Simplifying Trade Finance: How Much Could Internet-based Solutions Save You?
The tools and technologies used by multinational corporates to produce, distribute and market their services are changing at breathtaking speed. To remain competitive, companies need to ensure that the most effective techniques available are being deployed throughout the organisation. If your rival is selling widgets cheaper than you, it may be because their production processes are more advanced, or their procurement costs lower, or their delivery mechanisms more efficient. For certain, the application of technology is playing a part in the competitive advantage the rival has established.
Although products, processes and technologies change, the underlying priorities of commercial organisations do not. ‘How can I grow revenues while keeping control of costs?’ has always been a critical concern. Efficient, scalable business processes are a prerequisite. Inefficiencies of any kind cost money and business, but delays in financial transactions are more damaging than most. Untold levels of working capital can be tied up and commercial opportunities frustrated. Whether importing or an exporting, all firms know that the labour- and paper-intensive nature of trade finance make it particularly prone to delay. But perhaps not for much longer.
This article looks at the opportunities for corporates to cut handling costs and improve information flows through use of Internet-based trade finance solutions. It considers the evolving priorities of MNCs and their impact on the role of bank in trade finance. It also looks at the potential benefits of conducting trade finance online and the attributes of an effective ‘etrade’ banking solution.
In common with many other areas of commerce, an emphasis on partnership is replacing traditional notions of customer-supplier roles in the trade finance environment.
Corporates that are searching for a way to improve process efficiency – and thus reduce internal costs – are finding that this is only really possible with collaboration throughout the financial supply chain. This not only changes how trading partners deal with each other; it also changes their expectations of their trade finance banks. Greasing the wheels of international trade has always been a major role of the corporate bank. In the electronic age, this means using today’s technology to create a secure and cost effective environment for the conduct of trade finance. Because of the level of documentation required, trade finance has often been subject to costly error and delay, to the point where letters of credit volumes have actually declined. But now etrade banking solutions enable firms to initiate, amend, track and settle transactions with less paper being generated. They also signal a new stage in the banks’ shift of role from credit supplier and transaction processor to partner and advisor. Banks are already facilitating process re-engineering in partnership with corporates who are looking to drive down customers’ costs across the financial supply chain. In the not-too-distant future, new products and services that manage operational risk and aggregate supply chain information more effectively will take the banks’ transformation a step further:
Of course, one should not over-generalise corporate demand. To optimise the financial supply chain, larger MNCs are looking for new operational models and to adapt processes to an enterprise-wide internal standard by a using state-of-the-art IT infrastructure. As such, banks are expected to play a key role – alongside logistic suppliers and others – in facilitating integration across the whole supply chain. Small and medium-sized enterprises (SMEs) are also looking for support from their banks within the financial supply chain. But SMEs need more product and transaction-based consultation and demand the delivery of value-added services. To provide such services in an efficient way, banks are offering more user-friendly and web-enabled front-office tools.
The letter of credit – used by the exporter to obtain a security from a foreign customer’s bank to pay a specified amount once shipment of a product has been made according to pre-agreed terms – is centuries old. The principle behind the instrument remains sound but incomplete and incorrect documentation can cause delays at any of the numerous stages in the trade process. Mistakes when filling in the application form for an L/C are one of the sources of delay, but online trade finance solutions can include plausibility checks, thus preventing L/C applications being forwarded without all the fields being filled in. An additional advantage is that previous samples of L/Cs can be stored and used as the basis for new L/C applications, or specific data fields, e.g. names of business partners of descriptions of goods, can be pre-formatted.
Further advantages of an etrade banking solution:
In addition, both importers and exporters can customise authorisation, integrate systems to upload data to their treasury applications or Enterprise Resource Planning (ERP) system, and maintain multi-level security mechanisms. Any new system, regardless of functionality, needs to be able to integrating with the existing IT environment. And a strictly controlled hierarchy of user privileges is required to prevent fraud or mis-use of systems.
The migration from paper to Internet-based platforms is an opportunity to improve, automate and simplify transaction flows across the commercial organisation. Trade finance is no exception to this rule. The most benefit can be achieved when all parts of the financial supply chain can communicate across interoperable systems. Use of online trade finance systems to integrate banks’ trade services is an important step toward this goal and one that can help firms both monitor their working capital more effectively and realise greater operating efficiencies. Moreover, given the potential for such systems to meet corporates’ changing demands, the quality of banks’ own proprietary systems will be a key differentiator for trade finance banks.
The impact of Internet-based trade finance solutions will differ from company to company depending on the quality of underlying processes, transaction volumes and the nature and diversity of trading partners. Nevertheless, if trade finance processes can be made quicker and more visible, companies’ costs can be reduced and less time spent on low value added work by staff. Export and import managers can spend more time on assessing credit risk and evaluating risk mitigation strategies for specific transactions and/or customers. Moreover, if transactions are more effectively executed, there is more scope for companies to conduct more transactions and take on more business at a manageable and foreseeable cost.