Cloud computing can accelerate the recovery of trade finance, enabling banks to build a strong architecture for maximizing profitability by making such services more affordable and accessible to customers.
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How Cloud Computing Impacts Trade Finance
1. • Cognizant 20-20 Insights
How Cloud Computing Impacts
Trade Finance
Executive Summary offer dedicated solutions with rigorous security
controls, freeing both banks and customers from
As worldwide trade gradually recovers, the
expensive IT investments.2
financial climate enablers remain challeng-
ing. Affordability, accessibility and adherence
Trade Finance Industry Players
to newer, stricter Basel regulations stand as
unabated hurdles in the path to rapid recovery of Trade finance is already an extremely mature
trade finance.1 According to a survey conducted industry, with numerous incumbent players. All of
by International Chamber of Commerce (ICC) in these players are impacted directly or indirectly
2010, a total of about 42.9 million transactions with the kind of technology prevalent in the trade
were registered, representing a 5.81% increase market. The players and the impact of technology
over 2009 — a slight gain after the previous year’s on them can be classified as the following:
fall.
• Importers (Buy Side): These players have the
Technological innovations are bound to play a need to buy goods or services from a seller in a
crucial role in accelerating the recovery process different country. Importers use trade finance
through the streamlining of front-end to back-end instruments from their respective banks
processes, enabling trade finance institutions to for ensuring the timely delivery and quality
offer customized, low cost, value-added solutions of goods or services against the payments
that meet the requirements of geographically made. They expect a fast flow of documents
diverse customer segments. and their verification to save demurrage costs
and standing charges. The higher the Straight
This paper discusses a key technological advance- Through Processing (STP) rate in a transaction,
ment, cloud computing, which is already making the better it is for the importer. Communica-
inroads at leading trade finance software players. tion needs to be efficiently managed between
This development enables a bank to build a the bank and the importer.
strong trade finance architecture for maximizing
profitability, a goal which starts with making
• Exporters: These players form the sell side of
the trade finance supply chain. When selling
such services more affordable and accessible to goods or services to a party in a different
customers. country, the sellers want to mitigate the default
(non-payment) risk of the buyer. Using trade
Within trade finance and other corporate trans-
finance instruments, a seller ensures timely
action banking services, financial institutions are
payment for goods or services delivered per
moving ahead to reap the benefits from lower-cost
the trade agreement. The exporter’s finances
private cloud services. These cloud services
cognizant 20-20 insights | november 2011
2. Cloud Computing’s Full Gamut
Present
Day
Cloud Computing
Standards
Cloud Computing: Infrastructure:
Leveraging third-party computing messaging, network, queuing
capability over the network to
Computing
cut costs, increase scale, improve
Computing Fabric
agility, and access best practices
Virtual Instances
Storage
Block Storage
Keyed Storage
Open APIs:
identify
technical
domain-specific
Figure 1
can be greatly affected by the STP rates, the technological change and adapt accordingly to
time required for document verification and the needs of their clients.
the speed of communication with the bank.
• Product Companies: These are the players
• Banks: Financial institutions play a major role that develop specialized technology products
in trade finance business. They provide various to facilitate trade finance processing for
financial instruments to mitigate the risk banks. Misys, Surecomp and China Systems
arising out of a nonpayment in an internation- are examples of companies that have
al trade transaction. Adoption and upgrade of developed specialized technology products
technology is of utmost importance for a bank’s for trade finance processing that incorporate
trade business as it is often the deciding factor the industry’s best business practices. These
for the customer in choosing a trade finance players must continuously upgrade their
bank. Banks need systems running on robust products to adjust to ongoing, industry-wide
infrastructure, the latest technology, the ability technological transformation.
to accommodate constant regulatory changes
and the industry’s best practices.
• Outsourcing Banks: These are the banks that
have built their own trade finance processing
• Finance Providers: This role is primarily systems on a large scale and provide the facility
assumed by banks. Exporters require financing to smaller banks to leverage these services. The
for procuring raw materials for fulfilling the smaller banks generally prefer to outsource
import orders. Similarly, importers may require their technology-intensive trade processing
financing to pay for goods being imported. to larger banks or avail themselves of these
Financing is an extremely crucial activity in services through white labeling. An example of
the trade finance area and helps the parties such outsourcing is MaxTrad, a customer inter-
in maintaining a healthy cash flow. Technology facing trade solution by Royal Bank of Scotland
can play a vital role in enabling the financiers (RBS). Within the ever-changing technological
to make quicker and better decisions with landscape, smaller banks rely on larger banks
regard to finance disbursements. to keep abreast of new developments.
• Technology Vendors: These companies play a
Technology Initiatives for
major role in providing customized technology
Trade Finance
services and solutions as per the requirements
of banks and corporate customers. Technology Following the steep downturn in 2008-2009, the
vendors also provide specialized systems main- trade finance industry has made a recovery. The
tenance, upgrade and support to the banks. outlook for the year 2011, despite the uncertain
They can quickly absorb any industry-wide global economy, is positive, with increasing
cognizant 20-20 insights 2
3. Trade Finance Market Players
Technology Layer
Product
Companies
Banking Layer
(Misys, China
Systems, Trade Finance
Surecomp, etc.) Banks
Outsourcing
Corporate Layer
Banks
Finance
Technology Providers Importer/Buyer Exporter/Seller
Vendors
Inter-Bank
(IBM, Accenture, organizations
Cognizant, etc.) (SWIFT/Regulatory
bodies)
Figure 2
demand for traditional trade finance instruments. the entire trade finance operations lifecycle.
By choosing the right IT platform for themselves These solutions are based on the latest technol-
and their customers, banks can more effectively ogies like service-oriented architecture (SOA),
profit from the ongoing recovery by increasing Web services standards and XML, which provide
STP rates for their transactions and increasing the control and agility for achieving efficient
the affordability and availability of trade finance and fast trade transactional processing capa-
by reducing the cost and time related to manual bilities. These solutions also provide interfaces
processing. Over the years, numerous technologi- to bank’s internal functions like limits and lia-
cal innovations have emerged in the trade finance bilities checking, document verification, letter
industry. The more prominent developments are generation, financing options, and generation
as follows. of Society for Worldwide Interbank Financial
Telecommunications (SWIFT) messages as well
• Front-end Technology: Trade portals provide as postings to the required core banking and
corporate customers with an innovative Web accounting systems.
browser-based approach for online requisition
of business requests. It benefits the bank and • Interbank Technologies: Global interbank
societies led by SWIFT have been actively
its trade services or international guarantee
involved in evolving innovative approaches
teams by providing a personalized and
such as Trade Services Utility (TSU) for open
dedicated front end to their back-office users,
accounts transactional datasets matching, to
sales teams and administrators to review
enable high STP rates in fast-paced interbank
and process customer requests.3 Front-end
transactional flows. .
customer portals leverage technology to
enable faster processing of trade finance appli-
Trade Finance Trends
cations and eventually contribute to achieving
higher STP rates. This is made possible by ICC’s trade finance survey published in March 2011
using advanced XML techniques which map reveals the following trends regarding the afford-
information fields of the customer’s online ability of trade finance products and services:4
application directly with the bank’s back-end
trade processing system, thus reducing the • The cost of trade finance remains high in many
parts of Asia and Latin America.
need for manual input.
• Back-office Technology: Trade finance back- • Traders in many low-income countries still
have considerable difficulty accessing trade
office solutions provide advanced work-flow
finance at an affordable price, particularly for
management that enables the streamlining of
import finance.
cognizant 20-20 insights 3
4. Figure 3 shows the reasons cited by banks for 2. Insufficient turnaround time.
losing corporate business in the wholesale 3. High interest rates and fees (high cost).
banking segment.5
4. Inadequate products and services.
Bank’s View of Corporate 5. Insufficient geographic coverage and reach.
Banking’s Decline 6. Inconsistent customer service.
Based on SWIFT message figures published by
Percent of Banks Responding
ICC in March 2011, approximately 43 million trade
Inadequate Products
& Services 62% finance messages were transmitted over the
SWIFT network in 2010 (see Figure 5). Assuming
Interest Rates & Fees 57% that the majority of these are contributed by
Ease of Access to Services 400 prominent banks worldwide, we deduce that
& Information (channels) 57%
major banks on an average issue and advise close
Insufficient
56%
to 10,000 trade finance products such as Letters
Turnaround Time
of Credit (LCs), guarantees and collections
Insufficient Geographic per month.
Coverage & Reach 56%
Percent of Banks Responding
Inadequate Products
Financial Weakness 25% 62%
SWIFT Trade Traffic Worldwide
& Services
Interest Rates & Fees 57% 50
Source: Market Intelligence Report,
Ease of Access to Services
Finextra/Pegasystems, 2010
& Information (channels) 57% 40
Figure 3 Percent of Corporates Responding
Insufficient
Ease of access to Turnaround Time
services
& Information (channels)
46% 56% 30
Insufficient Geographic
Similarly, Inconsistent& Reach cite the following
corporations reasons
Coverage
Customer Service
46% 56%
20
for reducing business with a bank. 6
Financial Weakness 23%
Financial Weakness 25%
10
Company View of Corporate
Interset Rates and Fees 23%
Banking’s Decline
Insufficient Turnaround Time 15% 0
2003 2004 2005 2006 2007 2008 2009 2010
Insufficient Geographic Reach 0%
Total growth 5.31%
Percent of Corporates Responding
Inadequate Products & Services 0% Cat 7 growth 8.24%
Ease of access to services 46%
& Information (channels) Cat 4 growht -0.79%
Inconsistent 46%
Customer Service
Financial Weakness Note: Measured in number of messages,
23%
2003 – 20107 Source: ICC
Interset Rates and Fees 23% Figure 5
Insufficient Turnaround Time 15%
Insufficient Geographic Reach 0% Leveraging the Cloud
Inadequate Products & Services
Cloud computing supplies what IT always needs:
0%
a way to increase capacity or add capabilities on
the fly without investing in new infrastructure,
training new personnel or licensing new software.
Source: Market Intelligence Report,
Cloud computing encompasses any subscription-
Finextra/Pegasystems, 2010
based or pay-per-use service that, in real time
Figure 4
over the Internet, extends IT’s existing capabili-
ties.8
Distilling these data points, the following issues
Existing bank-supplied trade finance solutions
are the primary reasons for the decline of the
and services are hosted on infrastructure
wholesale banking industry:
consisting of data centers that are monitored and
1. Ease of access to services and information maintained by financial institutions themselves
(channels). around the clock and incur immense investment
cognizant 20-20 insights 4
5. of time and money. Contrary to this, content a flexible capacity model that would be inflated
on the public domain is accessible commonly during peak periods and decreased during the off
on the Internet without the need to maintain season, thereby scaling costs to service demand.
the underlying hosting infrastructure which is
managed by content providers (for example, Platform as a Service (PaaS): PaaS clouds
Google Docs managed by Google). provide a platform-based approach to developing
or customizing business applications. A platform
This provides an attractive opportunity for can be comprised of a development environment,
banks to reduce or eliminate associated costs a database management suite, a hosting service,
of provisioning and maintaining these applica- etc. From an international trade perspective, appli-
tions “in-house.” What is crucially required is the cations such as customer portals, trade transac-
guarantee from cloud service providers of service tional processing solutions and trade reporting
delivery and data protection.9 Typically, this systems can be developed in any programming
guarantee can be provided through Service Level platform hosted on a PaaS layer.
Agreements (SLAs) and data protection NDAs
Software as a Service (SaaS): This type of
brokered between the providers and consumers.
cloud computing delivers applications through
Cloud Capabilities for Trade Finance a thin client, generally a standard Web browser,
to thousands of customers using a multi-tenant
Cloud computing has gained momentum and
architecture. From a trade finance perspective,
prominence due to the immense cost saving
especially for small players, SaaS can be leveraged
potential that it promises for businesses. Based
to host a bank’s entire trade finance system on
on discussions with various vendors, analysts and
cloud resources provided by a trusted partner.
IT customers, the following is a rough breakdown
of what cloud computing can offer and how can it Cloud Computing for Trade Finance
benefit the trade finance industry.
The trade finance processing system encompass-
Infrastructure as a Service (IaaS): This layer es a customer interfacing trade portal, back-of-
of cloud computing provides flexible on-demand fice transactional trade processing system, SWIFT
storage space and virtual computing resources. transmission system, transactional data transfor-
The range of resources typically encompasses mation and communication system and reporting
on-demand memory management, computation- system. In a combined manner, trade finance
al power and secondary storage available from systems form a crucial part of corporate banking
a virtual resource pool over a network on a pay- services for banks or financial institutions. Such a
per-use basis. In the long run, IaaS may emerge trade finance system must be extremely robust,
as a highly cost-effective alternative to data scalable, secure, automated and compliant
centers for hosting back-office trade transaction- with ICC regulations and Basel II norms. If such
al processing. The cost advantage emerges from a system is to be based on a cloud computing
platform, the onus of managing it shifts partly
to the cloud suppliers who must have expertise
Cloud Computing Ecosystem
in handling technological platforms and a great
sense of responsibility to address business-criti-
cal issues.
Software-as-a-Service
Market Trade Finance System Within a Cloud
2012 Market: $21B (20% CAGR)
Maturity We believe the ecosystem must have the following
Platform-as-a-Service
components (see Figure 7, next page).
Value 2012 Market: $9B
Add (70% CAGR) Service provider: A cloud vendor providing appli-
cation hosting, data center management, virtual
Gross Infrastructure-as-
Margin databases, virtual server processing capabilities
a-Service
2012 Market: $2B and storage and business support.
(30% CAGR) On the bank’s side, it will include trade finance
applications, such as:
• Customer portals.
Source: AMR, Gartner, IDC
Figure 6
• Back-office trade processing system.
cognizant 20-20 insights 5
6. Components of a Cloud-based Trade Finance Ecosystem
SaaS Layer (Business Applications)
Trade Finance Environment
Customer
Bank’s SWIFT Gateway
Portal
Trade finance processing system
Corporate Customer
Reports and Limits Banks’ Back-end Systems
Batch
extracts management Processing
system system Core Banking System
Accounting System
Bank User PaaS Layer (Development / Support Platform)
Database Services
Support Platforms Application Development
OS Google apps
Web Services Amazon EC2
Windows Azure
Technical User
Application
development/business IaaS Layer (Infrastructure)
support team, etc.
Auto Scale Auto recover Monitor Resource Mgmt
Physical Storage Processing Security Network
Power Back-up and recovery Management
SAN 1 Firewall
CPU 1
SAN 2 Anti Virus
CPU 2
Support User
Server administrators and DBAs,
etc. These are resourced
by the cloud provider.
Figure 7
• Limits and liabilities management system. tational power upgrades).
• Reporting and extracts system. • Anti-virus upgrade costs reduction (fully
managed by cloud service providers).
• Interface to SWIFT gateway.
• Disaster recovery and backup centers cost
• Interface between customer portal and back- reduction (complete management of backups,
office trade system. recovery and disaster management by cloud
Pay-per-use Model: The services should be service providers over the long term).
available on a contractual basis, with a minimum
number of users and resources agreed upon. Strategic benefits:
The system shall provide the flexibility to auto- • Increased affordability through reduced
matically allocate resources for an increased costs for banks trickling down to reduction of
number of users during peak periods. The cloud charges and fees on trade instruments.
service provider should charge a fixed minimal
price for off-peak periods with reduced transac-
• Focus shift to business growth: Management
can focus on growing the business and leave IT
tional processing and usage. Periods of increased
management to providers.
activity and usage shall be charged on a “pay-per-
use” model over and above the required threshold • Easy widespread availability and accessibil-
of users as agreed to in the contract. ity through the cloud without the need of huge
installations.
A pay-per-use model includes the following. • Decreased turnaround time of transactions
Cost: with high STP rates.
• Periodic license upgrade costs elimination Key challenges and concerns include:
for essential software and installations (fully
managed by cloud service providers). • Data integrity, control issues, regulations,
security and risk are the biggest concerns
• Infrastructure management cost reduction regarding cloud computing. According to a
(database upgrades, server upgrades, compu- survey of banking executives conducted by
cognizant 20-20 insights 6
7. independent research firm TechMarketView in Conclusion
conjunction with core banking systems provider
Cloud computing has great potential to deliver
Temenos, 44% of bank executives see the lack
massive cost savings to the slowly recovering trade
of data security as a significant barrier to the
finance industry. The benefits can be apportioned
adoption of cloud computing.10 Furthermore,
to increase affordability by reducing costs and
only 15% of respondents are currently running
increasing accessibility to trade finance solutions
cloud applications. The survey revealed that
for both banks and corporate customers. Studies
80% of respondents could not name a leader
have shown that a full-fledged cloud migration
of cloud computing in the banking sector.
can help reduce processing costs by 80% to
• Access of Internet/WAN is another critical 90%.11 This cost reduction would then filter down
concern, especially for peak times of operation. to reduce the cost of trade finance transaction-
Cost of bandwidth and other services will be al charges and fees levied by the banks, thus
higher, depending on the type of application increasing affordability and yielding increased
used and data intensity. usage and growth for corporate customers.
• Disaster recovery and system failure is an
important concern due to the potential for a
“single point of failure” that will affect multiple
systems concurrently.
Footnotes
1
ICC Trade finance survey findings, April 2011
http://www.ft.lk/2011/03/30/global-trade-recovery-takes-uneven-course-says-icc-survey/
2
UK Reuters, March 29, 2011
http://uk.reuters.com/article/2011/03/29/idUS132070+29-Mar-2011+BW20110329
3
Misys Trade portal http://www.misys.com/banking/markets/trade_services-trade_portal.html
4
ICC Trade Finance survey published Mar 2011
5
Source: Finextra/Pegasystems Corporate Banking Customer Satisfaction Survey 2010
http://www.pega.com//sites/default/files/Corporate_Banking_Customer_Satisfaction_Survey_2010.pdf
6
Source: Finextra/Pegasystems Corporate Banking Customer Satisfaction Survey 2010
http://www.pega.com//sites/default/files/Corporate_Banking_Customer_Satisfaction_Survey_2010.pdf
7
ICC Global survey on trade and finance, 2011
8
What cloud computing really means
http://www.infoworld.com/d/cloud-computing/what-cloud-computing-really-means-031
9
R. Buyya, et al., Cloud computing and emerging IT platforms: Vision, hype, and reality for delivering
computing as the 5th utility, Future Generation Computer Systems (2009)
10
M2 Publishing – Banks skeptical on cloud computing, TechMarketView and Temenos survey reveals
http://www.m2.com/m2/web/story.php/200944CF0204B268F08F802575FA0037035C
11
To Move or Not To Move: The Economics of Cloud Computing, March 2011
http://www.cse.psu.edu/research/publications/tech-reports/2011/cse-11-002.pdf
cognizant 20-20 insights 7