denotes premium content | Jan 6 2009 
Feature
posted 23 Feb 2005 in Volume 8 Issue 4
In recent years, trade processing has developed into a large-scale technology-led business. Here, Erika Morphy charts the rise of the online letter of credit and explores the latest in web-based solutions.
TradeCard was among the vanguard of companies in the 1990s pushing importers, exporters, banks, transport companies and insurance agencies – in short, just about every party involved in a global trade transaction – to automate their piece of the payment process.
That battle, of course, is now over with TradeCard et al the clear winners.
“Now, the question is not if we should do it, but how we should do it,” TradeCard president Guy Rey-Herme says. “Adoption grows every year; in 2004 we more than doubled our volumes and we expect doubled volumes again in 2005.”
But ask Rey-Herme what TradeCard has done for the global community lately and he tells you about a customer that wanted to increase its trade volumes with a Canadian supplier. “The supplier, though, didn’t have the funding to hire the additional people and meet the new demand.” It was TradeCard, he says, that arranged for the financing without tapping the vendor’s line of credit.
“We used the volume of past and ongoing transactions and brought in a financial institution that would discount the receivables based on that. The supplier got paid right away, while the buyer still was able to pay in the normal 60 cycle.”
Evolution, not revolution
TradeCard is not alone in the enhancements it is making to a novel approach to an age-old problem (it’s been said that a variation of the letter of credit was first developed some 800 years ago when England’s King John used one to purchase marble from Italy).
While not on the par of the online global trade payment revolution that started some nine or so years ago, banks and private providers are introducing tech and product innovations – both large and small – that provide even greater visibility into the financial supply chain. The goal, these companies say, is to keep their products current with the ever-changing dynamics of global business.
Some of these enhancements address problems that the uninitiated may think have been long conquered. “The biggest problem exporters and importers still encounter are the inordinate number of discrepancies and then, the delay in payment,” says Allen Bornscheuer, director of trade services for TradeBeam Holdings, a provider of global trade management software and services.
“Ideally we would like to see settlement move away from a document-based process – the root cause of most discrepancies — but the reality is the world still revolves around the trade document in some way.”
Other changes develop around strategic – as opposed to financial – reasons. For example, Rey-Herme says TradeCard’s supplier financing programme originated from the observation that buyers had begun to consolidate their suppliers, giving key vendors much more business – often more than they could financially absorb – than in the past.
It’s the little things
Wachovia Bank has concentrated on both the strategic and practical as it further develops its online payment mechanisms, such letters of credit and open account products, according to John McFadden, head of trade product management and development for Wachovia’s global trade services group.
“We have tried to identify ways to improve efficiencies and make the data that we capture for the letter of credit more efficient and usable in other ways as well,” he says.
Some of its enhancements are merely the result of taking standard technology and applying it to the letter of credit process, he says. “Such as XML and incorporating it into a document. Or incorporating the various flavours of Adobe’s PDF technology.” Another innovation is Wachovia’s e-vault, in which companies can safely store documents and data, says McFadden.
Then there is the integration and other data management technology that enables the bank to pull data from various sources and present it in a native format within the customer’s back office, according to Mike Schmittlein, managing director in Wachovia’s global trade services group. “That way, suppliers and business partners along the continuum can share their data without having to adhere to a rigid standard,” he says.
Such data management processes are invaluable given the emphasis most financial systems place on the purchase order, he says. “The purchase order is the driver behind any transaction, and by mapping that data into the LC issuance process or open account process, we save our clients a lot of time and money.”
This happens, he says, because the bank is now performing more document review and data entry – not the customer. “In our open payment account solution, we as the bank may be reviewing submitted documents and doing some kind of evaluation to determine if the documents conform. In essence, we pre-position the documents for the buyer to make the pay or no pay decision – work that traditionally would have been handled by corporate accounts payable.”
Internal versus front-end systems
Other Wachovia innovations centre around the continued enhancement of its web-based products. “We have a web front-end that supports the LC cycle from end-to-end,” McFadden says. “We are also taking that same technology and re-using it in different ways, such as with documentary collection and support for open term forms of payment – all on a consolidated platform with a single sign-on feature.” Larger corporates, though, especially those with high international trade volumes, are seeking to further internalise the automation process, McFadden says.
“We have several large customers starting projects that have asked us to help them migrate to a fully integrated environment in which our system connects directly to their back office.
“It is a push away from what has become known as the typical online letter of credit to something that can be called computer-to-computer integration. It allows big players on the import side to have a common platform or approach for dealing with multiple banks.”
From that point, it is only a small matter for corporates to embrace the very latest trend in online letter of credits: private label LCs. Wachovia is, in fact, one of the largest processors of this growing form. The basic assumption surrounding this development is that a non-bank entity can in fact issue an LC – at a lower cost than a traditional or even online payment mechanism – that still conforms to, and is supported by, UCP 500 and 600.
Who knows? Given this new turn of events, in a few years time the industry may regard the 90s trade payment revolution as quaint as King John’s.
‘First impression’ case affirms rights for wire transfer
A December 2004 court ruling in a New York state appeals court will have an impact on the global banking community, according to the law firm that represented the winning party in the appeal.
The implications of the case, in which a $2.5m wire transfer for a commercial transaction became embroiled in US federal law and geopolitical events, also extend to the use of letters of credit, says Kenneth A. Caruso, an international litigation partner at Chadbourne & Parke.
“As regulatory authorities continue their campaign against terrorism and international crime, more global trade transactions will come under scrutiny and you can bet we will see more instances in which legitimate money transfers, such as letters of credit, are blocked as the authorities check out the bona fides of the participants,” he says.
This case’s outcome does not hamper the ability of regulators to monitor global fund flows, Caruso continues. It does, however, establish that creditors and other private parties cannot attach claims to the money in such an eventuality.
Caruso says this is the first case that tested that premise.
The circumstances
In 1993, Genex, a Serbian construction company, wired $2.5m to Norilsk Nickel, Russia’s largest mining company, in payment of a debt. The dollar transaction had to clear through New York, but when the cash reached the Bank
of New York, it was frozen in a ‘call account’ in accordance with US treasury office of foreign assets control regulations then in effect. These regulations prohibited any financial transfer that benefited Serbian entities and others during the war in the former Yugoslavia.
In 2003 the treasury department lifted the block. At that point, another company, Monter, sued Genex and attached the $2.5m, keeping those funds in New York.
The ruling
In the 21 December ruling Justice James M. Catterson said it was clear that title to the money passed from Genex to the banks conducting the wire transfers in 1993, but federal law blocked the movement of the funds until 2003. “When the hostilities in Yugoslavia ended, and the federal government had no further reason to block Genex’s use of the funds, federal law unblocked the funds,” the judge wrote.
“What this ruling reaffirms is that a creditor of the originator cannot stop the proper flow of money through the international payment system, no matter what other circumstances are surrounding that payment,” Caruso says. “And when a government body freezes an account or transaction, strangers cannot come in and re-attach the money for a civil matter.”
