Banks move to combat disintermediation

The challenges and opportunities of supporting the supply chain

Published on 17 September 2008
Michael McDonough, Vice-President of Bank of New York Mellon
In the shift from traditional letters of credit (LC) to the emerging open account culture, where payments are made between buyers and sellers – typically electronically – banks have been facing the threat of disintermediation. Moreover, corporates are increasingly reluctant to pay the high fees associated with LC, leaving banks struggling to ‘stay in the game’ when it comes to the trade finance process.

To combat this, banks are looking to extend their role by providing back-to-front IT, financial information flow and payment processing services to customers and their trade partners in the electronic supply chain. The business benefits are compelling: banks’ trade services are growing at a rate of 8% a year as compared to LC business at 3%.

However, Michael McDonough, Vice-President of Bank of New York Mellon issued a caution at yesterday’s session on SWIFT’s expanding supply chain portfolio: the art of cooperation. “Customers are demanding that banks invest in complex new technology yet expect to pay lower prices, leaving banks in a quandary as to whether to keep their clients or lower their margins. Moreover, trade bankers are expected to be documentation, regulatory and credit experts – a multifaceted commitment that needs to be well-considered before jumping into this market.”

For those going forward, third party system providers have seized an early advantage in providing IT support. But they fall short in trade financing, which is where banks can gain new revenue opportunities along with providing enriched financial data flows across the chain. To provide support, SWIFT has developed the Trade Services Utility (TSU) that went live in April 2007, and provides banks with a powerful set of tools to take advantage of the opportunities in the open account space.