Srikrishnan

Oct

2022

Trust, Trade & Transact

When we visit a store to buy a product, we ‘see’ the product, ask for a quote, if satisfied about the product and quote, we buy it (of course, we will haggle if possible – over the price). Once we pay, the transaction gets completed.

Here the quote, trade and payment transaction happen almost simultaneously. There is an element of trust which we don’t often realise. It is the trust that, we, as a consumer have, that the shopkeeper will allow us to take possession of the product upon payment. Similarly the shopkeeper trusts that the payment will be made when the product is handed over.

When we order an item online in an unfamiliar website, we don’t ‘see’ the product itself but only a representation of it on the website. Having made the payment, a question lingers in our minds: “will the product come through as promised”? Or will I receive a brick in the mail. To overcome this, we choose from a set of “risk mitigation” activities:

(a) order ‘Cash on Delivery’ — so that we don’t have to pay if the product is not delivered to our satisfaction. Or

(b) order from a renowned website (like Amazon) that ensures a return if the product was either not delivered or was not as listed.

In cash-on-delivery, there is absolutely no risk for the buyer, however the seller bears several risks. He wouldn’t know if the buyer would accept and pay for the product and still needs to pay for the transportation if the product is returned by the prospective buyer. While the seller may not lose the product itself, there is a transportation cost involved. If the product is a perishable item (like a block of cheese), the possibility that it can perish in the back and forth journey and lose its entire value is real.

What a reliable platform like amazon does is, it brings trust for both parties with its robust return policy and feedback mechanism on products and sellers. Both buyers and sellers recognise this value addition by Amazon (or a similar service) and make long distance trade possible and vibrant — whether we are conscious about it or not.

This element of ‘Trust’ becomes even more pronounced if the trade is international — where additional transit times and customs complications are usual. Yet billions of goods and services get sold and bought across the oceans. Is there an Amazon like entity that provides trust? Well, it is not one single entity a network of banks (yes banks!) that provide this trust.

Let’s take an example of a trade between two very reputed, financially rock-solid and ethical companies. I say this because none of these companies will wilfully cheat the other and pose a credit risk to the other.

Caterpillar USA, (the manufacturer of those monster trucks we all love) and Balkrishna Industries Ltd., (India’s largest manufacturer of off-highway-tyres) sign a deal where BKT is to supply its famed “Earthmax SR 47” tyres for one of CAT’s off-Highway trucks. BKT has its plant in the western Indian state of Gujrat and CAT needs those tyres in Illinois, US to be fitted into those (monster) trucks.

The journey of those tyres, even before they start their journey moving trucks on the road, is a long one — inside containers from BKT’s plants in Gujarat, India by road to one of the ports in Western India, then by sea to the eastern seaboard of US and then again by road to Illinois. CAT will pay BKT only if the tires (since they have reached American shores, lets use the American spelling) it receives are of the specification they asked for and if the tires reach them in good shape. The journey of the Earthmax tires can be interrupted in the sea by storms, sea pirates off the coast of Somalia or even delayed by a random ship that runs aground in the narrow straits of Suez canal. Bottomline, the tires may not arrive at the warehouse of CAT in time, despite the best intentions of BKT.

Or, in spite of supplying the right tires braving all the interruptions on the way, BKT may not receive payment for what it delivered to CAT because — ahem, a political sanction was put in place due to one of those unforeseen risks we are slowly getting used to in these uncertain times.

These are risks that both the companies face!

As commercial public limited companies that need to answer their shareholders, these companies will employ the best international trade practices to de-risk. Enter — banks & their “Letters of Credit”.

In its simplistic terms, a letter of credit is an assurance by a bank that it will make payment to an exporter, as long as the exporter supplies the goods according to the terms agreed between the exporter and importer, at the agreed place.

If BKT indeed made available to CAT the tyres of agreed quality & quantity at the agreed place and provides documentation proving that, CAT’s bank will pay BKT’s bank to be credited to BKT.

And if BKT isn’t able to do that, CAT is protected and no money is paid to BKT.

Voila! We now have a mechanism of instilling trust in a trade between two companies across the oceans. Actually, this mechanism has been in place for decades — even before Amazon came into the picture.

Thus banks provide a very important ingredient (apart from money of course) — the trust needed for international trade & transactions.

Photo Credits:

Picture collages made from pictures & photos thanks to:

Photos by krakenimages & Ian Taylor on Unsplash
Photos by Mediamodifier & Coker free vectors on Pixabay
Photo by energepic.com through pexels.com
logos of respective companies

Click on the urls below the images below to view the previous and next articles in this series

https://curiously.me/trade-across-borders-how-choosing-the-right-currency-matters/

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Oct

2022

Gods of Trust!

Now that we understand the need for trust and how “Letters of Credit” (we will call this LC from here on) bridge the trust deficit among (relatively) unknown trade partners, let’s get into the mechanism of how they work.

Let’s carry on with the previous example of our fictitious trade between Caterpillar & BKT tyres.

Once CAT and BKT find each other suitable (for the transaction that is 😁 ), they enter into a contract that will determine

– what type of tyres BKT is selling, its technical specifications

– the quantity

– price,

– what does that price include (just the products, or freight & insurance too)

– where will it be delivered (at CAT’s location or is it sufficient if BKT delivers it to someone outside its own factory)

– when the tyres will be shipped / delivered

– how will the trade be carried out (through LC)

– which banks will be involved and who pays the fees

– how many days does CAT get to make the payment once the invoice is served

– any inspections to be done by a third party at the port where the tyres will be offloaded?

– Anything else they both (CAT & BKT) agree on.

So, in a sense, each and every foreseeable part of the transaction will be committed in the contract — including unforeseeable “force majore” clauses.

Now with this contract in hand, CAT will go to its bank (lets call it BofA, short for Bank of America) and ‘Open” an LC favouring BKT.

BKT receives this LC through its bank — say SBI- State bank of India. SBI performs a very important task here. It:

(a) Validates if the LC is genuine and is indeed issued by BofA (banks have a way of identifying each other, thanks to SWIFT).

(b) Advises BKT if BofA is a trustworthy / creditworthy bank. This is a little more complex activity, but for now we will pretend it is simple.

These are important steps, as the LC itself is an instrument that is meant to establish trust. If the issuing bank is not trustworthy, it beats the purpose. You would immediately understand what I mean if I mention CAT gets the LC issued by the Fifth Third Bank (yes, such a bank exists!). So, it is important for SBI to satisfy itself that the bank that opens the LC is indeed worthy of trust. If SBI is not able to directly establish trust, it can do so with some intermediary (called the “confirming bank”).

By doing so, SBI becomes the “advising bank” for BKT.

Now why would BofA or SBI take the trouble of doing all this for their customers? Fee income! but they will get into this business only after assessing the risk they are taking. So in a sense, the banks allow their customers to transfer risk on to them, thereby becoming trust providers.

To look at it another way, all the banks in the chain make money with LC fees. Remember, this is without lending a $, just by lending their trust (& of course managing the risk) banks make money. So this LC business -which you can see as “fee based” income in bank’s annual reports — is something banks fight for.

Let’s get back to the contents of the LC. CAT will ensure all the important conditions that are to be fulfilled are included in the LC terms & conditions for its bank to release the payment. It will include conditions like the type of tyres (Earthmax SR 47), quantity, type of packaging etc. If these conditions are met by BKT and verified by BofA, BofA will make a payment to SBI. (Did you notice that BofA is making the payment instead of CAT?).

Now, a question may pop up. Are banks equipped to validate the type of tyres? Are they qualified to ascertain the quality of materials used as per the specifications?

Banks service a wide customer base that would be dealing with a variety of merchandise. What if a pair of customers trade in chemicals; will the bank have the ability to tell what those chemicals are? Is this why bankers study chemistry in school? Or graduate in biology to validate the animal products shipped for their customers?

Thankfully, they don’t have to do all this. Banks will have to deal only with documents (without having to leave their airconditioned offices). Between trusted partners, a self-declaration by the exporter is sufficient to say what they are shipping but if an importer wants to be doubly sure, they can insist on a validation by an independent agency at the port of export, before goods are exported. They just have to ensure that this verification by the appropriate agency (identified upfront) is included in the LC conditions & a clearance certificate is one of the documents to be submitted to the issuing bank to claim payment.

Coming back to our CAT-BKT trade, all BofA has to do is, ensure BKT’s agent submits all the documents that are mentioned in the LC, with the desired contents. And if BofA is satisfied with the contents of the documents, it will release payment to SBI (for BKT).

But before that, let’s see what the steps in international trade under LC are, at a very high level.

Consider the below picture, follow the numbers on the arrow for the sequence of steps. (This picture is AFTER both CAT & BKT have contracted with each other and BofA has also ISSUED the LC in BKT’s favour). In a sense the below is the actual flow of goods, documents and payments sequence. Arrows are colour coded.

Step 1: BKT sends the consignment of tyres to its freight forwarding agent, who will liaison with

(a) the export customs and get the necessary paperwork done,

(b) engage a shipping company that will take the tyres to Illinois, arrange to load them on to the ship.

Each of these entities will issue documents like export certificates, bill of lading, insurance policy etc.

Step 2: These documents are sent to BKT. The bill of lading is an important document that confirms that the shipping company has taken possession of the goods as described in the LC AND has loaded on to the ship headed towards where CAT wants.

Step 3: BKT hands over these documents to SBI, which verifies if these are as mentioned in the LC (if not, it will be iterated enough number of times to ensure they are as per the LC).

Step 4: SBI sends these documents to BofA to claim the payment.

Meanwhile, in parallel, the goods set sail to the destination port in Step 5: and are unloaded into the customs warehouse there (as in Step 6).

Step 7: All customs related procedures will be performed by CAT / its agent with the customs in the import country. Customs’ clearance & approvals are essential.

Step 8: Based on all documents (Bill of lading, Bills of exchange, Insurance, packing lists, certifications if any, etc.) that BofA has received, it takes a decision to accept or reject the payment and if accepted, they arrange to make payment to SBI as per the terms of the LC [could be immediate payment (called sight) or a deferred payment (usance)].

With this, two things happen.

(a) The transaction as per the LC is now complete from BKT / SBI point of view as their payment (or its assurance) is done. (Step 9)

(b) The title for the goods shipped are now transferred to CAT.

Step 10: All the documents that establish title to the goods and as required by the customs warehouse to release the possession of the goods are handed over by BofA to CAT, which can now share these documents to customs (Step 11) and receive the tyres (Step 12). Only at this stage CAT will get to lay its hands on the goods they purchased.

The payment terms between BofA and CAT are mutually agreed based on their relationship and upfront agreements. CAT can make the payment immediately to BofA or choose to convert the payment BofA made to SBI as a loan (much like ‘buy now pay later’), but this is between a customer and a banker as the international trade part is already complete.

BKT is happy that it received payment as long as it complied with the process and CAT is happy that payment was released only when its trusted banker verified all the documents are as per the LC conditions CAT jointly drafted.

Above is a simple flow and there are multivarious sub steps / complexities in each of the above steps. Our objective is not to get in deep but to have an overview of this process.

It is important to realise that all the communication between BofA, SBI and any banks in between are through the trusted network between banks — SWIFT.

Right from issuance of an LC to its lifecycle (issuance, additions, amendments, pre-advice, reporting discrepancies, acceptance or refusal, there are several types of messages under the MT700 series. MT stands for Message Type and each area is banking is covered by a series. 700 series (commonly written as MT 7xx) is dedicated for the LC type transactions.

Alongside, you would have also noticed (if not, please notice now), how a trusted messaging system is essential for the banking system to work and why it is important most banks in the world be part of it to move the wheels of the international trade machine.

We haven’t concluded yet as we are to see how the payment actually happens across borders. That, is a matter for our next article! See you soon.

Click on the urls below the images below to view the previous and next articles in this series

https://curiously.me/trust-trade-transact/

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Oct

2022

Trade across borders — how choosing the right currency matters

We saw how money helps in exchanging goods & services in this article. But what do our exporters do when they have to deal with buyers in countries that have their own money, issued by a different institution than ours, with a different guarantor than the one we trust.

Obviously the simplest way for an exporter is to quote a price in the currency of his home country. But it should be acceptable to the buyer (importer), for whom her home currency is different.

Why would a buyer or a seller hesitate to deal with currency which is not their home currency? Is it trust in a currency? Or is it a more practical consideration. There are two simple reasons which we will see below.

1. Stability: Imagine a carpet exporter in Turkey who prices a particular variety of carpet at 100 TRY (Turkish Lira) apiece when he sells within his own country. He would like to charge the same when he exports them too. As long as he quotes the price in TRY, there is no currency risk for him. But let’s assume the importer — who lives in Egypt- prefers not to pay in TRY and wants to pay only in EGP (Egyptian Pounds). Our exporter submits a quote in mid Dec 2021, where the exchange rate between the two currencies was 1 EGP = 1 TRY. So the carpets will be quoted at 100 EGP (which would have translated to 100 TRY). This looks simple. But we need to understand currencies can be volatile, (i.e the extent to which exchange rate varies on a given day is high). Below is a chart of exchange rate between EGP and TRY for the past one year. (Credit: xe.com)

One year exchange rate history between EGP and TRY. Credit:xe.com

Now, international trade doesn’t happen in an instant. Importers seek quotes from various exporters across countries, take their time to evaluate and then place the order. Suppose our importer in Egypt wants to place an order in mid-Jan 2022. The importer would be willing to pay only 100 EGP as that was the quoted price per carpet.

As we can see from the chart above, the exchange rate between EGP and TRY changed in Jan 2022 to 1EGP = 0.70 TRY when the deal is signed. Now if the payment were to happen immediately, our Turkish exporter would have got only 76 TRY for each of his carpets instead of 100 TRY, thereby incurring a loss if he goes ahead with the deal. All because the exchange rate was very volatile.

So just quoting the price for the order in a volatile currency is very difficult for the exporter (& to the importer if the opposite had happened). However if they were to agree to price the goods in a more stable currency, where the volatility is less, it brings some stability in the trade process. So exporters around the world want to quote the price of their goods in currencies that are less volatile. Let’s call this stable currency, XYZ for now.

2. Exchange rate risk. Let’s say our exporter “receives a confirmed order”. This means he has locked in his price in a (relatively) stable currency XYZ. This does not completely eliminate his price risk. International trade usually has a time lag between the time an order is placed and the final payment is made (more on the why in a later article) — say 3 months. There is every chance that the exchange rates between XYZ — TRY and XYZ — EGP changes in these 3 months. But this exchange rate risk can be mitigated by both the exporter and the importer by taking out currency forward contracts with their respective banks. The bank will charge a fee for this, but this mitigation gives certainty to both the importer (on how much she has to pay) and the exporter (on how much he will receive) in their respective local currencies.

A question can come in your mind, if exchange rate risk can be mitigated for a fee, why not do it at the time the quote was prepared, i.e in Dec 2021 itself? We need to remember, in Dec, there was no certainty that the importer will accept the order; so there is no cash flow expected to cover the risk. Whereas in Jan once the deal is signed, there is a contractual obligation for the importer to pay and certainty on a certain amount to be paid and received.

There will be volatility between any two currency pairs but the extent of volatility will be less if one of the currencies is a stable currency (XYZ).

Enough of talking in variables, what happens in real lives? What is the stable currency in which most trade happens in the real world? Most trade is quoted in USD (the reasons are long but the undeniable fact is, it is a currency backed by the US govt and trusted by almost the entire world to be relatively stable). A few other currencies also enjoy this trust, (EUR, GBP, JPY & CHF) but not to the extent of USD.

Lets see how the two currencies performed w.r.t USD. Below are one year historical charts of exchange rates.

First between USD and TRY. Credit: xe.com

One year exchange rate history between USD and TRY. Source: xe.com

The chart looks almost similar to the EGP TRY chart, indicating that it was TRY which had had a volatile year.

Now, if we see the exchange rate between USD and EGP in the same period, it looks like this. Credit: xe.com

One year exchange rate history between USD and EGP. Source: xe.com

The chart looks volatile but within a very narrow band. So most of the exchange rate volatility between EGP — TRY was due to high volatility of TRY and moderate volatility of EGP.

3. Fungiblity of the trade currency. While all money is fungible in theory, it has boundaries. Real fungibility happens only when the earned currency can be ‘used’ to purchase any other goods / services from a different country. Assume that our exporter quotes his goods in EGP to his Egyptian client and also receives EGP upon sale. He will now have EGP funds with him. Unless he has to buy something quoted in EGP (most likely from Egypt), he has to convert his EGP into a third currency. Take for instance that he needs to buy weaving machines from a vendor in Germany, his EGP will be of no use and he has to convert EGP to EUR which involves transaction costs and fees to bank (even if we ignore currency volatility for a moment). So exporters and importers, prefer to have a single currency that is acceptable by traders across borders.

4. Government diktat. Yes, as part of managing the economy, governments also dictate — for good reason- what currencies their international traders can deal in. This is because, governments, primarily through their central banks maintain what is called “Foreign currency reserves”, to ensure they have adequate currency to pay for their countries’ imports. Central banks cannot be holding (& maintaining) a balance in several currencies like EGP, TRY and may prefer to hold only in certain currencies (like USD, EUR, JPY etc.) that are not very volatile. (None of us would want to hold an asset ( a reserve) whose value is volatile isn’t it). Due to this, any importer or exporter of a particular country are allowed by their governments to trade in only a few currencies. Purists might want me to tell you about the gold standard, the Bretton Woods agreement of 1944, and more importantly its undoing in 1971 for why the USD is a preferred trade & reserve currency worldwide. They are correct. But we will keep it for a later day. If you are interested, you can check that out along with the concept of petrodollars. Right now I want to cover the more basic reasons as to why a stable currency is needed for trade.

Now when you zoom out and find a list of commonly preferred / allowed currencies across countries, it is a very small list and the most favoured currency is just one. And that is why, most international trade is quoted in USD.

Click on the urls below the images below to view the previous and next articles in this series

https://curiously.me/money-money-who-art-thou/

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Oct

2022

Money money, who art thou?

Money has taken various forms over the centuries

What is money or Why do we need Money?

I can imagine you chuckle at this question, but I ask you why do we need the “concept” of money? Let’s understand this first at a beginner’s level. I hope to progressively expand this for a more deeper understanding later, but for now, the basics.

Money is a financial tool, an invention nearly as old as agriculture and wheel.

But present day ‘Money’ is also a story. Before we get to it, let’s see what happens if the concept of money did not exist.

We all have needs & wants, but we cannot produce all that we need and create all that we want. Some examples of the limitations are:

– My location doesn’t help (I cannot grow apples in my geography or have petroleum beneath my ground).

– I don’t have the know-how to produce it (from growing vegetables to making automobiles or aircraft).

– I may not have the authority to do it (build a copper smelting plant or start an iron foundry in my garden).

– Social contracts may prohibit (I cannot bury my dead in my apartment compound).

Since we cannot produce everything we need, there is a necessity to trade, exchange goods & services — even for personal needs (food, transportation, haircut, tuitions etc.)

Barter was an option that was very popular at one time (and even used very occasionally in this day and age) but it is not convenient. For those who aren’t familiar with barter, this is how it goes.

– I have something that I am ready to give away in exchange.

– Another person has something I want.

– The other person should have a need (or a want) for the goods I have — at the same time I need what the other person has. (‘coincidence of wants’).

– We both are accessible to each other (or we would need some intermediation service like that of a broker)

– We both are acceptable to exchange with each other.

– We need to establish the value of each others’ goods (how much gold for a haircut or a glass of milk) in each trade. This also means we need to publish the price list of all commodities in every other commodity / service. This discovering the price of each item against another can be daunting, and even unfair at times.

– Minimum transaction quantity became a problem (cannot give half a haircut for a litre of milk)

– Physical exchange has to happen.

Since there were so many limitations, we needed to have an intermediary medium of exchange that had certain characteristics.

It should have value — not necessarily in itself but should be able to buy value at will.
Should be convenient to use, store, retrieve, transfer the title. I own 100 US dollars and if I give it to you in cash or deposit in your account, it becomes yours.
Fungible (a 1 dollar coin and a 1 dollar note have the same value — even though the material (intrinsic) value for both are different). Similarly 100 cents and 1 dollar are the same value, irrespective of the shape and form.
It should be durable. Not only should it be available across time but also weather any wear & tear. Let me explain. I stash cash under my mattress, forget about it and be able to use it after a year. Also my one dollar note is torn? I should be able to exchange it for a new one dollar note.
Establish “Price” for every good or service with a single rate card. For example, 10 dollars for a haircut, 5 dollars for a litre of milk or a Kg of Rice. As opposed to 2 litres of milk or 2 Kgs of rice for a haircut or half a haircut for a litre of milk.
But the most important characteristic of all is the acceptance. Others in your community should “accept” that it is currency. Pokemon cards and Monopoly money too are currencies — but with limited acceptance within a closed group. But a true currency should be acceptable across a wider community of people — usually across a country or a wider region.

So came the tool called money as a medium of exchange.

What forms of money have we seen?

Cattle
Precious or semi-precious stones
Precious or semi-precious metals. Gold, Silver, Iron, Tin, Copper, Aluminum, Nickel (rings a bell isnt it)
Salt….(the etymological root to the word Salary)

Each of the above served as money for a while in its time. And they also had their limitations, so a new virtual value was created — Printed or Minted money — with a guarantee by the issuing authority — a king or a central bank in today’s world. Of course, for keeping the trust on the guarantor, the country has to have a robust economy, a mighty power – both military power & soft power – to make sure that guarantee is believable.

Today, central banks issue a guarantee on a piece of paper or cloth (that costs say 50 cents) and call it — say 10 dollars. Although the physical piece of paper costs only a few cents to make, we are ready to believe (in the story) that it is indeed 10 dollars because of the guarantee. That is how a guarantee became currency.

Money underwent a A BIG TRANSFORMATION. We settled for and accepted an apparently value-less (or less value than indicated) commodity due to the trust we have in the guarantee & the guarantor.

The biggest factor for a currency’s success is when both the buyer and seller TRUST that a fair value exchange has happened, even when one of the commodities is just a piece of paper.

Over the last couple of decades, with modern technology in banking, we don’t even exchange paper anymore but are satisfied with a virtual electronic unit.

The most popular form of ‘present day’ money is a magnetic medium, that holds an electric charge in the form of binary value, stored in some remote location inaccessible to the general public. We don’t hold it in our hands, we don’t even see it, but are happy with a bank statement, an email or even an SMS, that says we have money in our account. That is the story called money that most of us believe in.

Picture Credits

Collage made from pictures, thanks to: Steve Ruby & Shubham Dhage on Unsplash and gorartser & LeonMay on Pixabay

Click on the urls below the images below to view the previous and next articles in this series

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Oct

2022

A swift introduction to SWIFT

Cursory google searches would have told you what SWIFT (Society for Worldwide Interbank Financial Telecommunication) is. I am not going to repeat it but will help you relate to it and tell you why it is important, briefly.

SWIFT Logo for representation purposes. Copyright with SWIFT

SWIFT is a messaging system. Yes, it is like email for banks. Only banks around the world can send and receive messages between themselves in this messaging system. And it has to be about a financial transaction. Which means they cannot exchange cute cat videos or talk about weather. Banks generally use SWIFT for asking for payment, instructing one another to make a payment, send each other confirmations of treasury or trade transactions they did amongst each other. Each message is an instruction or an important FYI that results in a financial action on the other side.

So why the big fuss if it is like an email system between banks. Open your email inbox now, yes now! See for yourself the loads of messages sitting in your inbox, junk box and spam box. Deep inside you will also see a mail from a Nigerian Prince wanting your help (payment request) to send you loads of money (Payment instruction). Smartly you ignored the message which could have otherwise costed you money and acidity.

To avoid the pesky Prince and other fraudsters, SWIFT has an elaborate system of authenticating senders and receivers of messages, which ensures that all message senders are authenticated (the banking version of a Twitter blue tick). Many of them have an added layer of identification between themselves through bilateral (key exchange) mechanisms. As a result, if a bank receives a SWIFT message, it is authentic, received from who they claim themselves to be and the message is ‘actionable’ . There are additional acccount mechanisms, but for the purposes of our understanding, suffice to say, it is a very authentic messaging system that keeps ALL SPAM out.

Reliable & Secure: “I haven’t received the email yet”. Some of us have used this excuse or know someone who has. Such excuses don’t work with SWIFT. In its 47 years of existence, SWIFT (claims that it) hasn’t lost a single message out of the billions that were exchanged in its platform. So secure is the platform that if a bank says they sent, the recipient bank would have received it.

Not only has SWIFT not lost a single message, but the platform is so secure that no one else was able to hack or gain access to messages that were not meant for them. Yes I hear that you have heard about hacks (Bangladesh central bank etc.) but these were login credentials abused instead of the SWIFT platform yielding to hackers. Again, not a single hack in almost half a century!

Some feat!

Automation: These days we live in an API driven world where our email talks to our bank, one application talks to another etc. But SWIFT has implemented automation (which it calls ‘Straight Through Processing’) for the last 20+ years. To facilitate this, SWIFT has standards and rules on how messages are to be structured, how each field needs to be filled for each business case and so forth. So, a huge portion of the millions of messages exchanged everyday have not seen human hands at all. They all have been generated by, handed off to, received by, read and acted upon automatically , by the myriad software applications in a bank [Core banking applications, Payment (product) Processors, Payment hubs, message queues and other technical jargons your friendly neighbourhood tech guy might help elaborate].

What is the big deal you may ask, RPA is a thing and a pilot too puts his plane on autopilot. Just like how the autopilot reduces human errors and saves lives, automation in SWIFT message processing reduces errors (financial — yeah your money), speeds up transactions (in most cases less than a day but not more than two) and thereby reduces cost for you as a customer of a bank.

Standard, widely used. We know countries can’t agree on political systems, can’t agree on borders between them and proudly agree to disagree on several areas. But if there has to be a stellar example of worldwide agreement on something that has held for a long time, it is the standards published by SWIFT. So in a sense, it is truly one of the very few things the world agrees on — before expelling some specified banks due to politics that is.

There is much much more to SWIFT than this article, but for someone who wants to understand what the big fuss is about, I believe this is a good starting point. Let me know your thoughts.

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Oct

2022

Animal camouflage in our minds?

Take a look at the below pic and try to spot the brilliantly camouflaged snake amidst the crevices of a tree bark.

Pic source: buff.ly/3TLo0H2 shared through the twitter handle @Rainmaker1973.

Recently my friend shared the below Facebook link with me (Original video by BBC One).The video is exceptional. Nature is so beautiful and works in mysterious ways.

Link is here.

Just in case the video is inaccessible, you can search the internet for videos on BBC, Science, Ptarmigan Camouflage.

Whenever I marvel at the brilliance of nature and the camouflage abilities, a series of thoughts nag me and make me curious on what exactly is happening.

Issue no 1: Camouflage is needed by the prey (in this case the ptarmigan) to protect itself against its set of predators. Example – hawks, snakes, humans, foxes etc. Each prey has multiple predators. And each of these predators have different types of (dominant) sensory organs. For ex: Hawk can see in ultraviolet spectrum, humans can see in “visible” spectrum and snakes can see in infrared. In which of these spectrums will the camouflage be? Because as long as the ptarmigan blends in with the rocks, we humans can’t find it but the hawk can find it easily because the ultraviolet signature of the ptarmigan and rocks are different. A snake on the other hand, because it sees in infrared, can literally “see” the “warm body” of the ptarmigan against the cold rocks. Coming to the fox, even a blind fox can smell the ptarmigan from a distance or even find it using its (not so) special sense called magneto-reception. Even as “we humans” marvel at (or are blinded by) the camouflage, the ptarmigan is “visible” to its other predators.

So against which predator is the ptarmigan deploying this camouflage? Is it able to choose? Now this brings us to the second issue.

Issue no 2: Assuming it is against “a particular” predator, is the ptarmigan able to choose to deploy its camouflage selectively? Does it have the ability to change its body chemistry or physics (that property that allows it to change its colour)? Just like it blends in with its environment of the same colour, can it also blend in in ultra violet? change its body temperature to give a diff infrared signature? Change its smell? Its magnetic properties? Does it have these capabilities?

For that, the ptarmigan needs to have the ability to “KNOW” how other organisms perceive it (How would it know how a hawk or a human or a snake or a fox perceives it)?

In case it is able to do it, it is wonder of wonders! Because, would we humans know how a dog senses us? We may have a reasonable understanding of the mechanism it uses to sense us (ability of smell) but how exactly does it perceive us (good or bad odour, smelling like what?)? Without knowing it how can we determine what camouflage (perfume) to wear so that we blend in? (scientists call this qualia – how one uniquely perceives / experiences something). We humans know it based on the learning we have had. How would a ptarmigan know?

So my (unvalidated) thoughts run like this.

Thought no 1: The ptarmigan is NOT doing anything active. In its feathers there is a property which gives it some “permanent” feature – colour, smell, etc etc. And some flexible feature which “adapts” involuntarily(from ptarmigans point of view) to its surroundings. So when we “see” it, depending on how much of light falls on it, gets reflected those parts and reaches us, we see it in different colours. Because the feature (pigment etc) itself adapts to the surroundings, irrespective of the observer (humans, foxes etc), the colour of the ptarmigan is the same in that context.

Thought no 2. If you recall my session on how our brain perceives the world around us, we learnt that what we see has nothing to do with the ptarmigan but what our MIND actively constructs. We saw this in numerous examples of how the two shades of grey were the same, but with differences in angle and the context it is present in, we perceive those colours differently!

We also saw an example where the same dress appeared black & blue to one set of people and gold & white to another set of people. So this makes me think that, the camouflage is in OUR EYES (more accurately MINDS) and the ptarmigan is blissfully unaware of how others see it. There may not be any active agency from the ptarmigan at all in accomplishing this.

We will continue to marvel at nature – as though something extraordinary is being done by the ptarmigan – but it might be the handiwork of the tricks played by our mind after all.

I am not concluding anything but seeking answers if any of you know what exactly is at play here. Leave your thoughts in the coments section.

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Oct

2022

Welcome to the Global Financial System and Geo-politics

To listen to an audio version of this article, please use the play button above.

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This blog is an attempt to explain the world of international finance from a bird’s eye view. While it was written with a layperson audience in mind, some of my friends in this field who have read these posts, found the posts to be useful to understand the fundamentals. So if you are new to the world of international finance or are familiar with it at some level, you will still find these articles helpful to some degree.

If you are an expert and want to offer some suggestions or contribute subject matter, you are welcome and your contributions will be cherished!

A good way to understand the world of international finance is to take a scenario & see how things work. For this purpose, we will take the restrictions put on Russia by the west subsequent to its “special military operations” in Ukraine that started in Feb 2022. Remember, we aren’t taking any sides, but are using the situation to understand the world.

Some articles of this blog are standalone and can be read independently. However, if you are someone who would like to follow a structure, then you will find reading in the following order helpful.

As a first step, we need to become familiar with “what is money”. Yes we all use it, save it and grow it, but do we know what exactly it is? Read it up in Money money, who art thou?

Have you wondered how international trade works? And why most transactions in the world are performed in USD.Find out the answers in

Trade across borders — and how choosing the right currency matters

and in

Trust, Trade & Transact

The world of International finance works on a distributed giant machine composed of banks. Read more on how they play a role in facilitating trade across borders in Gods of Trust!

and how international payments get paid in Show Me My Money!

Or how the tools of international finance play a big role in Geo-Politics in The Kill Switch.

The thing with adaptive systems is -they adapt. If one of the players don’t play nice and makes a move that hurts others, everyone takes notice. A famous saying in geo-politics is, “capability is more dangerous than intent“. This is to say, when a player accumulates an advantage, whether the intent was good or malicious doesn’t matter. Because intentions can change at a moment’s notice but a capability may takes years to build. So if a country has a finger on the kill switch, some others will work on building another capability and a few others will try to make the kill switch useless. This is a relentless game. The next series of posts will look at the challengers to the current mechanism of international finance. How some are red herrings, some are just minor inconveniences and some, turn out to be more serious. In the first of the articles in this series, we see how some of the challengers have challenges.

A new kid is on the block, a money kid! It looks like its parents, but is more sophisticated. It is a simple, yet a powerful new form of money. And it seems to be blooming across the world. Yes we are talking about CBDC. What is it you ask? Find out in CBDC- A new form of money.

In, the shifting gears of cross border payments with CBDC, you will read about why several countries are implementing CBDCs and the different collaborative initiatives between countries in the world in this area.

We look at one of the most promising collaboration projects that is set to revolutionise payments in Let’s talk mBridge. Read how it reduces risk, cost & transfer time for all parties – countries in general, corporates that do business internationally and common people like us.

Supplementary articles:

These are “explainers” on some key concepts that assist the understanding of the main theme will also appear in this blogpost. They can be read anytime or as a supplement to the main ones.

Like the one on the SWIFT network at the below link.

A swift introduction to SWIFT

Happy reading. Do let me know of your thoughts.

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