ELECTRONIC TRADE: BANK VIEWPOINT

Competitive advantage through supply chain co-operation

Idana Salim and Zeno Chow, Vice-Presidents at JPMorgan Treasury Services, discuss how banks can deliver value throughout the trade flow - from initial stages to payment and collection - through understanding electronic methods of supply chain management.

Global interdependence dominates today’s business and economic environment. Within this context, the power to compete does not rest solely in the control of any one company. Rather, how well the members of the supply chain interact helps define the competitiveness of each participant. At times the supply chain members might not exactly be partners - they may have conflicts as well as shared interests. Yet the ability to co-operate can create competitive advantage for the benefit of all participants.

Three primary flows impact the smoothness and efficiency of interactions along the supply chain, namely, the flows of goods (raw materials, products and services), money (collections, payments, and financing) and information. For each of these flows, the challenge of working together effectively across the chain is to avoid a duplication of effort, obtain optimal financing terms and speed payment. On all of these counts the flow of information is critical. To the extent that parties can access real time, rich information, they can perform analysis and make decisions to optimally manage operating cash and mitigate risks.

For both documentary trade and trade finance, banks have traditionally performed the role of financial intermediary. However, to add value in this increasingly complex and interdependent competitive landscape, banks must look to intermediate at each point where they can improve the monetary and informational flows. To achieve this banks must not provide a piecemeal approach to the documentary trade, payment and financing components. Rather, they must perform the role of integrator to provide a total solution for managing the value chain throughout a single or multiple trade flows. Financial institutions that choose this integrated approach can help their clients save costs, gain efficiency, speed payment, mitigate risk and optimise working capital management, in addition to raising capital and providing financing.

Digitising trade documents and e-enabling information flows

Documentary trade presents an area of significant opportunity for strengthening co-ordination along the supply chain. Towards this end a select number of banks are looking to employ technology as a tool for automating manual and paper-intensive trade processes and providing immediate access to information for multiple parties to a transaction. Three of JP Morgan’s web-based solutions - Trade Origination Process, TradeDoc and Trade Information Exchange - illustrate how banks can add value to improve the movement of documents and data across the supply chain.

JP Morgan’s Trade Origination Process is web browser-based tool for importers to securely initiate a range of trade transactions, including letters of credit and direct collection letters, to JP Morgan’s global branch network. Clients can use this product to make the application process more cost effective. For example, digitised purchase order data streamlines the creation of letter of credit applications, and staff can use the database to automatically populate data fields. Clients can even transmit discrepancy notifications and approvals online to facilitate quick resolution.

TradeDoc enables exporters to outsource the preparation of trade documents to JP Morgan. Exporters securely transmit relevant shipping and financial data directly from their host systems to JP Morgan via the internet. With payment predicated on documents rather than goods, timeliness and accuracy are critical. The TradeDoc solution automates the entire process of preparing, transmitting and negotiating trade documents to address both speed and accuracy.

Clients can save a significant amount of time over physically preparing and sending documents as well as realising the efficiency gains of automation. By eliminating manual processes, discrepancies can be minimised and clients can achieve faster turnaround in the overall handling of export documents. The results can include a reduction in the risk of delayed payment or non-payment, an accelerated settlement of trade receivables, improved cashflow, and cost savings from reduced courier fees, communication fees (such as cable and fax charges) and interest.

JP Morgan’s Trade Information Exchange provides importers, exporters and other designated parties real time access to rich information on trade transactions via the internet. Users can securely initiate inquiries on letters of credit, documentary collections, purchase orders and courier details as well as obtain the status of their trade business with JP Morgan. Access to a database of timely and detailed information at any time gives participants the required tool for quickly analysing and sharing data across their firms and the supply chain to grease the wheels of efficiency and make informed decisions about cashflow, risk and payment.

Trick of the trade: taking an evolutionary approach

The technology necessary to securely create and transmit a wide range of documents electronically is available today. TradeDoc, for example, employs the latest public key infrastructure and the use of digital signatures. Yet while digitised documents can dramatically improve both timeliness and accuracy, ironically, trade continues to resist automation. The challenge lies in gaining wide acceptance among numerous parties for automating the entire set of trade documents and broad agreement on a standard for technology and format. Further complicating advancement is gaining legal recognition across the large number of documents required subject to varied local regulations.

Some documents - like the commercial invoice and packing list - are easier to digitise than others. JP Morgan’s approach is to focus on continually expanding the scope of electronic documents. TradeDoc’s latest enhancement is the ability to receive an electronic bill of lading. The achievement involves not only the technical capability, but also establishing the legal framework with a major international shipping carrier and exporter to authorise release of the bill of lading electronically to JP Morgan.

JP Morgan also takes an evolutionary approach to continually enriching the database of information for Trade Information Exchange. The latest addition is an interface with DHL’s logistics system for the inclusion of courier information, including pick-up time, delivery time and the airway bill reference number. Clients can track the progress of documents closely and more quickly address delays in the flow of documents. Courier information also gives additional data points with which to fine-tune the prediction of cashflow requirements.

Complementary efforts: industry and government-led consortia

Proprietary initiatives such as TradeDoc complement the efforts of consortia organised and led by industry players and the public sector. In Asia, for example, the Singapore International Chamber of Commerce (SICC) is spearheading the development of an electronic certificate of origin in concert with a small group of local and international banks. Although the SICC is driving the development of the technical solution, a large part of the effort is in gaining acceptance for the document by other international chambers of commerce as well as other parties to the trade transaction. For markets that require third party documents like inspection certificates and certificates of origin, the goal of a fully electronic set of documents is most challenging.

Efforts like bolero.net and TradeCard both complement and compete with government led and proprietary initiatives. Bolero, for example, leverages the internet as a common, open system to exchange documents with uniform standards. The goal is to develop an interoperable system that facilitates communication among all of the involved parties. The Bolero system provides secure electronic transmission of data and documents from document creation to management and exchange. The various initiatives underscore both the shared and competing interests of participants in creating the universally embraced standard for electronic documents.

Value chain management: encompassing financing and risk mitigation

By providing timely access to rich data as well as tools for mining data and performing analysis, financial institutions can work with clients to leverage information for improved financing structures. For example, banks can offer financing solutions for a client’s portfolio of trade transactions across multiple obligors (importers or exporters). Increased flexibility in providing innovative structures can lower financing costs, shift financing away from vendors, enable price discounts, mitigate risk and provide a host of other possible advantages.

Financial institutions can also look to expand co-operation with suppliers in their own financial supply chain, such as insurance companies. By combining capabilities they can offer innovative financing structures that enhance economic value for the customer and offer alternative approaches to managing risk. JP Morgan is also partnering with technology providers and other entities to further enhance and extend its already broad suite of products. At each stage of the supply chain, co-operation can improve the competitive stance of the participants. Bank can serve as powerful intermediaries in increasing that co-ordination and ultimately creating value.