The trade finance industry is in a state of flux. In a bid to gain operating efficiencies, corporates are moving away from the practice of using letters of credit (L/Cs) and increasingly towards open account trade, particularly where they have well established trading partner relationships. Consequently, they are having to confront the issues of increased risk and access to finance.
To compete against open account trading – where counterparties agree to deliver on the strength of invoices – banks are developing electronic forms of the letter of credit. BNP Paribas’ award-winning innovation has taken the concept online by using the information in purchase orders to populate an electronic letter of credit, which enables corporates to issue and manage a letter of credit faster.
Innovative platform
Launched in November 2002, Standard Chartered Bank’s B2BeX platform enables corporates to manage trade documents across the entire trade process, regardless of the method of payment used. Customers can, for example, use purchase order data to create order confirmations to send to a buyer, or to create L/Cs, payment instructions or requests for open account finance to send to the bank. B2BeX goes beyond traditional banking services, enabling intelligent use of data and connectivity across multiple parties, to create dramatic new efficiencies for importers and exporters.
Jon Richman, business head of Standard Chartered’s trade platform, B2BeX, says: “To this extent, we are neutral as to the terms of trade corporates use, as we are focusing on adding value through the management of data and documentation in the end-to-end supply chain process.” Rather than seeing open account trade as a threat, he believes banks must look for ways to innovate and add value in all terms of trade whether it is based on letters of credit, collection, or open account.
“There is a big opportunity for banks to go beyond offering just basic L/Cs and payments by helping corporate customers manage the various documents and data needed in the trade process, to make the letter of credit process, and other forms of trade much more efficient,” he says.
Changing trade flows
Alain Biscaye, managing director and head of global trade services at BNP Paribas, says the changing trade flows (away from the traditional Organisation for Economic Co-operation and Development countries and towards China, India, Brazil and Russia) have meant a greater need for faster and safer supply chain finance. The internet has enabled faster communication of documents and it is down to banks to give corporates the tools to enable this to be done safely, if they are to prevent disintermediation from non-bank payment mechanisms. “To this end, banks must innovate. Those without robust, efficient internet offerings simply will not keep up,” he says. “The most active players want to be able to respond to a purchase order and not have to wait for L/Cs instructions. Our customers are able to pay and pass the order to the supplier using the internet, which speeds things up. This enables them to manage their inventories more efficiently, and reduce their costs.”
According to Bruce Proctor, global trade services head at JPMorgan, L/C volumes have been declining in many cross-border flows for some time, while overall revenues have shown growth for most major trade providers. “The substitution of other product and service fees has helped to offset this change, and banks have moved aggressively to offer the component functions of letters of credit, such as data matching, payment assurance etc, on a disaggregated basis, so that clients can choose to use the services they value,” he says.
Mr Proctor believes the disintermediation of major trade providers will not happen, as banks are continuing to move into the open account space in order to service their clients’ business requirements. “This migration to open account activity has resulted in the need for banks to develop and implement new service offerings and to sometimes source new functionality through partnerships or alliances with third-party providers. This moves banks into the role of consolidators of market capabilities,” he adds. Relevant session Wednesday 13 October
- Innovative trade services: responding to evolving needs 14.00-15.30
