Strategy: How Banks Win with Global Trade
The Following Sea
Such banks as Citi and JPMorgan?are reorganizing in order to improve their profitability. This occurs in a world in which e-commerce and innovation in payments and investment are increasingly engaged in global trade. Global trade totaled $19 trillion last year.?
Strategy
Citi?
The Trade: Citi CEO lays out reorganized strategy for 2022 as Q4 profits drop 26%: The bank is making some major changes to its reporting structure as it moves to consolidate business operations -By?Laurie McAughtry
Citigroup kicked off the Q4 earnings season on Friday with the release of its latest figures. Recently- appointed chief executive officer Jane Fraser, who only joined the bank 10 months ago and has embarked on a radical revamp of the bank’s priorities since her appointment, outlined the ongoing strategy in a detailed earnings call, as well as explaining the mixed bag of results.
JPMorgan Chase
Fixed income trading decline weighs on JP Morgan’s Q4 revenues as the bank highlights colossal tech investment. Jamie Dimon says JP Morgan is investing $12 billion a year on its global technology strategy, as trading revenues drop in Q4: By?Jonathan Watkins
A decline in fixed income trading revenue weighed on JP Morgan’s revenues during the final quarter of 2021, as income from its markets division fell 11% compared to the previous year. Fixed income revenues were down 16% year-on-year, while equity markets were down 2%,?driven by lower revenue in derivatives. The bank said revenues in its prime services division offset some of the declines.?
During its quarterly earnings call, JP Morgan chief financial officer?Jeremy Barnum?said the fixed income results reflected “a more difficult trading environment early in the quarter, especially in rates, as well as continued normalisation from the?favourable?trading performance last year in currencies, emerging markets, credit and commodities.”?
Aside from the drop-off in its market-related revenues, JP Morgan brought attention to its technology spend during its earnings call, which CEO Jamie?Dimon?said has reached $12 billion annually.
Steve Jobs
Correlation
The following incomplete flow chart provides a peak?at how banks can win at global trade.
Strategy fails because of lack of vision and lack of process.?Seneca, Deming and Jobs addressed these issues:
Background
Buyer-Seller Agreements
In global trade, buyer-seller agreements are founded on the 1934 UN Convention on Contracts for the International Sale of Goods. The role of buyer and seller has been refined and expanded to include buyers, sellers, cargo carriers, freight forwarders, customs house brokers, the buyer’s bank, the seller’s bank and insurers of cargo and political and commercial risks. A settlement and financing process was advanced by La Huppe, Belgium-based SWIFT (now very much in the news):
and described as "four-corner interoperability." This process, developed by Andre’ Casterman envisioned banks as playing a central role in the conduct of global trade. Banks, you see are trusted in a non-cybersecure world. SWIFT collaborated with ICC to consider all the important players and the key role of logistics in the global trade process:
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?The Paris-based ICC (International Chamber of Commerce) has created Incoterms or International Commerce terms which define the role of every party to a cross-border trade transaction. Incoterms 2020 by which some 200 countries voluntarily abide, represents the latest evolution of this process.
The advent of Supply Chain Finance considers another set of agreements between the seller/exporter and its vendors. Supply Chain Finance:
and Dynamic Discounting:
play prominent roles in providing cash flow to vendors and a more profitable use of cash by the buyer/exporter.?
As the flow chart draft explains, the seller/exporter will issue invoices that represent their sales to the buyer. In addition, the seller/exporter will arrange to prepay or pay early invoices selected by the vendors. This prepayment not only benefits the cash flows of the vendors but also benefits the seller/exporter by achieving a discount in the price of the select items sold to this exporter. Dynamic Discounting gives flexibility and dynamism to this SCF process by providing a greater discount the earlier the payment.?
Straight-Through-Processing
Straight-through-processing involves the matching of invoices with purchase orders. Innovation has provided the ability to match serialized QR encoded purchase orders of the buyer with the serialized QR encoded invoices of the seller by a trusted entity, namely the SWIFT TSU or Trade Services Utility. SWIFT has not yet adopted these innovations despite their facilitation of e-commerce in global trade, a global trade now dominated by Small, Medium-sized Enterprises (SMEs).
Risk Mitigation?
Walter Wriston called Risk a four-letter word and predicted that one day, all that banks will sell is information. Six key processes additionally refine the role with which banks engage in the global trade finance process. They are risk mitigation, forfaiting, straight-through processing, the aforementioned serialized QR encoding of invoices and purchase orders, geolocation and the matching of invoices to purchase orders by a trusted entity:
1.Risk Mitigation
Prior to the encoding of purchase orders and invoices, a credit check on the buyer is performed by a credit insurance agency such as Coface which insures domestic as well as cross-border sales against political and commercial risks. Such insurers as Coface have a winning edge in providing such risk mitigation because of their ability to gather credit information on buyers based in former colonies of France and of many other European countries.?
2. Forfaiting - Forfaiting is derived from the French "a forfait" or without recourse and is the financing of sales to a buyer, a foreign buyer in the case of global trade, without recourse to the seller.
Forfaiting provides a clear strategic advantage to European banks because it is rapid and facilitates straight-through-processing, while the processes of banks which do not utilize forfaiting are notoriously slow.?
3. Straight-through-Processing?- Guy Tozzoli of World Trade Center Associates came up with the concept in the late 1970s, that so long as purchase orders match invoices and the resulting sales are credit-insured against political and commercial risk, straight-through-processing is feasible and practicable.?This is now utilized by Infor/GTNexus to run circles around commercial banks in financing cross-border e-commerce transactions for the sale of consumer goods.
4. Serialized QR Code Encoding?-A little known aspect of QR Codes is that they can be serialized with a unique watermark or other unique characteristics. The entire manifest of a vessel can be encoded and described by a QR Code manifest. This allows the inventory of ship manifests to be described and importantly, compared to purchase orders, by a trusted entity.?
5. Geolocation - It is now possible to not only describe the contents of a vessel, truck or aircraft by serialized QR Coded manifests, but to locate these manifests with geolocation and EDI. EDI was utilized by the U.S. military to provide a Soviet-surrounded Berlin with everything its residents needed to survive during the Berlin Airlift:
6. Matching of Invoices to Purchase Orders -?SWIFT innovated with the Trade Services Utility:
and the Bank Payment Obligation:
to streamline the matching of the seller’s invoices with the buyer’s purchase orders (P.O.s). This matching process by a trusted entity facilitated straight-through-processing.?
Because it was aimed at assisting MNCs (Multinational Corporations) and did not sufficiently address the needs of SMEs and e-commerce innovations, SWIFT's innovations had limited success.?
The Following Sea provides the instruction, the "deep Knowledge" whereby these combined?processes, called Correlation, can be implemented in banks, to provide a decisive strategy for success in a $19 trillion market.?