More than a year ago major banks began offering online B2B suppliers credit instruments to back their promises to deliver products to customers. Now insurers are offering to cover online buyers' obligations to pay.
One proponent of the insurance product is Joshua ten Brink, vice president of online seafood exchange GoTradeSeafood.com. He contends that vendors around the world are interested in trading with new partners, but most are wary of extending credit to unfamiliar companies that could present payment collection problems. While the industry has traditionally used letters of credit, the process of securing one takes hours — sometimes days — making it unsuitable for speed- seeking Internet merchants.
Hoping to boost the exchange's transaction volume, ten Brink offers buyers credit ratings and insurance products from France-based credit giant The Coface Group. New buyers pay up front for a credit rating that is executed and backed by Coface. "The rating is an alternative to a letter of credit," says ten Brink.
But differences do exist between traditional and cyber letters of credit. Most notably, the Internet gives insurers access to real-time credit information on buyers, so insurance companies can parcel out coverage on a transaction-by-transaction basis. That's a significant departure from traditional plans, in which merchants pay for portfolio coverage allowing insurers to spread risk over many transactions.
Such automation can be crucial to making the coverage cost- effective. Witness Earthking Alliance's Econstructionparts.com. The online marketplace bears the buyer's risk on transactions ranging from $500 to $50,000. To mitigate the risk without creating an internal credit department, vice president Patrick Carroll turned to eCredible, a unit of Swiss Re's NCM, for credit checks as well as insurance for up to 90 percent of the dollars promised. "It takes a little bit of the margin on all open account transactions, but that's far less than any other structure would take to handle the volume."
To date, few buyers have used rating and coverage packages, but insurers predict that will change when online markets become more liquid. To that end, heavyweights like Coface and NCM, along with Gerling Credit Insurance Group and AIG, are leveraging their huge corporate credit history databases and moving buyer credit instruments to the Web.