Corporate TreasuryFinancial Supply ChainBank RelationshipsTrade Finance on the Internet

Trade Finance on the Internet

The facility for customers to carry out their trade finance activities with their banks dates back to the early 1990s, when banks started to introduce systems for their corporate clients, either vendor systems or in-house systems. These systems were installed at the customer sites. Some of them were DOS-based, and the more advanced ones were Windows-based. These systems provided customers with basic functionality, mostly the ability to initiate and amend import letters of credit (L/C), with minimal feedback from the bank.

At the bank site, there was generally very little integration with the bank’s back office trade finance systems. Most banks that offered customer trade finance services simply printed the application and re-keyed the data into their back office system, with minimal feedback to the customer in the form of some basic reports. These systems could almost be regarded as glorified fax services.

Customer Demand for Services

Towards the end of the 1990s the situation changed with the widespread take-up of the Internet as a recognized delivery channel in the banking community. Although trade finance was usually the last banking service to be considered, due to its complexity, many forward-looking banks did invest in upgrading their services to provide full trade finance on the Internet, and these banks have tended to reap the rewards of being the first in their respective markets to offer such innovative services.

In addition to the pure technical and cost-saving advantages to be gained by deploying trade services over the web, corporate customers started to become much more sophisticated and demanding in the services they required. No longer was the import L/C the only instrument to be considered. Customers wanted to be able to carry out the full range of their trade finance activity with the bank. In addition to the import L/C, customers wanted to be able to issue guarantees, standby L/Cs and shipping guarantees over the web. They wanted to be able to create their export collections over the web and send the documents directly to the collecting bank with a cover letter in the name of their own bank (i.e. the remitting bank). In many cases they wanted to be able to initiate payments over the web (although many banks still separate the remittance function from the trade finance area). They also wanted to be able to provide finance requests to their banks, both under the transactions and in a stand-alone mode.

On the incoming side, the customers wanted to be able to receive into the system all those transactions which originated at the bank, such as export L/Cs, import collections, advised guarantees and incoming remittances. Furthermore, they wanted to be able to process these transactions where a response was required from their side, such as providing transfer instructions for transferable export L/Cs, payment and settlement or rejection instructions for import collections and discrepant L/C documents.

Banks Have Also Changed

From the banks’ side, expectations have also changed. While a small minority of banks still print and re-key customer instructions, most banks now expect full STP of customer transactions so that back office processing is reduced to a review and approval process, with possible minor data completion for inter-bank instructions.

Over the last three to four years, customer expectations have expanded even further than a system that encompasses all their trade finance activities. Sophisticated corporates are now looking for value-added services such as:

  • Document preparation modules, which will allow them to produce their in-house export documentation, utilizing data from the export L/C, and present it to the bank together with external documents for discrepancy checking prior to physical document presentation.
  • Purchase order upload facilities from the customer’s ERP systems with the ability to automatically create L/C applications from one or more POs and PO tracking facilities once the documents have been presented.
  • Image interchange with the bank’s back office trade finance system, enabling the customer to upload images at any stage (e.g. as supporting evidence for an L/C application or a remittance request) and allowing the bank to download images (e.g. copies of invoices or bills of lading received for collection).
  • Notification of new transactions received in the system via external channels such as e-mail.
  • Much wider reporting facilities including customer-defined and ready-to-use reports with standard spreadsheet interfaces.

Multi-banking

One key issue that is still causing a problem for banks is the demand from larger corporates for a multi-bank trade finance solution. Larger corporates who may deal with 20 or more banks claim, with some justification, that it is impossible for them to use 20 or more different systems offered by each banking partner. Multi-banking has been available in the banking world for some time. However, it is usually limited to closed groups. One well-known example is the MultiCash solution, which originated in Germany but is now available internationally as well. However, this is not a true Internet solution, and even the latest version, [email protected], is an Intranet solution that still requires the system to be installed at the corporate. This system is also mainly designed for international and domestic payments, although it does include some trade finance functionality.

The problem for banks, which has not yet been solved, is that with a true Internet solution, no application resides with the customer. The entire application resides on the bank’s web server.

One attempt to overcome this problem has been made by Bolero with their BoleroAdvise and BoleroApply applications. Bolero Advise was first introduced to the market in 2002 and was aimed at providing L/C (and more recently guarantee) advices and amendment advices to beneficiaries in a unified format, irrespective of the identity of the issuing bank. One of the main drawbacks, which will probably limit this solution in the future, is that ‘the activity supported by BoleroAdvise is limited to one-way communication from the advising bank to the beneficiary’ (quoted from the Bolero website). As stated above, corporates want to be able to conduct the entire life cycle of the transaction with their bank, including all the day-to-day interaction which happens in real life. BoleroAdvise was launched more recently, and is aimed at supporting the issuance and amendment of L/Cs in a multi-bank environment.

The Future for Trade Finance on the Internet

The economic justification of a bank investing in its Internet trade finance services only to have a corporate use those services to transfer applications to other banks is one that banks have not yet come to terms with. The power of the larger corporates might change this in the future.

The latest initiatives are centered on the issue of closing the gap between the physical and financial supply chains. One of the main ones is the new Trade Services Utility (TSU) from SWIFT. Time will tell if this initiative fares better than several previous ones, although the initial reaction from the banking community looks promising.

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