Trust, and a new take on traditional trade from Acerium looking at escrow trade finance

Technology Update | 6 July 2016

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A new entrant to the trade finance space is using a well-known financial tool to deliver a fundamentally different type of transaction. Oliver O’Connell looks at how Acerium is disrupting the market with escrow trade finance.

From taxis and hotels, to bookselling and cable TV, industries around the world have had to adapt due to increased competition from market disruptors. Trade finance is ripe for disruption given the long decline of its traditional instrument, the letter of credit (LC).

The basis of all trade is relationships and trust. The seller trusts that they will get paid and the buyer trusts that they will receive their goods. Fulfilling these obligations builds a relationship. While the LC provides a traditionally solid legal backing to a trade transaction, it is also a slow, unwieldy, expensive instrument, and additional fees frequently crop up for amendments, with no cap to these extra charges.

Familiar with the inefficiencies of the LC, the founders of Acerium were quick to realise that increased connectivity, the democratisation of financial services away from banks, and a desire for faster transaction times, together presented an opening for them to disrupt the massive traditional trade finance market.

Sean Hecker, managing partner at Acerium (pictured), recalls: “We had started out as a trading platform linking buyers, sellers, and traders in the steel market, with a plan to grow into other non-exchange-traded commodities. While expanding the range of services for users of the site, we came to partner with a leading escrow provider. They were not adequately geared towards trade at all. One very telling anecdote is that the way you would return items through their platform was just to ‘send them back to the shipper’ – which is completely unworkable when you're talking about a dozen shipping containers.”

Acerium began to form a new business case: “When we looked at existing providers, we found the same issues: escrow was a compelling way to open up global trade safely and simply, but nobody was using it for that purpose.”

Opening up escrow for trade

A neutral escrow account service – in which funds in a trade transaction are held in a fully-insured and licensed account and only released when the seller sends original shipping documents to an intermediary – could act as an efficient alternative to an LC. Transactions become significantly quicker and cheaper, with just one intermediary rather than multiple banks. Discrepancies are also more easily resolved with no additional fees. The solution is ideal for those transactions where speed is of the utmost importance.

Acerium launched its flagship service, SafePay, which operates under the same rules and regulations as LCs (UCP 600, ISBP 745) and, as the company is New York-based, all transactions are governed by the laws of the US financial system.

Hecker adds: “We were completely bootstrapped and already profitable as a trading marketplace, but we saw an entirely different level of demand and potential for disruption on the trade finance side. I think it took us less than a week to settle on the pivot, and we haven't looked back since.”

In just six months since launch, SafePay has seen signficant growth in transaction volume, and the average deal size leapt from US$10,000 up to the high hundreds of thousands of dollars.

Acerium’s clients are equally enthusiastic.

iBuild is a US-based supplier of finished goods to large construction projects, with a unique business model for the wholesale building supplies industry. Explaining how they have used SafePay, Gary Tongate, vice president, explains: “Our orders tend to be large, high six and seven figures, and must be paid in advance.  Clients are understandably reluctant to write checks of that magnitude to a new, and unknown company. Acerium provides a high level of comfort and safety to the client through its third party escrow service.

“Our clients are secure in the knowledge that no funds are disbursed until iBuild has performed.  That security extends to iBuild in that we are sure of receiving timely payment from the client.”

He enthuses: “We expect nearly all of our business will be using Acerium. Next year we expect to see sales in the US$5m to US$10m range.”

Onboarding a new platform or process can be an anxious time for any business. Tongate recalls: “We had concerns that the escrow process might be a difficult and complex addition for our clients.  However, Sean and his team worked diligently with our vendors and customers to explain the process[…] always kept us informed, and worked through any questions quickly and thoroughly so everyone had a high degree of comfort.”

SafePay, says Acerium,  brings security to transactions where counterparts may not be familiar with each other. iBuild’s clients have remarked that Acerium offers them security sometimes lacking when importing products - in this case, from China. Others are impressed at by the feeling of safety in dealing with new international suppliers with whom they have no previous relationship.

Tongate concludes: “I would not hesitate to recommend Acerium to anyone needing escrow services and associated instruments.  We have found Sean and his colleagues to be knowledgeable, efficient, flexible and willing to go the extra mile to ensure a successful process.”

Oliver O'Connell is a freelance financial journalist and the former editor of Euromoney's Trade Finance Magazine

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