It was all fanfare in February 2009 when the Bank of China (BOC) and the Bank of Tokyo Mitsubishi UFJ (BTMU) signed an agreement to create the first direct bank-to-bank connection through Swift's trade services utility.
At the time, Michael Cheung, head of China and North Asia at Swift, said in a statement: "The agreement is a milestone in Asia and reflects the commitment of our industry leaders to move the Asian and indeed global community forward in terms of automated, standardised trade settlement."
The trade services utility, or TSU, is a centralised matching engine for banks to handle open account trade transactions. The utility went live in April 2007 and is capable of matching certificate and insurance documents, invoices, purchase orders and bills of lading.
It has now been a year since the BOC and BTMU agreement and bankers are not describing the benefits they have reaped from the utility but still talking about its potential benefit to the marketplace. Ashutosh Kumar, global head of trade product management at Standard Chartered Bank, said adoption of the utility is something that would "take its own course" and not happen in short order.
Kumar is not alone. "We have no real live transactions [through TSU] now," said Shinwon Kang, senior manager in the trade and services division at Korea Exchange Bank (KEB). Even Swift confirmed that the utility is still in a "commercialisation" phase.
"Volumes remain low," said Connie Leung, Asia-Pacific head of trade and supply chain at Swift, on usage of TSU.
There has been progress since the TSU saw its first live transaction between J.P. Morgan and BNP Paribas three years ago. The number of member banks has increased to more than 100 and financial institutions are actively developing products that use the utility for payment matching. But this does not make up for the fact that it has yet to see significant transaction volumes when, by most accounts, more than half of world trade is conducted through open account.
Connections
When BOC and BTMU signed their direct connection it was hailed by Swift as a positive step towards the widespread adoption of TSU by banks. By directly connecting, the institutions could offer end-to-end solutions to their trade customers dealing with counterparties working with the other bank.
"We have completed the interbank testing and have moved to involve our customers," said Shin Mizutani, chief manager of the trade business division at BTMU, in an interview with Swift's Supply Chain newsletter. "We are inputting live D/P [documents against payment] transactions to TSU as test data to confirm the service." Regular use of TSU for customer transactions has yet to start.
Despite the delays, other Asian financial institutions still see bilateral connections as the way forward. "In KEB's view, a bilateral agreement is required now," said Kang. "To eliminate a bilateral agreement with specific institutions, the common rules of Swift TSU must be enhanced." He said the Korean bank has draft agreements with BOC, BTMU and China Construction Bank.
BOC has even gone on a roadshow with representatives of Swift to promote the utility in Taiwan and, though no direct connections have yet been formed, the collective said the number of Taiwanese member banks has increased to nine. But to date, the only additional direct connection that has been signed is between BTMU and China Construction Bank.
Leung disagreed with Kang. "When BOC and BTMU signed a bilateral agreement, we realised that if every bank had to do that it'd take a lot of time," she said. She explained that with TSU's second release, Swift addressed a major concern of many institutions by adding a bank payment obligation (BPO). Leung added that the collective's Trade Services Advisory Group updated the utility's legal framework at the end of 2009, tackling member concerns about bilateral agreements.
"We have sufficient functionality now for TSU to take-off," she concluded.
Despite Swift's confidence that the utility is ready for the big time, trade bankers said it still needs more clarification.
Clarifying TSU
"There are a few reasons why TSU has not been adopted quickly," said Standard Chartered's Kumar. "The incompleteness of guidelines is definitely one and the other is the understanding of what the utility means and what its benefits are."
He said at least two things need to be done to explain the added value of TSU to the market. First, was the creation of a BPO and, second, was ensuring understanding of the utility's benefits among traders.
A BPO is a rule stating that when an exporter and an importer's electronic documents match in TSU, the respective parties are required to pay. While simple on the surface, without it the utility would have no legal requirement for the importer to make payment.
"Without the BPO, when a match was created everybody was asking 'So what? What happens next? How do I get benefit?'," said Kumar. "The BPO lays the ground rules."
With the BPO added, next comes the more difficult task - getting traders to understand the benefits of using TSU. In the case of BOC and BTMU, they established a direct connection a year ago but are still explaining the benefits of the utility to their customers.
"Exchanging information through TSU is definitely a value add [to customers], but there are so many other substitutes or platforms that could do that," said Kumar. "The question is how does TSU distinguish itself from the crowd. The exporter and importer really have to see a value add."
Swift has a plan to speed up market understanding and adoption. "We have proposed to get an ICC [International Chamber of Commerce] endorsement of TSU as the instrument of open account trade," said Leung. "We believe an ICC endorsement will drive market adoption."
Currently, the international chamber sets the globally accepted standards for trade documentation. A similar endorsement would give TSU credibility among the ICC's more than a hundred thousand member companies.
Swift planned to present its proposal to the ICC at its meeting in Beijing last month but, due to the ash-related airspace closures following the eruption of Eyjafjallajökull in Iceland, the meeting was postponed and has yet to take place.
It is worth noting that no banker expressed doubts that TSU would not become the standard format of open account trade. Banks love standardisation and corporates want security and low-cost, three things the utility has the potential to achieve.
Without a crystal ball there is no way for bankers, traders or Swift to know how long it will take for TSU to be widely accepted. Kang said it is two years away, Kumar at least one to two years and Leung said Swift should "see some [notable] volumes" by the end of this year - by far the most optimistic outlook. Bear in mind that it took the better part of a decade before its standard message formats replaced the Telex for financial communications. If history repeats itself, TSU has seven more years in the wilderness before ubiquity, but in the end it may be the best thing since sliced bread for trade finance.
This story was first published in the Asian Trade Finance Yearbook supplement to the April 2010 issue of FinanceAsia magazine.
