A fine line – and getting finer

Driven by the changing needs and demands of corporates, banks are blurring the lines between the trade-finance and cash-management solutions they offer – to the mutual benefit of themselves and their clients. Craig Weeks explains the cash-trade convergence and its implications for Latin America.

Increasingly, treasurers are including trade finance as an element of receivables management. Therefore, as treasurers continue to focus on optimising working capital to improve financial performance, so too do they view cash and trade integration as a logical progression towards enhancing receivables-management efficiency. Now a confluence of developments – changing market dynamics and environmental factors, evolving client demands and advances in technology – is driving the creation of integrated cash and trade solutions to the mutual benefit of corporations and banks.

The emerging solutions are enabling corporations to manage the entire value chain, which encompasses the physical and financial supply chains across the order-to-fulfillment and procure-to-pay processes. Both automation and outsourcing are key components of these emerging solutions. Latin American firms are particularly well suited to leverage these latest e-solutions to realise cost efficiencies and enhance competitiveness.

Cash and trade: Where interests converge

A convergence of factors and interests is facilitating cash and trade integration. First, several developments are driving a move towards open-account financing of trade flows. From 1990 to 2001 alone, US imports financed by LCs fell from 40% to 17% of total imports, according to the US Census Bureau. One reason is an increase in the level of comfort between buyers and sellers. Traditionally, a progression in comfort has been represented by the move, over time, from the usage of LCs, to date or sight drafts and, finally, to open-account terms. Today, counterparties can gain a comfort level much more quickly due, in part, to telecommunications improvements such as e-mail and video conferencing. With increased trust, counterparties are willing to accept open account or other non-LC-based terms.

Second, just-in-time inventory has increased supply-chain efficiency by enabling businesses to move away from warehousing goods in large volumes. Shipments are smaller, as are the associated dollar values. As a result, banking charges represent a higher percentage of a transaction, and banks are under pressure to reduce expenses to remain competitive. At the same time, as corporate treasurers strive for greater efficiency, they are pressing their banks to provide automated alternatives to paper-based trade processes. In the past few years, advances in technology – and, in particular, the internet – have accelerated the development of such tools. Treasurers are embracing e-solutions such as those that automate document preparation and improve the timeliness of information. For example, an automated document outsourcing solution lowers document-preparation costs, reduces the risk of discrepancy-related delayed payment or non-payment (since banks prepare the documents) and, ultimately, shortens the time period to payment. From the perspective of buyer/seller trade financing, this translates into reduced days sales outstanding (DSO) and a shortened borrowing period, which improves working-capital efficiency.

As banks invest in technology to satisfy evolving client demands, they face higher fixed costs alongside client pressure to reduce expenses and a declining profit margin per transaction. Those banks with marginal trade business will find it increasingly difficult to compete in this environment. Further, as banks institute strategic measures to save costs, some are re-evaluating whether trade finance is a core activity. The response has been market consolidation. The number of banks engaged in the trade-finance arena is shrinking as the cost of retaining and growing business outpaces profits, the thresholds for processing scale continue to rise and the number of seasoned trade experts diminishes. In 2001, total market share of the top 20 trade-banking providers grew by 13%, up from 6% growth in 2000.

Banks that decide to play in the trade-finance arena share a mutual interest with their corporate clients to move towards e-enabled open-account solutions. There is a long-term opportunity to evolve from providing classical trade services to more competitive solutions that drive deeper into clients’ core business processes to enhance value-chain management. Key to adding value is a bank’s ability to help clients accelerate the cash-conversion cycle, thereby enhancing working-capital efficiency.

Enhancing the value chain

Companies can now originate transactions, prepare documents, manage their payables and receivables, and make investments, all over the internet. They desire a single point of access to multiple solutions covering their cash-management and trade-finance requirements.

The spectrum of electronic products includes:

E-procurement;
Trade origination;
Information aggregation;
Commercial-trade document preparation;
Receivables and payables discounting;
E-investment.

E-procurement solutions enable companies to view offerings from preferred vendors, order supplies or other approved goods or services, and make payment – all online. A comprehensive solution would include the ability to create a purchase order, route approvals for management review and sign-off, receive invoices, resolve disputes and initiate payments. The solution may incorporate an electronic invoice or bill presentment and payment capability and may integrate information reporting with a company’s accounting system.

Most major trade banks have browser-based tools that enable importers to originate a range of trade transactions including LCs and direct-collection letters. A web-based solution enhances efficiency and reduces cost around the application process. For example, by providing purchase-order data electronically, companies can streamline the LC-creation process. Clients can also inform their banks of discrepancies and approve discrepant documents online.

As for information aggregation, bank solutions are also available. Leading trade banks offer internet-based solutions, which give importers and exporters real-time access to detailed information on their trade transactions via a web browser. Such solutions commonly enable clients to obtain the status of their trade transactions with their bank. Clients can also initiate enquiries on LCs, documentary collections, purchase orders, courier details and document images. Solutions that aggregate information serve as a timely, rich data warehouse that gives participants a valuable analytical tool. Because they are web-based, such solutions facilitate the sharing of data organisation-wide to enhance the decision-making process around cashflow, risk management and payment.

Outsourcing is another major trend, since importers and exporters increasingly cannot, or do not want to, afford the technology to stay in the business of processing their trade transactions. A flexible solution should enable exporters either to prepare their own trade documents online or entirely outsource the preparation of their trade documents to their bank. In the capacity of an application service provider, a trade bank can enable its exporter clients to create documents online from existing templates, purchase orders or documentary credits issued in favour of the exporter. Alternatively, exporters can transmit shipment and financial data directly from their host systems to their trade bank for an outsourcing solution. The bank then electronically creates documents – the commercial invoice, packing list and insurance certificate, for example. A few document-preparation solutions have the ability to receive electronic bills of lading from third-party service providers.

A document-outsourcing solution eliminates manual, paper-intensive processes and leverages bank expertise and technology to minimise discrepancies in documents. Exporters can reduce the frequency of delayed payment or non-payment; accelerate the settlement of trade receivables; enhance cashflow; and save money from reduced courier fees, communications fees and interest charges.

A few global banks with advanced technology are sharing their e-solutions with regional banking providers, who need support in enriching the trade capabilities they offer corporate clients. For instance, a global bank might provide a private-labelled document outsourcing solution to a regional provider who wishes to offer a document preparation service to its own clients. The global bank would deliver systems support and continued product innovations to provide a regional bank with a market-leading capability.

Other services, such as electronic payables and receivables discounting, can be made available through an online portal. The solution enables vendors to post and discount approved invoices over the internet, while simultaneously outsourcing the administration to their bank provider. Similarly, buyers might post their own payables in order to provoke investor interest.

The full range of cash-management products (payables, receivables and information reporting, and investment) can form another component of the e-services spectrum. The delivery of aggregated information, for purposes of cashflow analysis and forecasting, and the ability to initiate investments of excess cash online, rounds out a portal of integrated cash and trade capabilities. Companies that optimise their cash-conversion cycle can reduce their working-capital requirements by as much as 35% to 40%.

Latin America: Positioned to benefit from e-solutions

Asia has been the driving force behind much of the developments in trade technology. Initially, large US retail chains pushed their banks to enhance efficiency around the procurement process. The result was the development of products such as LC direct issuance. Global banks with Asian branches have continued to take the lead in responding to evolving client expectations by developing cutting-edge trade products. Latin American banks, importers and exporters are well positioned to benefit from technology-driven trade solutions. Countries like Mexico and Brazil are important members in the supply chains for commodities and capital goods. These trade flows lend themselves well to electronic solutions for two reasons. First, there are a limited number of counterparties, who have known each other a long time – this provides a higher comfort level that lends well to an open-account structure. Second, these trade flows often have fewer documentary requirements, which makes it easier to fully automate the transactions from end-to-end, thereby realising the greatest efficiency gains.

A lack of previous technology investment gives some companies the ability to leapfrog older technology and immediately leverage internet-based solutions without the drawback of maintaining legacy systems. The benefits of these e-solutions are obvious – lower costs, better efficiency and the ability to reduce DSO by one-half or even two-thirds. The fact that the first paperless trade transaction took place in Latin America demonstrates that the region welcomes technology despite the challenges.

However, the challenges are not to be underestimated, some of which include:

The cost and difficulty of integrating new technology with legacy systems;
A lack of buyer readiness;
Finding the right technology;
Co-ordinating activities online with counterparties and other supply-chain participants;
Internal bureaucracy and resistance to new technology.

Another barrier to success in certain regions is the lack of customs automation for the certificate of origin or other required governmental document. This underscores the loss of efficiency when even one member in the supply chain delivers paper.

There are also a number of challenges to implementing e-solutions that are specific to Latin America. The region’s economic and political volatility, the regulatory environment and the technology environment make it very difficult to deliver a truly pan-regional solution that integrates cash, trade and liquidity management. Pragmatists will wisely settle for the 80/20 rule, meaning they will focus on solving their most critical issues in their most important markets. Finally, the region is incredibly diverse, with some geographies more willing than others to embrace new technology.

An awareness of, and sensitivity to, cultural differences is critical to success.

The bottom line: Enhanced competitiveness

While there are challenges to applying electronic solutions in Latin America, the opportunities are enormous. The cost of administering the global supply chain is a significant component of a corporate cost structure, on average accounting for 10% of sales. Those banks and companies that choose to leverage the latest trade technology will be well positioned to enhance their competitiveness and improve financial performance.

Craig Weeks is senior vice president and head of Western hemisphere trade-finance sales and Latin American cash-management sales for JPMorgan Treasury Services in New York.