The most important development in U.S. banking BPS in the last five years has just been announced (it may still not pass the U.S. Congress, but this analyst believes that too much pressure will be applied by industry for Congress to block it).

The announcement is that the signatories to the Trans-Pacific Partnership (TPP) have reached an agreement on the terms of the trade agreement and will now seek ratification of the trade treaty in their respective countries. The 12 parties to the agreement, which represent ~40% of the world GDP, are United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

If enacted, TPP will eliminate 18,000 taxes across the participants and be the first major trade treaty signed since NAFTA in 1994. TPP will certainly increase the level of trade among the signatory countries.

A recent Federal Reserve Bank of New York study (January 2014) on trade finance found that trade finance supports ~30% to ~40% of international trade. Trade finance was ~$7 trillion to ~$8 trillion in 2011 (i.e. notional value of goods financed). Market share in trade finance is hard to precisely calculate but is estimated to be concentrated among the largest ten banks active in the field. The AsiaPac region uses trade finance much more as a percent of trade volume due to the nature of goods and lack of established company to company relations, which would disintermediate the banks.

Why is this important to banks and their BPS vendors?

NelsonHall research in the past has found that very few trade finance processes are outsourced in banks. Documentary review has been perceived as a highly specialized process with a high potential for loss if executed improperly. The physical nature of documentation to date has also served to limit the ability to outsource documentary review into a low cost global delivery center.

Banks have looked at outsourcing trade finance processes when volumes have grown faster than they have felt comfortable ramping up operations. In 2011, merchandise trade grew at an annualized rate of 7%, according to the World Trade Organization, and many banks and BPS vendors were ramping up offerings for trade finance processing BPS. By 2012 merchandise trade growth had fallen to 2% per year, below the 3.5% average growth rate from 2003 to 2013, and trade finance BPS conversations were moved to the back burner.

Today a few vendors, such as TCS and Cognizant, provide trade finance BPS services to banks. Banks themselves, such as JPM, Citi, and HSBC provide “outsourced trade finance services” to exporters and importers, via their lending operations. The market for BPS in trade finance now has improved delivery capabilities including:

• Electronic documents, in more cases than previously, to support electronic presentation, remote document review, and processing
• Closer to STP (and in some cases STP for the entire document value chain) which reduces manual remediation requirements
• Increased standardization of documents across markets.

Global BPS vendors will be able to apply their skills in making process improvements, including:

• Increasing accuracy of processing with remote manual review enhanced with scripted automated analytics
• Increasing operational flexibility with ability to scale operations up/down to match market volume fluctuations
• Reducing turnaround time with 24 hour processing
• Applying multi-lingual capabilities.

Because the TPP will scale up a line of business rapidly without displacing an existing business, we expect banks will choose third party BPS vendors to help rapidly scale operational delivery of trade services processing. It promises to be a rare opportunity for BPS vendors to quickly grow a new line of business which, due to its required domain knowledge, will have relatively high barriers to entry.