The Society for Worldwide Interbank Financial Telecommunication, better known as Swift, is the accepted leader in intra-bank electronic messaging. Three years ago the group launched its trade services utility (TSU) in response to changes in trade payment practices. The move paid off and today the utility has cornered the market for open account transactions.
Swift's Asia-Pacific head of trade and supply chain markets, Connie Leung, sat down with FinanceAsia to discuss the company's latest TSU enhancement and the growth of the utility in Asia.
Please describe Swift's trade services utility.
The trade services utility, we call it the TSU, is a matching engine for the banks. We started creating it in 2005, launched our first service in 2006, officially went live in April 2007 and came out with the second release this April. The first release dealt with matching -- for example the purchase order, invoice and the bill of lading -- and made us the central engine for open account data.
In release two, we added matching capabilities for two more documents -- insurance and certificates. We also added a bank payment obligation (BPO) function, whereby a bank can provide a payment guarantee to the seller's bank on the underlying TSU transaction. BPO is an important risk mitigation tool for banks to offer pre- and post-shipment finance, particularly to small- and medium-size enterprises (SME) in Asia.
How does the TSU engine build on Swift's existing offerings?
When you look at the entire trade environment, we have traditional trade, including letters of credit (LCs) and collections, and we have open account. Swift has provided a standardised platform for traditional trade flows for over 30 years.
LCs used to represent 80% of trade business in the world, but today account for less than 20%. When we saw that the market was moving away from LCs to open account, we created the TSU to serve the new market on the same infrastructure as our traditional trade services.
Who benefits from the TSU?
At the moment, it's a bank-to-bank service, whereby buyers and sellers acknowledge the fact that their banks are using the utility, but the buyers and sellers are not directly connected to it. Traders directly connect to their own banks' trade or supply chain services, with the TSU forming the backbone. At the end of the day, the utility is fundamentally helping the community in risk mitigation for financing, by matching documents to reduce costs and streamlining the trade settlement process.
Has there been widespread industry acceptance of the TSU?
Prior to the TSU's introduction, the industry was really missing a universal open account platform so acceptance has been pretty widespread. If you look at our growth rate in terms of the banks joining TSU, we have grown by four times since we started in 2006. That growth proves to us that the TSU was needed by the industry, both from a standards and a platform point of view.
Before the TSU existed, there were many proprietary channels where a corporate and a bank would each have their own channels that did not interoperate. Now we have opened up a single platform for trade, where any bank can communicate with another bank that's on TSU by using one common standard. This standardisation streamlined many of the proprietary channels to support both single- and multi-bank trade flows.
Earlier this year, Bank of China and Bank of Tokyo Mitsubishi-UFJ signed an interbank agreement connecting over TSU, why is this significant?
The TSU alone is only a bank-to-bank service [and] banks need to build on their own open account services to meet their customers' needs. What the bilateral agreement basically says is that customers of Bank of China and Bank of Tokyo Mitsubishi-UFJ can now do a complete end-to-end transaction through the TSU. This agreement makes these banks first movers in Asia.
What is especially unique to Asia is that the physical supply chain often flows faster than the financial supply chain. From China to Japan it takes about two days for goods to arrive, but it takes probably two weeks for the documents, so you have a two-day physical supply chain but a two-week financial supply chain. Because the TSU automates data matching, it replaces the traditional [paper] collection process with e-collection, making the trade settlement much faster.
The agreement between Bank of China and Bank of Tokyo Mitsubishi-UFJ is just the start. There will be more contracts signed among [Asian] banks within the TSU community, and we are just embarking on a very innovative process between Taiwanese and Chinese banks.
Trade liberalisation between China and Taiwan is a hot topic today, what are you doing to facilitate these flows?
Between China and Taiwan there is already a very strong trade flow. Traditionally, the banks would go through Hong Kong as the hub for the trade transaction. Now the liberalisation is making things a lot easier. Just last year we had four Taiwanese banks join TSU. Because Chinese banks joined the utility earlier, they are now taking the lead to promote their open account services to the Taiwanese banks.
Have you had any difficulties connecting Chinese and Taiwanese banks over the TSU?
From a Swift perspective, we have no restrictions. Each bank and how it operates is of course subject to its local regulatory regime, but for the TSU engine there is nothing that would stop a transaction between a Taiwanese bank representing the seller and a Chinese bank representing the buyer or vice versa.
Looking at the big picture, do you see more Asian trade flows moving to the TSU?
The global financial crisis has triggered an unprecedented collaboration among banks and their counterparties to support trade flows and the TSU is uniquely positioned to support these initiatives.
It's a very interesting time for Swift in Asia. The environment is still dominated by LCs, but there are a lot of customers -- they are really the ones who drive bank adoption of TSU -- who are moving or thinking of moving to open account, and we are helping banks to pick up that wave.
