Online Trade Finance – Future Prospects

Monitoring and collection of receivables, has been a challenge for exporters, for a long time.
The launch of electronic trade finance services in recent years, could make lot of paperwork
disappear, particularly in the context of increasing Global Trade.

The problem is about getting paid on time. Some governments insist on a complex trade finance
procedure involving several documents, multiplying the risk of error. With documents like bills of
lading, certificates of origin, quality and quantity certificates, affidavits, bills of exchange etc., it
could be very difficult to keep track of all the delays in getting different documents accepted and
approved to send to the banks, to get the money on exports.

Several companies, who were operating on an open-account basis with foreign buyers, are now
considering internally automating the trade document flow. But such companies may not have in-
house expertise in the electronic document exchange process. Alternatives in the form of
outsourcing the entire process to banks or other financial services providers are now available.
Companies have been turning to providers of electronic trade finance services for help managing
the often difficult and time-consuming documentary and accounts-receivable processes inherent in
international trade.

Major Global Banks (like JPMorgan Chase and ABN AMRO) have been offering such electronic
trade finance services. They have made all the tracking of documents electronic, and run the entire
process through a Web portal. Exporters using these services can get paid on time, advantaging the
float on the cash. They can also track the document approval and payment process online. The
range of services on offer include electronic letters of credit (L/Cs), electronic invoices and
purchase orders, electronic bills of lading and certificates of origin, which come

For example, JP Morgan Chase boasts an end-to-end solution integrating all the trade documents on
either an L/C or open-account basis, and has a number of global customers for it, including BASF
Corp. Other banks also provide electronic services. For instance, Bank of America offers electronic
management of purchase orders, while Wells Fargo has a product that converts foreign and
domestic accounts receivable into cash.

But these financial institutions are not the only service providers in the market. Bolero.net, formed
in 1998 by a consortium of global banks and logistics providers, offers secure electronic
transmission of documents along the entire trade chain, from front-end order processing to back-
end trade document exchange. Others include L/Cconnect, which enables electronic sourcing of
export and standby L/Cs from banks. TradeCard is another firm which helps in tracking the
complex negotiations involved in global commerce, linking companies to banks, inspection agents,
and cargo insurers.

Incomplete solutions
The sudden emergence of all these new electronic platforms is confusing for treasury and logistics
units used to centuries-old systems of trade. But the value proposition proffered greater visibility
into the entire order-to-payment process, on-time payment, and improved cash management is an
offset. However, these offerings have not yet reached their maturation, and are at a very early stage
of development. Currently, many trading partners, foreign banks, and governments are either ill-
equipped to join an Internet-fuelled trade finance system or not very enthusiastic about the idea.
International trade involves many different players and is a complicated, paper-intensive process
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presenting special problems for both credit and settlement. If all the players are not on one of these
platforms, then the rationale to use it dilutes. Also, the various service offerings have not yet
coalesced in any meaningful fashion. Consequently, there has not been much buy-in. Treasurers
understand the existing processes so well that they are less than eager to scrap them, despite the
cost savings and other benefits presented.

A midsize company trading with one or two foreign companies may not need the services of an
electronic trade finance outsourcing provider, given the likelihood of good relations with these
partners and years of working out the payment kinks. And while companies with substantial import
or export relations may derive significant benefits via an electronic approach to trade finance, the
complexity of doing business with numerous third parties creates obstacles.

Even with related parties like subsidiaries, there are several issues to address: Logistics challenges,
different payment options, liquidity issues, compliance concerns, multiple banking relationships,
integration of treasury workstations, working-capital issues, risk-management challenges, and so
on. It is therefore not surprising that many large corporations continue to operate with suboptimal
receivable systems.

The perfect situation is an international electronic trade system with uniform standards governing
technology and document exchange, feeding directly into corporate treasury and enterprise resource
planning (ERP) systems. Such a model seems quite some time away.

Electronic L/Cs
Some of the large companies are already availing themselves of the current crop of offerings. For
example, Siemens Capital Corp., the in-house bank for technology-equipment provider Siemens's
29 North American operating companies, uses JP Morgan Chase's electronic global trade package
to initiate secure and encrypted electronic L/Cs covering the services and products it sells. We have
a password-protected link from Chase on the Web. On it they can input the amount of the L/C
request, the expiration date for the contract, and the operating company requesting it. They can then
have it reviewed electronically by our attorneys and Chase's attorneys and approved using
electronic signatures.

Previously, completing all these tasks meant following a lengthy paper trail. An application from
Chase had to be typed up in a Word document, printed, signed by two officers of the company here,
and then faxed back and forth. There were multiple iterations of this depending on the language,
how specific the text needed to be, and human errors, which consumed time. The new system
reduces the time it takes for the L/C (paid by the operating company to cover payment default) to
reach customers, which is money in their hands. In the old days, it took a week on average to clear;
now it takes between 24 and 48 hours. The operating company essentially gets the float for an extra
three or four days.

The system gives greater visibility into the invoicing and internal-debiting process. Users can go
online and see a list of L/Cs by operating company, grouped by type of L/C and dollar amount. By
slicing and dicing, customers can ascertain their contingent liabilities, targeting an operating
company that may be exceeding its credit limit. The elimination of faxing and mailing, added to the
enhanced cash management arid payment of receivables, can give huge potential savings.

Some companies are accessing JPMorgan Chase's Trade Information Exchange to be advised on
their foreign L/Cs. Chase receives the L/C opened by a foreign bank, authenticates the details, and
then transfers the information to a secure Web site that the clients can access. The clients get a
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record of all L/Cs received, which are also authenticated by Chase, and thus there are no delays in
document transfers.

In another instance, roughly half of the oil & gas major, Chevron Texaco's London trading
counterparties are run through the exchange. With the remainder, treasury continues to rely on
traditional payment methods, viz. a telex from the bank opening the L/C, and then mail or a fax
from the advising bank for authentication, all of which create cost and delay factors.

While electronic L/Cs have been around for at least the past decade, front-end electronic invoices
and purchase orders are relative newcomers to the scene. For example, ABN AMRO's electronic
trade application helps to create electronic purchase orders, invoices, shipping notifications, and
packing lists, which are routed to overseas suppliers, to trigger payment. Companies issue a
purchase order and the system does all the formalities needed to make sure it complies with
regulations, handling the other documents required under the trading agreement. All the pieces
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required for the transaction to occur are brought together in the ABN AMRO system, which
matches all the entries. Any exceptions are kicked out in an E-mail to the associates responsible for
that part of the process. The last step in the process - sending a payment request to the bank to pay
the supplier is done using PeopleSoft.

Credit Suisse First Boston is another bank that provides online services help customers to save time
and perform their banking transactions wherever they are. In Trade Finance, it offers Processing of
letters of credit, documentary collections and guarantees online. It also allows customers dedicated
links, to enter payments offline and subsequently transfer them online. It also offers Foreign
Exchange Trading facility to its corporate customers – they can do Foreign exchange transactions
(spot, forward and swap) in major currency pairs directly via the internet

Future for Online Trade Finance

Hard savings in terms of ROI are expected to be significant, in using electronic trade finance
facilities, considering the flow of working capital and increase in efficiencies in cross-border trade
activities. While there are sporadic cases of companies using the solutions, electronic trade finance
solutions are still tactical. Critical mass may not develop until the disparate platforms link up with
each other, and then have the whole thing feed into the corporate treasury platform and the ERP
system worldwide. Broad, integrated electronic trade finance is dependent on the varied
participants in the global supply chain signing on to an ecumenical system for all. It is hard for
banks to try and make two or three participants in the chain happy. Setting up arrangements with
basically everyone involved in world trade seems to be some time away, as things stand today.

Aparna Bellur
Pramod Mantravadi