Amidst the snowstorm of new solutions offering internet-based electronic alternatives to documentary credits, it would be easy to miss the entrance of a player that has the pedigree, resources and capabilities to make a difference to the arcane world of trade finance. State Street Corporation's i2eXSM secure, global electronic platform for trade management could however make a significant impact on the industry.

Best known as a technologically savvy global provider of institutional investment services, State Street has "been providing trade finance for 200 years" reminds the Boston-based bank's senior vice president, Sandy Andrews. Significantly, the i2eXSM platform and associated products are on offer, not just to end-user traders, but also to other financial institutions.

Global trade alliances

In October, two Australian banks announced global trade alliances with State Street. Under these agreements, Suncorp Metway and Bank of Western Australia (BankWest) will be able to offer their customers access to i2eXSM as well as a comprehensive range of State Street-s trade banking products.

State Street-s general manager for global trade banking business in Australia, Greg Mann, says providing electronic platforms to other institutions is what differentiates the bank from other providers of new technology-based trade banking services for the Australian market.

"State Street's commitment to supporting the customer needs of other financial institutions is unique," says Mann who maintains that services on offer to third parties "complement their existing services" and "do not compete with those services."

Suncorp Metway already offers its customers State Street's services that are available from BankWest from November 2000. Other Australasian institutions are expected to enter into similar alliances with State Street before the end of the year.

Outsourcing

"Our strategy in Australia is an outsourcing one," says Andrews who explains "because we are not direct competitors [with Australian trade finance providers], therefore we are well positioned to work with banks who use our global networks." More alliances with Australasian partners are expected this year. "We will also be extending our outsourcing offering to banks located in the US and Europe," he adds.

The i2eX system provides a full array of electronic import/export trade products including a state-of-the-art open account trade management system, as well as documentary credit processing, document preparation outsourcing, and global information reporting.

"We're not going for the one-off transaction," says Andrews who explains that the first core product delivered through i2eX - Open Account TraderSM - is aimed at "larger purchasers who tend to have deep relationships with suppliers...and larger accounts." This means State Street's offering is not in direct competition with online trading solutions that claim to provide secure trading mechanisms for buyers and sellers not known to each other.

L/C documentation can be about 90 per cent discrepant

Open Account TraderSM features several functions previously only found in so-called secure methods of payment such as letters of credit (L/Cs). But in terms of payment guarantees, the system promises more protection than conventional instruments.

Andrews claims L/C documentation can be "about 90 per cent discrepant, therefore there is no protection ... so the payment guarantee issue is somewhat illusory with L/Cs. We commit to purchase the export receivable, therefore we provide the exporter with non-recourse finance, which appears off-balance sheet. " This quot;eliminates the need to issue letters of credit and eliminates the need to obtain credit,quot; he adds.

As well as opening new channels for providing vendors and buyers with pre- and post-export financing, State Street maintains the data management dimensions of the platform are of paramount importance. Lines of immediate communication between the parties to a transaction are opened up so, for example, importers gain immediate access to shipping and bank documents and accept transactions online.

Efficiencies and cost savings

Cost savings are claimed to include the elimination of L/C opening and payment commissions and the costs of maintaining a specialised staff to deal with documentary credits. Because documents are available on the web, paper can be eliminated. This, it is said, leads to reduced courier fees, lower filing and storage costs.

Open Account TraderSM also serves as a central database for reporting and interface to other systems and aims to improve the speed and accuracy of transaction processing, and reduce the costs of traditional trade payment methods.

Efficiencies are gained from instantaneous access to documents that can be shared simultaneously by multiple parties. Moreover, digital documents reduce costs by eliminating keying errors and the need to re-key data.

New Balance Athletic Shoe, Inc, a manufacturer and distributor of athletic footwear and apparel that worked with State Street to develop the system says it has made a dramatic difference to its trade payments management processes.

"The old world of letters of credit has disappeared," says the Boston-based sportswear firm's vice president and group controller, Alan Rosen who reckons the platform also "reduces our use of credit, as well as our transaction costs, while providing competitive transaction financing to our vendors".

Target groups

The public internet has proved sufficiently secure for State Street's customers so far. Andrews does not however rule out integrating the bank's system with the Bolero platform. "We do see that Bolero, with its secure network and its rulebook could play a role. We're very open, we could use Bolero -its built, like our system on XML but it's a solution for a problem we haven't come across yet," he says. State Street is focusing on merchandise traded between trusted partners rather than on large commodity trades.

"We'll work with anybody," says Andrews. "With customers direct [such as New Balance in the US] or we'll stand in the background with banks who become natural parties to our global trade banking network."

A bridge

State Street aims to "move large importers off letters of credit" and according to Andrews, "banks have resigned themselves that large corporate L/C business is going away anyway." He does however "believe that the middle market company L/C business will remain vibrant for some time and that we wish to serve this part of the trade market through providing traditional documentary credit services to regional and emerging national banks that service the middle market company market segment."

Progress towards a paperless trade finance environment will be "an evolution not a revolution," says Andrews who reckons that in markets such as Sri Lanka and Bangladesh for example, "banks can be the bridge that work with exporters on a paper basis and convert that paper to a digital format for use by importers. There will be paper for quite a time to go," he concludes.

UCP 500 restrictions

Variations on Open Account Trader, including a virtual L/C, are being considered but according to Andrews, development is "bound up in UCP500 ... this makes it difficult because the UCP assumes paper-based transactions". He calls for a "complete rewrite" to accommodate changes that could happen in the electronic trading environment. "Advising and negotiating banks could disappear" he suggests, "but this is difficult unless UCP allows it." In that regard, the ICC is already working on an electronic supplement to UCP, the so-called eUCP, a first draft of which will be discussed at the ICC Banking Commission meeting in Istanbul, Turkey on 21-22 November.

The views in this article represent those of the author and not necessarily those of ICC or the other partners in DC-PRO.