TFPD_10: Cash management and trade finance – an odd couple

Trade Finance Paradigm #10: Cash management and trade finance – an odd couple


It is about time to return to the Trade Finance Paradigms: The one next in line is “cash management and trade finance – an odd couple.”


I have been revisiting some old ICC Opinions lately. One that did not strike my attention when I first read it was TA631rev. For the second reading however it initiated a line of thoughts – which I want to share with you.


Basically it deals with the situation where an issuing bank has outsourced the handling of all or part of the documentary credit processing to another bank. In this case by “nominating” an agent bank to which the documents are to be presented.

This means that the agent bank will examine the documents, and (if discrepant) will refuse the documents on behalf of the issuing bank. The ICC Opinions states that that is not a problem – as long as the LC clearly indicates the roles and responsibilities that the named parties are taking so that there may be no ambiguity or confusion in the transaction and its possible effect under UCP 600.


As such it is not the ICC Opinion that has been on my mind. It is more the background – and organisational structures – behind this – and other – models that (for better or for worse) are tried out for the purpose of increasing the efficiency in the trade finance departments.


Of course attempts for better efficiency have been along for many years – but as far as I can see, something has happened during the last 4-5 years. In many banks the organisation has been re-considered and re-structured and there seems to be a trend that trade finance are placed under the umbrella of (or perhaps side-by-side with) cash management. At the same time it seems like it is the cash management people that are placed where the main decisions are being taken. Most likely because 1) cash management is normally bigger than trade finance, and 2) because cash management is largely based on straight through processing – which (from a management perspective) would be nice to “transfer” to trade finance.


Many of the trade finance people I talk to, consider this a wrong direction to take. Basically arguing that cash management and trade finance is an odd couple: So different they should not be mixed. Oil and water in its purest forms!


The good question is if this is correct?


So first let’s look at some of the challenges.


The main challenge is that as such cash management and trade finance are different indeed, so if the management has its product knowledge from the cash management side, it may well take very wrong decisions in terms of trade finance.


For example – I have heard of cases where the trade finance process is cut in two – and handled by different teams: The examination of the documents presented by the beneficiary, and customer dialogue is done by one team. Then a working sheet is filled in and passed on to another team, who is to key in the transaction into the system, and forward the letters and documents to the issuing bank and the beneficiary. This working sheet consists of very detailed instructions as to how the transaction is to be keyed into the system.

Cutting up a process, may work well within cash management, but for a trade finance process like this one - it is plain suicide:

The process of examining the documents, forwarding same to the issuing bank (perhaps reimbursing itself) and paying the beneficiary simply is complex. It is really hard (impossible – if you add the requirement for efficiency) to “capture” all the information on one sheet. Likewise handling (keying in) these transactions based on a working sheet alone – without reading the LC is truly anxiety provoking: Transfer 10m USD to his company. Finance for 5m EUR on that part … one box missed to be ticked may mean the difference between night and day. Between a well handled case – and a huge loss.

Such process results in a highly increased operational risk – not to mention that the benefit may not be that big – not to mention that (for the benefits to be big) the people must do the same over and over again … i.e. it becomes really boring …

On top of this – you have one team that does not work in the IT system, i.e. do not get familiar with that, and another team that do not examine the documents – i.e. do not get familiar with that…


I have also seen other trade finance processes being cut in two. For example the handling of the documentary collections, where the keying in collection into the system is done in another country. This means scanning of instructions, documents and messages – and dialogue via the system. Again – it may make sense to cut up cash management processes, but for collections that are “low income” but still relatively complex – it only adds to the complexity – and to the operational risk. In reality it is often so that the correction of mistakes and losses will “kill” the business case.


Another model that may result in challenges is the outsourcing of examination of the LC documents. This has been around for many years – and frankly I have never heard of such model that worked 100%. First of all – the whole scanning process is often a nightmare! This takes so long time, so that the “small” document sets can be examined faster than it takes to scan it. It may even be so that it is not all document sets that can be outsources – e.g. based on compliance issues. So there must be some kind “evaluation” – and still some document sets must be examined “in house.”

But the really tricky part (that is the real challenge with trade finance as such) is that that “standard” of document examination is different between banks, countries and parts of the world. So more often than not, the part that has outsourced the service will “evaluate” the discrepancies mentioned by the other part. Especially if they are to call the customer, and discuss (defend) the discrepancies. So in most cases outsourcing the document examination – adds to the complexity – and in most cases does not add the desired value.

Not to mention – that the knowledge and experience gained by examining high volume of LC documents are lost!



Now – with these examples I am sure that you are of the impression that I am against all kind of “cash management intervention” into trade finance – or for that matter outsourcing! Even against change ….


The fact is: I am not: I am of the firm belief that a cash management / trade finance wedding can be a happy one.


Trade finance can learn a lot from cash management – and vice versa. But changes can only be done in a good way with the appropriate understanding of what you are changing! In order to change trade finance – you need to know it well.


So what can be done? Many things in fact, but here are some ideas off the fly:



Trade Finance includes a large manual part – most related to the examination of the documents. This is most likely the biggest single task in trade finance departments, so it makes sense investigating how to reduce that. As far as I can see there are two ways to go:


1: Outsource – but do it “right”

What do I mean by that? Well in many cases, the new process and contractual basis has not been thought through well. The bank must adjust the process to match the outsourcing – and make a really good agreement. For example:

* The SLA must be really practical. There must be a clear description of the “standard” for the examination, as well as clear governance; i.e. who is responsible for the follow-up on the standard … almost on a daily basis. The result must be that the documents are examined exactly as the part outsourcing the service would have done. There must be no need to evaluate any of the mentioned discrepancies.

* The process must be aligned – for example there should be no calling the customer, but simply passing on (refusing when needed) the discrepancies to the customer via an electronic channel. No re-writing – no translating the discrepancies. 


2: No disturbing of the document examiner

When you perform a certain task that requires some kind of concentration, and are disturbed, then tests have shown that it takes 2-3 times the “normal” time to complete the task. This also applies to document examination. Therefore – when you keep the document examination in house, make sure to “shield” the persons examining the documents – so that they are NOT disturbed. At best – provide a “document examination room” with no telephones. This will drastically increase the efficiency.



Go for the latest generation of trade finance software! Especially – the software that offers a really solid customer frontend. By offering such to the customers, a lot comes in for free. For example if the system offers a good document preparation module, then you may get the document in electronic form, which will (as an example) make it easier to outsource – perhaps even smoothen the compliance checks.

Taking this one step further (using cash management ways of thinking) this may even be integrated with the customers ERP systems – thereby forging close the customer.



Outsource what makes sense!

For example it may be difficult to keep the appropriate level of expertise within the department. In such cases it may be worth considering outsourcing this to a trade finance consultancy.


So concluding: cash management and trade finance ARE an odd couple … but if “merged” well there may be good value in it.


And now I am off to the ICC Banking Commission meeting in Lisbon. I hope to see you there. In any case I will revert when I am home well and safe ….


Take care of each other and the LC!




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