Open account trade "desperate" for standardisation

Ask Mike McDonough, head of global trade product management at BNY Mellon, what he thinks is important to trade finance customers today and he will tell you two things – price and simplicity.

“As long as they can get done what they need to get done at the cost level that they find comfortable, I think, even if I did it with carrier pigeons, they’d be OK,” he said with a chuckle during a recent trip to Hong Kong.

While carrier pigeons are not about to experience a comeback, open account trade finance – the dominant form of payment today – is at a crossroads. With more than 10 providers and formats available in the market, including those offered by Swift, individual banks and various vendors, and no dominant player, practitioners do not know which way to turn for their open account offerings.

“What the market desperately needs is some sort of standard around open account,” said McDonough. “Right now, the only way I can define open account is by saying it's anything that’s not a letter of credit.”

At the centre of the current debate is Swift’s trade services utility (TSU). Pushed by the financial services industry collective as the standard format for open account trade since April 2007, it has yet to gain traction.

“TSU is a great product,” said McDonough. “We would really love to see TSU become the standard of open account processing… but there still isn’t that critical mass of providers of TSU services for it to become the standard for the market.”

Other providers agree. Earlier this year, Ashutosh Kumar, global head of trade product management at Standard Chartered Bank, said adoption would not happen in short order, while Connie Leung, Asia-Pacific head of trade and supply chain at Swift, confirmed that volumes remained low on the TSU.

“I’m not sure that my customers necessarily will buy product from me because I’m a TSU [member] bank,” said McDonough. “I think they’ll buy product from me because my service is the best and my price is the lowest. If I can achieve those things using the TSU, then I am delighted to use it.”

In April the utility was due to receive the endorsement of the International Chamber of Commerce as the standard of open account trade finance – something Leung said was a necessary step in its growth – at a meeting in Beijing. Unfortunately, the meeting was cancelled after the closure of European airspace following the eruption of a volcano in Iceland. Swift now hopes to receive the endorsement at an ICC meeting in Orlando, Florida this September.

“The big fear among firms is that they’re going to buy the wrong technology,” said McDonough. “It may be great stuff but it’s the beta-max versus VHS problem. Beta-max was, I think, by far the better technology but where is it now? It’s not there.”

“Everybody knows they’ve got to be in the open account space. The question is what do they need to do and what risks do they run by doing that.”

Despite all the overtures by Swift and other players, setting the open account standard is still anyone’s game. Sure, Swift has the upper hand at the moment as a bank-supported collective but corporates are not yet sold on the TSU’s usefulness, on its cost effectiveness or on its efficiency, to paraphrase McDonough. Without those critical corporate customers who drive the actual trade transactions that the system is designed to finance, the TSU cannot get the market traction that it needs to become the dominant format.