IT company viewpoint: Trade finance – a tangled web?

John Franck Product Marketing Manager Trade Finance Systems at Midas-Kapiti in the UK looks at the main electronic trade finance initiatives out there and their prospects for survival and success.

Whether as predicted global e-commerce reaches US$3.4 trillion in 2004 no one doubts that the internet is going to change fundamentally the way in which companies trade globally. Anyone can become an exporter whether by offering their goods for sale on their own website or by participating in some of the B2B marketplaces which have grown up with the internet. But as well as being a medium that offers a global marketplace the internet also has the potential to become the channel through which trade can be executed and settled offering a new style of electronic trade services.

The systems that offer these services can be split up into a number of groups:

Electronic trade management systems operating over the internet which automate the process fully and cover the full trade cycle from raising a purchase order through to payment. The best-known service in this category is TradeCard along with CCEWeb and Proponix.
Trade services infrastructure systems which do not provide a corporate user with trade services directly. What they do offer is an infrastructure on which third parties can provide services.

The third parties can be financial institutions software vendors (like MKI) hardware vendors or consortia covering all of these groups. Such systems are open in the sense that all their external interface specifications are published. The most well-known infrastructure providers are bolero.net and Identrus.

Application service providers (ASPs) who provide an application hosting service do not appear to be making any impact in the market. This is possibly because trade finance is about the whole trade process including document management so that banks are more likely to move towards outsourcing their entire operation rather than using hosting services that provide only the technology infrastructure.
Trade finance marketplaces offer a vendor neutral service that matches corporate users with banks offering trade finance services.

The hosting companies in this area include LCconnect and LTP Trade. Although the service is superficially attractive it is difficult to see how the providers can avoid the difficulties that internet marketplaces in other vertical markets have found in building a profitable business.

The first two groups are likely to have a lasting impact so I shall concentrate on these.

Electronic trade management systems

According to its website TradeCard is “a B2B e-commerce infrastructure that enables buyers and sellers to conduct and settle international trade transactions over the internet”. Using TradeCard buyers and sellers can go through all of the stages of the trade process over the internet.

Payment guarantees for TradeCard transactions are supplied by Coface – the French export credit insurer. TradeCard user members are required to sign up to the rulebook and get an @rating or electronic credit rating from Coface. There is a small membership fee – currently US$250 – which is waived if at least two trades are executed through TradeCard. Payments are made through Thomas Cook’s global payment network.

TradeCard offers three types of trade product:

For compliance-triggered payments TradeCard’s patented compliance engine automates the document checking process.

If the documents are in order the compliance engine will automatically trigger an instruction for payment to be made. If there are discrepancies TradeCard allows the buyer and seller to negotiate the discrepancies and if agreement is reached the payment guarantee is reinstated. This differs significantly to a letter of credit where the guarantee only holds if the original terms are met. In other respects this product is functionally close to a letter of credit.

With a buyer-triggered payment the compliance engine still checks the documents but the payment is only made once the buyer has certified that the documents are acceptable.
Invoice presentation is very similar to a documentary collection. The documents are presented for payment with the onus being on the buyer to pay although there are no guarantees.

TradeCard is available for transactions between the US Canada Hong Kong Korea Japan Taiwan and Singapore. The geographical spread is interesting and appears to focus predominantly on importers in North America who are buying from Asian companies in line with a clear trend in world trade.

TradeCard has a fixed fee of US$150 for settled transactions up to US$100 000. Larger transactions may be handled but at an additional cost. All transaction charges are paid by the seller.

TradeCard started life in the US by pitching itself as a competitor to banks’ own trade finance services. The strategy changed as the organisation moved out of its home base in North America and into Asia with it now trying to work in partnership with banks. The banks can act as agents for the service with TradeCard also offering links into its partner banks’ websites to provide for pre-export credit. TradeCard has signed up FleetBoston and Comerica as partners in the US together with banks in Taiwan China Hong Kong and Korea.

Standing apart

Looking at the other entrants in the field CCEWeb’s @GlobalTrade service is the system that stands out. According to its website @GlobalTrade offers “the world’s first open end-to-end internet-based electronic trade processing system”. TradeCard might argue about this but it is certainly in the initial wave of such systems.

Functionally the service that is being offered is similar to TradeCard. However the way in which the service is marketed is very different. With @GlobalTrade users apply for a letter of credit over the internet – and in the @GlobalTrade world it really is a letter of credit. The rules are based on UCP500 with extensions for electronic trade. Documents are presented to the @GlobalTrade Document Clearance Centres and can be either electronic or paper-based. In fact the same is true of the TradeCard service which will also accept either paper or electronic documents – the differences are all in the marketing. TradeCard emphasises its compliance engine which only handles electronic documents although it will also convert paper documents to electronic format for checking. In contrast CCEWeb emphasises its specialisation in document checking.

@GlobalTrade payments are credit card-based. As long as the agreed terms are met then payment is guaranteed – just as for letters of credit. Its charges are slightly higher than TradeCard – US$180-350 depending on the transaction size – but there are no membership fees or other fixed costs for the users to carry.

Unlike TradeCard CCEWeb is aiming to be on the same side as banks. @GlobalTrade is being marketed to banks as an outsourcing option. A selling point is its handling of ‘nuisance LCs’ – those ranging in value between US$5 000-100 000 – where banks find it difficult to make a profit but have to supply the service as part of their overall service. CCEWeb believes that with economies of scale and the efficiencies available from operating over the internet it can build a profitable business where banks cannot – especially small to medium-sized banks.

Outsourcing for profit

Having reached the same conclusion a group of banks have established Proponix – an outsourcing initiative sponsored by IT company AMS with Barclays Bank ANZ Bank and Bank of Montreal. Proponix is structured along similar lines to CCEWeb the difference being that it is the banks themselves trying to build an outsourcing business. AMS is supplying the software with the banks providing the business input and the initial customer base. The consortium is planning to have the service running by mid 2001 with processing centres in Melbourne and Toronto. The service is similar to @GlobalTrade in offering traditional trade finance products over the internet.

Any major winners in the internet trade finance business are likely to be drawn from within this group.

Trade services infrastructures

bolero.net was initially set up by SWIFT and the TT Club but the organisation has recently benefited from a large infusion of venture capital through Apax Partners. bolero.net provides secure and authenticated document transmission over the internet as well as hosting value-added services such as:

The Title Registry a database that tracks the ownership of goods in transit.
SURF (Settlement Utility for Risk and Finance)is a “standard infrastructure component for handling trade settlement within an electronic environment”. Its function is to reconcile documents that have been presented electronically with the original contractual commitment known as a SURF undertaking.bolero.net is being piloted some leading banks. The document transmission and Title Registry services have been available for some time while SURF is planned for release later this year.

Identity and trust

Identrus was formed by a consortium of leading banks to promote security in financial transactions. The basic problem it is attempting to overcome is how to obtain reliable verification of a counterparty’s identity when conducting trades over the internet. Digital certificates are only as good as the (typically anonymous) certification authority which issues them. What Identrus does is provide a framework in which banks can act as certification authorities in their own right under the Identrus umbrella.

Like Bolero Identrus plans to offer value-added services through its network. The first of these is Project Eleanor – an electronic payment initiation scheme which in many ways provides equivalent functionality to TradeCard but is complementary to a bank’s trade services rather than as a replacement for them.

Prospects for success

As far as likely success the focus is on TradeCard and Bolero because they are older and so it is easier to draw conclusions about their prospects than those of the more recent entrants. It is not an either/or situation for TradeCard and bolero.net. It is quite possible that both bolero.net and TradeCard will be successful – or that neither will!

TradeCard’s major strength is that it is very well-known. The company is the market leader – ahead of CCEWeb and the rest.

TradeCard has a presence in North America and Asia – and Asian companies exporting to North America are among the major users. TradeCard does not have a presence in Europe but that seems to be its next target. Its other big plus is that like other systems vendors and unlike infrastructure suppliers it has a complete solution and does not have to rely on third party vendors to market to end-users.

TradeCard’s major problem is the expectation that internet services should be cheap. At US$150 per transaction TradeCard is relatively inexpensive but it needs to generate large transaction volumes to be profitable. With the downturn in the dotcom market and the impact on venture capital funding TradeCard is in a similar position to many e-commerce businesses in that it needs to achieve profitability before the cash runs out.

Another potential difficulty is that TradeCard’s products have to gain banks’ acceptance that they are equivalent to a letter of credit. This is essential since users on the export side may want to use a TradeCard agreement as security for financing in the same way as with a letter of credit. Even if banks are convinced there may still be obstacles in the way of selling the proposition to corporate users who will ultimately decide TradeCard’s fate.

Through its links with SWIFT and the TT Club bolero.net is the insider in the trade services business. The organisation is also financially secure having recently received major venture capital funding. It seems clear that Bolero is in business for the long haul. The difficulty is that for its trading model to operate effectively all parties in the trade chain have to be using the service. Although it is possible to come up with processes that mix paper and electronic documents they do not function efficiently. It is easier to deal in just a single medium rather than try and mix and match between paper and electronic documents. For this reason Bolero has to concentrate on constructing trade chains that cover all parties concerned in the transaction.

Although there are advantages in having documents delivered by electronic media rather than on paper there is a real question as to whether the advantages outweigh the costs involved in building a systems infrastructure to handle electronic documents. What might tip the balance in bolero.net’s favour are the value-added services it offers in particular SURF. The use of electronic documents with automated compliance checking should have an impact on both the speed and crucially the accuracy of document production. It has been estimated that around 70% of documents presented against LCs contain discrepancies which leaves plenty of scope for efficiency savings in the electronic world.

The banks’ major weapons in the battle against dis-intermediation are:

Credibility as guarantors for trade settlement.
A large existing corporate customer base.

They are looking to Identrus and bolero.net to help them in this battle. Looking at the recent announcements from Identrus on Project Eleanor there seems to be a great deal of potential for Identrus and bolero.net to collaborate on presenting a complete trading process solution.

The combination of the Eleanor payment initiation model with the SURF compliance checking service would allow banks to present an alternative to TradeCard that offers equivalent functionality backed by financial institutions.

It is up to the two organisations to show that they can work together to construct a systems infrastructure that exploits the obvious potential.

Originally published in e-mmerce