Article

by Mark Ford

Electronic trade finance is evolving, and rather than spawning electronic alternatives to L/Cs, new technologies and online environments are appearing to support documentary credits as well as a wide range of trade finance instruments and transactions.

Key themes in electronic trade finance are emerging. Some of the world's largest financial institutions are developing new solutions to support L/C transactions and providing these on a "white label" or "private label" basis to banks not having the capabilities to provide them, or that simply do not want to develop their own solutions.

Multi-bank solutions designed for larger corporates that need to deal with several banks, meanwhile, have persuaded some world-class companies to opt into electronic trade finance.

Casio's Bolero

Earlier this year, Japanese electronics giant Casio Computer Co Ltd started Japan's first L/C-based exporting electronic trade programme based on Bolero, the neutral secure platform on which trade finance can be transacted.

Initially focused on the export L/C transaction, Casio's electronic trade programme uses Bolero's title registry capability, which provides a repository and workflow for the creation and transfer of negotiable title documents. Bolero claims its title registry represents the world's only implementation of a service enabling a fully electronic negotiable bill of lading.

Casio's trade chain covers goods shipped directly from Hong Kong to Korea. Before the Bolero agreement, a non-vessel-operating common carrier (NVOCC) in Hong Kong would issue the bill of lading or airway bill by paper and send the original paper-based document to the computer giant's Tokyo headquarters. Casio would then send these documents with the other trade documents to the bank for negotiation. The length of time it took before the Korean buyer received these trade documents meant the importer would need to issue a letter of guarantee to the bank for earlier collection of the goods.

Now, with Bolero, Casio can receive the bill of lading securely and quickly over the Internet. In addition, Bank of Tokyo-Mitsubishi UFJ, as negotiation bank, and Korea Exchange Bank (KEB), as L/C issuing bank, can receive these electronic trade documents with attached digital certificate security. The new system, according to Bolero, reduces the time to collect goods by up to nine days, and the Korean importer no longer needs to issue a letter of guarantee.

Casio is apparently impressed. Logistics manager Mitsuyoshi Okamura says the company expedites L/C-based dealings "more safely and earlier" using the new system. Positive results include an "improvement of customer service and the early stage collection of accounts receivable", he adds. According to Okamura, the company is plans to expand its Bolero-based e-L/C dealings in Asia.

Corporate-centric approach

A focus on corporate customers, who routinely use several banks, seems to be driving the pace of some online L/C solutions forward. The need for multibank platforms has grown as corporates find it increasingly difficult to adapt business processes and technologies for each bank's proprietary technology.

As a result, it has become increasingly important for corporates to manage business-to-bank processes over a neutral but secure platform, which provides a single platform for both import L/Cs and export L/C advices. According to General Manager of Trade at KBC bank, Herwig Huysmans, corporate treasurers and CFOs are "increasingly driving for bank-neutral automation across a range of bank trade services", but he says that until recently it has been difficult for a bank to accommodate this need without shifting the burden to the bank to support multiple proprietary solutions.

The theory is that by automating the trade finance process to its multiple banking partners, a corporate can have the benefit of a risk mitigation instrument without the majority of costs and issues traditionally associated with L/Cs. This should allow a corporate to reduce time, cost and complexity, while providing visibility and certainty, eliminating errors and allowing it to manage working capital more effectively.

Over recent months, Standard Chartered Bank, WestLB and Bank of America have all signed Bolero agreements that will allow the bank in question to provide its customers a "multi-bank automation solution". Banks already live with the Bolero multi-bank platform include Crédit Suisse, ING Wholesale Banking, Dresdner Bank, Zürcher Kantonalbank, Bayerische HypoVereinsbank (HVB), Fortis Bank and HSH Nordbank.

Another company to embrace the multi-bank concept is Toronto-based GlobalTrade Corporation (GTC). Under its trademark @GlobalTradeTM, the company aims to serve corporates requiring multi-party information exchange and document management systems that enable visibility, improve risk control and result in cost savings. GTC also serves financial institutions requiring its solutions.

Co-operating closely with HVB - which is hosting a platform for @GlobalTradeTM - GTC describes @GlobalTrade as a multi-bank and multientity application that facilitates the uniform, real-time and secured exchange of information between all parties. As a web-based, modular interface, the company says that its solution is easily customized and that major investments or changes to the user's IT infrastructure are not required.

European aerospace and defence giant, EADS, became the first customer to mandate HVB in September 2005 to implement the @GlobalTrade Guarantee Platform in connection with its EUR 2.9 billion letter of guarantee umbrella facility, which was closed at the beginning of May 2006. HVB acts as the agent for the 36 EADS subsidiaries and as service provider for the 22 banks participating in this arrangement.

GTC now offers multi-bank L/C management systems used by large corporates like Daimler AG and EADS, the parent of Airbus Industries. Daimler Treasury and several of its factories in Europe have implemented the @GlobalTrade Export Letter of Credit System for the processing of export documentary credits.

White label developments

While the logic behind corporate-centric multi-bank systems is persuasive, there still appears to be room for what have become known as "white label" or "private label" solutions developed usually by major banks for themselves, but also made available to other financial institutions, typically smaller correspondent banks.

In September, one of the pioneers of online L/Cs launched a new secure, web-based messaging platform that it is prepared to outsource to other financial institutions. Wachovia Bank says its platform, known as TradeXchange, streamlines, automates and provides visibility to import and export trade operations across trading partners. It is designed to provide greater visibility throughout the financial supply chain from purchase order to invoice settlement.

"As one of the first banks in the world to initiate L/Cs over the Internet, we continue to focus on innovation and technology - particularly relating to the evolution of the financial supply chain," says managing director in Wachovia's Global Financial Institutions and Trade Services division, Steven Nichols.

TradeXchange is designed to be intuitive and easy to use. It aims to assist the management of pre- and postexport financing, indemnities for buyer default, purchase order delivery/ acknowledgement, document preparation, electronic document management and document compliance.

Wachovia claims TradeXchange does more than web-enable old processes; it also allows a seller's local bank to collaborate online and to provide pre- and post-export finance, while a buyer's bank can benefit by providing valueadded purchase order delivery, credit indemnities and document compliance management.

Switching to UCP 600

Electronic trading platform operators seem to have found the switch from UCP 500 to UCP 600 straightforward.

Bolero's Rule Book uses the same principle as UCP in that it is a private contract, but essentially, the two sets of rules do not overlap. While the UCP is a set of rules on the issuance and use of L/Cs, Bolero's Rule Book governs how transactions flow across its trading platform. Users do not have to use UCP, but they tend to. "For users of Bolero, there are options for other rules, but generally for L/Cs it's UCP 600," says Bolero's Client Engagement Officer, Ham Patel.

Because the UCP is a self-contained comprehensive set of rules and procedures, usually referred to "en bloc" on electronic trading platforms, switching to UCP 600 appears to centre on making reference to UCP 600 as the rules on the issuance and use of L/Cs instead of UCP 500.

The impact of UCP 600 on commercial providers of electronic trading platforms has been similar, therefore, to the impact the new rules have had on the Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) since 1 July 2007, when an updated version of the eUCP took effect on to coincide with UCP 600.

The eUCP aims to accommodate presentation of electronic records alone or in combination with paper documents and does not attempt to rewrite the rules and procedures. There are no substantive changes to the eUCP.

According to Patel, Bolero had to make some "reasonably minor changes" to the application form that its clients use to apply for L/Cs, but the company was able to "quickly get up to speed" with the new rules and procedures, essentially because it was a matter of changing wording to refer to UCP 600 instead of UCP 500.

Jacob Katsman of @Global Trade told DCInsight that GTC changed its system with the addition of a field called Applicable Rules. "Now the user can enter in the system the rules that are applied to the incoming export L/C or an outgoing import L/C," he says.

L/C alternatives

TradeCard, one of the first online trade finance providers to offer a solution to eliminate L/Cs, appears to be gaining some ground by offering an alternative to the documentary credit. The platform on which buyers, sellers and their trading partners manage transactions through a web-based platform with online financial services integrated into the workflow has recently announced several enhancements. These include freight invoice reconciliation and payment, enhanced inbound logistics tracking and improved work in progress functionality.

E-trade and L/Cs

But contrary to pundits, who some ten years ago suggested electronic trading would sound the death knell for the L/C, the documentary credit is apparently thriving, with banks in parts of Asia and the Middle East routinely reporting substantially increased volumes and values of L/C business.

Moreover, examples of the Internet providing new opportunities for L/Cs can also be found. InterNetLC.com, a US company providing documentary credit services, suggests L/Cs as an appropriate payment method for items over USD 10,000, which exceeds the routinely used PayPal settlement system's upper limit, especially if the transaction is one time only and conducted between strangers.

Clearly, the electronic age is creating both challenges and opportunities for L/C practitioners.

Mark Ford's e-mail is markford@gotadsl.co.uk