incredible shrinking letter of credit, The

Global Finance, Sep 2002 by Platt, Gordon

TRADE FINANCE

ELECTRONIC SERVICES

As more

global trade moves to open-account terms, banks are moving fast to serve the brave new world of trade finance. By Gordon Platt

A watershed event in trade finance occurred in August, when JPMorgan Chase linked its treasury services platform with New York-based TradeCard, enabling buyers and sellers worldwide to conduct and settle cross-border trades completely online.

Banks once viewed business-to-business trading services as competition to the letter of credit, or L/C, the old-standby instrument of world trade that places bankers in the role of trusted intermediaries. Now, with LIC volumes declining, financial institutions are plugging e-trade services into their own platforms to give corporate customers seamless access to the latest technology while keeping themselves at the hub of the system.

"We could have replicated what TradeCard already had done, but that would have cost quite a bit of time and money," says Bruce Proctor, head of product management, global trade services, at JPMorgan Chase in New York. "By offering a white-label version of TradeCard, the customer doesn't have to go out of our site, and the JPMorgan logo remains on the screen."

Earlier this year the bank became the first to offer electronic bills of lading in conjunction with Oakland, California-based APL, a shipping carrier for BASF South East Asia, a subsidiary of German-based chemical company BASE The system enables BASF to print electronic bills of lading directly at the bank, eliminating the need for couriers and speeding payments. And in February 2002 JPMorgan Treasury Services became the first financial institution to adopt boleroSURF, which was developed by the Brussels-based Bolero consortium for automated open-- account transaction handling. The mechanism ensures that both parties to a cross-border trade have fulfilled their contractual obligations, allowing payment to take place.

JPMorgan is not alone in offering more e-trade services. In March 2002 San Francisco-based Wells Fargo introduced Trade Finance Online, which allows corporate customers to convert their foreign and domestic account receivables into cash. "Manufacturers and exporters are constantly looking to use open-account rather than letter-of-credit payment terms," says Jane Hennessy, senior vice president in the international group at Wells Fargo. The aim is to improve cash flow and free up working capital, she says.

The service allows users to check invoices for qualification against credit insurance and financing limits and them submit them for financing or purchase by the bank.

Information Intermediaries

Banks will start to offer new services to importers that will allow the banks to play an information intermediary role, similar to an event-management company, says David Gustin, managing partner at Vancouver, Canada-based Global Business Intelligence, a cross-- border trade and financial services research company.

The banks need to recognize that trade is moving into an event-managed world and out of a document-managed environment, according to Gustin. Paper- and compliance-intensive L/Cs tie up capital, he says, whereas events such as the delivery of goods should determine when payment is made.

According to Gustin, trading on open account, or cash on delivery, is increasing as importers integrate relationships with long-term suppliers. This is especially true of the large US retailers that drive trade with Asian suppliers, he says.The growth of contract manufacturing also is reducing the need for L/Cs, he adds. Brand-name apparel companies that no longer manufacture don't need to issue L/Cs to material suppliers.

Banks may be left out of the trade loop altogether unless they provide additional benefits and content integration with their electronic services, Gustin says.

Gordon Platt is finance editor of Global Finance

Email: gplatt@gfmag.com