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What the Banking Industry can learn from Rail Finance

Posted on: 29 October '15
Soumya Kuber
Business Consultant, Banking & Financial Services, Mindtree Ltd.

Amidst all the talk about the fintech revolution in financial services, traditional banks are seeking ways to stay relevant. What can a bank do to improve its customer relationships? How can a bank make itself indispensable to its most important customers?

The rail finance industry has unique properties that hold interesting lessons for other banking organizations.

The transportation rail finance industry at a glance

With over 140,000 rail miles, the U.S. freight rail system moves more freight than any other freight rail system in the world. [Source: Federal Railroad Administration]

The railroads are the safest, most energy-efficient and least expensive means to move heavy freight across long distances. That‘s why producers and distributors of bulk commodities – agriculture and energy products, automobiles and components, construction materials, metals and paper – rely heavily upon freight rail.

The financial services companies that support industries using freight rail do much more than supply capital. They also provide critical information for logistics, planning and safety.

Companies in commodity-intensive industries tend to lease or finance the transportation assets they need, whether railcars or aircrafts, instead of owning vehicles outright. This allows companies to adjust their transportation capacity in response to changing levels of production or consumption. Transportation finance companies act as intermediaries between industrial companies, service shops and the OEM (Original Equipment Manufacturer) companies.

There are railcars for every conceivable purpose, and the standard types can be further customized based on industry requirements. No matter how it‘s customized, each railcar has to meet standards set by the Department of Transportation, including a growing list of safety requirements.

Starting in May 2015, the freight rail industry began a multi-year retrofit to improve the safety profile of “tank cars” that specialize in transporting liquids and gases. A series of train derailments led the Department of Transportation to phase out the legacy DOT-111 railcar design in favor of CPC-1232 or higher standards. Over the coming years, railcars transporting flammable liquids will be have to meet the higher specifications.

The retrofit puts increasing pressure on the maintenance and repair shops that service the freight railroad industry. Whenever a car goes out of service, either for scheduled maintenance, required retrofit or for repair following an accident, there‘s probably someone waiting for that car to go back into service. Yet the repair shops are organized to fix railcars, and are not necessarily equipped to provide real-time logistics data to the end users. Similarly, when end users bring railcars to repair shops on their own initiative, the freight companies that manage the railcars need to know about it.

Adding value with data-driven solutions

Mindtree has been working with a leading rail finance company to optimize workflow and to build innovative new solutions to make freight rail more efficient and predictable for its customers.

The solution includes modules to track:

  • Railcar servicing, maintenance, overhaul and repair
  • Railcar maintenance history
  • Railcar mechanical attributes
  • Railcar documentation management

The implementation will allow the rail finance company to reinforce its role as a valued intermediary. Instead of just focusing on the financial flows, the finance company will also be an intermediary with regard to data flows.

By collecting real-time data about car location, mechanical attributes and maintenance status, the finance company will be able to quickly answer questions, with near-real-time accuracy, about how long it should take to get a car back into service. That‘s critical information for commodities companies for whom delays in moving product can open them up to price swings or expensive delays elsewhere in the supply chain.

The solution uses web services, APIs and integrated workflows to connect the rail finance company with its repair shops and existing customers. Any of the connected parties can track or update the statusof a particular railcar, down to the smallest detail.

In addition, the same solution will ensure that rail industry databases contain the most accurate, up-to-date information about each individual railcar in service. This ensures that the relevant mechanical attributes are synchronized in the databases of the freight company, its customers, and industry regulators.

Lessons for the banking industry

While the specifics of rail finance may not apply to other areas in financial services, there are still a few aspects of the relationship between rail finance companies and their customers that are worth exploring.

1. Understand the benefits of what your customers buy.

It‘s a well-known truism that people buy benefits, not features. The rail finance company understood that its customers weren’t just leasing railcars meeting a certain specification. More importantly, the bulk shippers were leasing a reliable, safe means of getting its products to market. Based on that understanding of customer needs, the rail company took the initiative to invest in a real-time data solution that would assist in logistics and planning during periods of downtime. The repair shops would have had a hard time building such a solution by themselves, leaving a valuable opportunity for the rail finance company.

Similarly, retail and commercial banks can do a better job of analyzing transaction data and interviewing customers about their transactions and needs. By doing so, they can discover ways to develop data-driven services that deliver continuing value to customers.

2. Anticipate the effect of industry regulation on your customers.

A 2014 rail accident involving tank cars had immediate effects upon the companies involved beyond the clean-up costs. The damaged tank cars were taken out of service and sent for repair, which had knock-on effects across the entire supply chain.

Beyond the immediate effects, the entire legacy fleet of tank cars will have to be retrofitted to comply with new Department of Transportation regulations. This places even more importance on real-time data about railcars.

The lesson for banks: Be aware of situations where a problem facing one customer may create a situation that affects an entire industry. For example, when a single large retailer suffers a data breach, that can be a factor leading to increased regulations across all retailers. In these situations, financial services institutions are often in a strong position to support their customers through such regulatory transitions.

3. Know and apply your customers‘ data standards.

When the rail finance company built a solution to capture real-time data from repair shops, it also made sure that the same data repository could feed the databases maintained by Railinc, a data utility for the freight rail industry. This facilitated rapid and accurate compliance with industry standards, ensuring higher levels of safety and uptime.

Similarly, banks should understand the data formats and standards being used by their customers. In some cases, the right approach is to deliver an API-based solution that permits companies to embed financial processes into their enterprise resource planning (ERP) solutions. Or, such as with the rail finance example, it‘s possible for the bank itself to offer logistical support as a service.

In either case, it‘s critical for the bank to understand the data formats and standards actively being used by customers. With financial industry standards such as ISO 20022 allowing business data to be embedded into financial messages, the possibilities for corporate-to-bank integration are greater than ever.

To learn more about the example set by the rail finance industry, please read:

Soumya Kuber

Soumya is a Business Analyst with 9+ years of experience working with European and American giants in the fields of Banking & Financial services, Aerospace & Defence, Communications, Media & Entertainment verticals; with significant exposure to Business Process Management.