Electronic Trading for Treasurers Gains Momentum
Trade drives the world’s economy. In recent decades, trade has grown exponentially as globalisation has become the principal force of our time. However, despite the ever-increasing complexity of trade routes and supply chains, much of the documentation associated with global trade, such as letters of credit (LCs) and bills of lading, remain paper-based. Trade-related processes have not undergone drastic changes for decades, if not centuries.
For corporate treasurers, the reliance on paper-based documentation and manual processes in trade is costly and time-consuming. Corporates have switched complex processes and flows associated with cash and liquidity management from paper to electronic methods over the past decade and have even developed innovative supply chain finance solutions that are entirely electronic. The inability to achieve something similar in trade is frustrating for treasurers.
There are straightforward reasons why electronic trade (e-trade) has not achieved the desired momentum. One is that, in contrast to cash management for example, trade involves multiple parties, including shipping firms, customs authorities and multiple banks. Another explanation is that, while paper-based trade and trade finance may be cumbersome, it does what is required: it facilitates trade in a way that is commonly accepted worldwide. These challenges to e-trade remain important. However, change is underway.
Benefits Come to the Fore
After years of false starts, uptake of e-trading is finally increasing. One crucial driver is a change in view among corporate treasurers. The imperative in the post-financial crisis era is for companies to find ways to continually improve working capital, enhance efficiency and lower costs. This goal is reinforced by the uncertain economic environment in many parts of the world. Consequently, treasurers are now prepared to consider new ways of managing trade.
E-trade neatly fits with many of treasurers’ objectives in the current environment. These include a focus on risk management and especially counterparty risk in trade transactions. Electronic delivery channels help to mitigate risks by providing greater visibility of positions. E-trade also enables working capital to be optimised, by improving days sales outstanding (DSO). Moreover, e-trade has the flexibility to adapt to changing global trade flows. It also facilitates the continuing preference of many corporates for LCs as a risk mitigation instrument.
At the same time, the technology associated with e-trade has improved. Moreover, bank agnostic models – such as trade solution platform Bolero and electronic shipping and trade documents solution provider Electronic Shipping Solutions (ESS) – have emerged. Given that trade transactions often involve multiple parties and banks, the advent of credible independent models has been important in helping to build support.
Interest and understanding of the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) has increased significantly in recent years, helping to pave the way for e-trading. The eUCP is a set of rules regarding the electronic issuance and use of LCs devised by the International Chamber of Commerce. Although the rules were issued in 2002, the first presentation of documents required under a LC issued subject to eUCP only occurred in November 2010, when Korean Exchange Bank issued a LC for buyer TaeKyung Industrial Company’s order from BHP Billiton, which was advised by RBS.
Building a Track Record
A series of recent successful transactions have highlighted how switching to e-trading can simplify trade processes and deliver real benefits to corporates. In August 2013, the Chinese trade finance industry achieved a milestone when Bank of China and RBS successfully completed the first electronic presentation of documents via the Bolero platform. Bank of China was the first of the ‘big four’ Chinese banks to carry out a fully electronic presentation of documents.
Bolero facilities electronic presentation of documents issued under a documentary credit and electronic bills of lading. By using straight-through processing (STP), solutions such as this can enable corporates to streamline their trade finance processes and reduce paperwork. As a result, it speeds up transaction turnaround time for all parties, shortens DSOs and maximises overall working capital. By enabling straight-through document presentation, it offers a way to reduce bottlenecks, enhance security, increase payment certainty and reduce the time to payment.
In October 2013, BHP Billiton, RBS, Westpac, Cargill and Minerva Marine completed the first iron ore trade using ESS’s CargoDocs electronic bill of lading and eUCP presentation solutions. CargoDocs, which enables users to replace paper documentation such as bills of lading with electronic documents for e-presentation to their banks, was used on a shipment from Australia to China.
The use of electronic documents (eDocs) results in faster, safer STP of data. It reduces the probability of error through manual intervention because it minimises (or eliminates) manual processing. Furthermore, eDocs deliver greater transparency and a clear audit trail.
In the BHP Billiton/Cargill trade, the electronic bill of lading was drafted by BHP Billiton in Shanghai (eliminating the need for separate document instructions). It was then approved, signed and issued on behalf of Minerva Marine by Wilhelmsen Ships Services in Port Hedland, Australia. BHP Billiton created original electronic peripheral documents within CargoDocs and the whole set of documents was presented electronically to RBS under an LC subject to eUCP600. Once accepted, the eDocs were transferred to Westpac electronically, before being forwarded to the buyer, Cargill.
The use of eDocs resulted in short processing times in the BHP Billiton/Cargill trade. The electronic bill of lading was drafted, approved, signed and issued, and the full eDocs set was presented to RBS, the confirming bank, within one hour. RBS presented the eDocs to Westpac in Singapore, the issuing bank, the next working day. Westpac passed eDocs to the buyer Cargill, completing the four corner presentation within four days: all of documents required under the LC were presented as original electronic documents.
Uptake of e-trade is expected to increase rapidly in the coming years. The entry of China into the e-trade world – and its enthusiasm to explore the use of electronic trade documents – could be a crucial catalyst in helping e-trading to achieve sufficient momentum to encourage widespread global adoption. While China’s economy has slowed slightly, the country remains at the heart of global trade. It is expected to form 15 out of the top 20 trade partnerships internationally by 2030 and will have replaced the US as the world’s biggest trading partner by the same date.
The successful completion of the first electronic presentation of documents by Bank of China could prompt China’s other big four banks – Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China – to accelerate their own e-trade efforts. Given the critical role of these banks in facilitating trade between China and the rest of the world, any initiative to promote e-trade by them could have a profound impact on how the global trading system operates.
Another factor that could boost e-trade is the importance of China to the commodities market. China is the largest consumer of commodities, partly as a result of its massive investment in infrastructure projects. Many companies in the commodities sector are eager to make the switch to e-trading and, combined with growing interest in China, there could be sufficient momentum for e-trading to become standard practise in the commodity business in a relatively short time.
Finally, the two factors that spurred the current wave of interest in e-trading – the need for companies to improve treasury efficiency and technological advances in bank-agnostic trade platforms – are certain to remain potent forces for increasing adoption. Corporate treasurers worldwide are committed to enhancing working capital, lowering costs, and improving visibility, control and risk management. Similarly, existing platforms and the banks that work with them will continue to innovative by creating new features, while new platform providers could also emerge, further increasing choice for corporate treasurers.