational risk.
Opportunities through SWIFT
The bank-to-bank communication platform offered by SWIFT has become widely accepted as a platform for bank-to-corporate communication in recent years. Unlike traditional bank proprietary systems, corporations can connect with multiple banking partners through a single channel. This streamlines integration and communication, facilitates standardised processes and reduces operational risk. Furthermore, as a bank-neutral platform, corporations are less reliant on individual banking partners and can introduce new banks easily without the need for additional technology. Although SWIFT was originally chosen by the largest multinational corporations that often had a very large number of banking partners, the spectrum of businesses adopting SWIFT has now expanded substantially, encouraged by growth of service bureaus, who provide SWIFT connectivity services without the need for the company to invest in these skills, and SWIFT’s introduction of Alliance Lite and Alliance Lite2, web-based solutions that have further lowered the barriers to entry.
In most cases, corporations have used SWIFT to exchange cash-related information such as urgent and bulk payments and bank account statements. Earlier this year, SWIFT introduced MT798, a new message type for trade-related messages, including import and export documentary credits, standby LCs and demand guarantees (see Box above). The MT798 message is effectively an ‘envelope’ into which all actions and information related to a transaction can be included and exchanged with the relevant banking partner, whether or not a corporation is the issuer or receiver of an LC or other trade instrument.