Glencore Ltd. is in the business of exporting carbon black feedstock, but for years the company, a branch of $44.5 billion Swiss commodities trader Glencore AG, was stymied by payment-collection problems in its largest market — India. "Anyone who deals with India is well aware it's not the easiest place to sell in," says David Porter, treasurer of Glencore Ltd., with a sigh.
The problem, in a nutshell, was getting paid on time. The government of India insists on a complex trade finance procedure involving close to 15 separate documents, multiplying the risk of error. "We had documents all over the place — bills of lading, certificates of origin, quality and quantity certificates, manifests, bills of exchange," Porter recalls. "It was extremely difficult to keep track of all the delays in getting different documents accepted and approved to send to Indian banks for us to get our money."
Glencore trades on an open-account basis with Indian buyers, which use its feedstock in the manufacture of tires. It considered internally automating the trade document flow, but didn't want to be in the electronic document exchange business. Ultimately, the company decided to outsource the entire process to J.P. Morgan Chase & Co. Global Trade Services, a treasury services unit of global banker JPMorgan Chase specializing in electronic trade finance.
"They've made all the tracking of documents electronic, and run the entire process through a Web portal," says Porter. "We get paid on time, I'm advantaging the float on the cash, and I can track the document approval and payment process online. Before, we considered it lucky if we got paid five days late."
Glencore is among a few pioneering companies turning to providers of electronic trade finance services for help managing the often difficult and time-consuming documentary and accounts-receivable processes inherent in international trade. In recent years, such major banking institutions as JPMorgan Chase and ABN AMRO have spread their wings into the emerging electronic trade finance market, offering a range of services that includes electronic letters of credit (LCs) and Web-based document-preparation services. The latter run the gamut from electronic invoices and purchase orders to electronic bills of lading and certificates of origin.
JPMorgan Chase boasts an end-to-end solution integrating all these trade documents on either an LC or open-account basis, and has a number of global customers for it, including BASF Corp. Other banks also provide electronic services. For instance, Bank of America offers electronic management of purchase orders, while Wells Fargo has a product that converts foreign and domestic accounts receivable into cash.
But these financial institutions aren't the only service providers in the market. Bolero.net, formed in 1998 by a consortium of global banks and logistics providers, offers secure electronic transmission of documents along the entire trade chain, from front-end order processing to back-end trade document exchange. Others include LCconnect, which enables electronic sourcing of export and standby LCs from banks; and TradeCard, which shrinks the paper trail by tracking the complex negotiations involved in global commerce, linking companies to banks, inspection agents, and cargo insurers.
The sudden emergence of all these new electronic platforms is confusing for treasury and logistics units used to centuries-old systems of trade. But the value proposition proffered — greater visibility into the entire order-to-payment process, on-time payment, and improved cash management — is an offset. However, these offerings have not yet reached their maturation.
"We're at a very early stage of development here," says Aaron McPherson, research manager at Framingham, Massachusetts-based research firm IDC. "It's kind of like moss — a little growth here and there that hasn't linked up yet into a complete organism." Currently, many trading partners, foreign banks, and governments are either ill-equipped to join an Internet-fueled trade finance system or apathetic about the idea. "International trade involves many different actors and is a complicated, paper-intensive process presenting special problems for both credit and settlement," comments McPherson. "If all the actors aren't on one of these platforms, then the rationale to use it dilutes."
David Furlonger, vice president and research director at GartnerG2, the unit focused on business research at the Stamford, Connecticut-based technology research firm, agrees that electronic trade finance is still in the embryonic stage. "The various service offerings have not yet coalesced in any meaningful fashion," he says. "Consequently, just like all those highly touted B2B exchanges, there hasn't been much buy-in. Treasurers understand the existing processes so well that they are less than eager to scrap them, despite the cost savings and other benefits presented."
A midsize company trading with one or two foreign companies may not need the services of an electronic trade finance outsourcing provider, given the likelihood of good relations with these partners and years of working out the payment kinks. And while companies with substantial import or export relations may derive significant benefits via an electronic approach to trade finance, the complexity of doing business with numerous third parties creates obstacles.
"Even with related parties like subsidiaries, there are so many issues to address," says David Gustin, managing partner at Global Business Intelligence, a Vancouver-based international trade consulting firm. "There are logistics challenges, different payment options, liquidity issues, compliance concerns, multiple banking relationships, integration of treasury workstations, working-capital issues, risk-management challenges, and so on. No wonder the largest corporations continue to operate with suboptimal receivable systems."
The perfect paradigm is an international electronic trade system with uniform standards governing technology and document exchange, feeding directly into corporate treasury and enterprise resource planning (ERP) systems. Such a model is more than five years down the road at the earliest, says McPherson. "In the meantime we have these partial solutions, held together with tape and chewing gum."
Not that large companies aren't availing themselves of the current crop of offerings. Take the case of Siemens Capital Corp., the in-house bank for technology-equipment provider Siemens's 29 North American operating companies. Siemens Capital uses JPMorgan Chase's electronic global trade package to initiate secure and encrypted electronic LCs covering the services and products it sells. "We have a password-protected link from Chase on the Web. On it I can input the amount of the LC request, the expiration date for the contract, and the operating company requesting it. I can then have it reviewed electronically by our attorneys and Chase's attorneys and approved using electronic signatures," says Ed Farrell, manager of Siemens Capital's letters of credit and guaranty department.
Previously, completing all these tasks meant following a lengthy paper trail. "An application from Chase had to be typed up in a Word document, printed, signed by two officers of the company here, and then faxed back and forth," recalls Farrell. "There were multiple iterations of this depending on the language, how specific the text needed to be, and human errors, which consumed time."
Farrell says the new system reduces the time it takes for the LC (paid by the operating company to cover payment default) to reach him. "The LC is money in our hands," he adds. "In the old days, it took a week on average to clear; now it takes between 24 and 48 hours. The operating company essentially gets the float for an extra three or four days."
Farrell says the system gives him greater visibility into the invoicing and internal-debiting process. "I can go online and see a list of LCs by operating company, grouped by type of LC and dollar amount," he notes. "By slicing and dicing, I can ascertain our contingent liabilities, targeting an operating company that may be exceeding its credit limit." As for the new system's return on investment, he says the elimination of faxing and mailing, added to the enhanced cash management and payment of receivables, is saving "well into the millions."
ChevronTexaco Global Trading in London is accessing JPMorgan Chase's Trade Information Exchange to be advised on its foreign LCs. "Chase receives the LC opened by a foreign bank, does a little work on it, and then transfers the information to a secure Web site that we can access," says Ron Wells, credit executive in the London office of the San Francisco-based integrated energy company. "We get a record of all LCs received, they're authenticated by Chase, and there are no delays."
Roughly half of ChevronTexaco's London trading counterparties are run through the exchange. With the remainder, treasury continues to rely on traditional payment methods — a telex from the bank opening the LC, and then mail or a fax from the advising bank for authentication, all of which create "cost and delay factors," says Wells.
Payless Goes Paperless
While electronic LCs have been around for at least the past decade, front-end electronic invoices and purchase orders are relative newcomers to the scene. Payless ShoeSource Inc. is the first company to use Amsterdam-based bank ABN AMRO's AllTrade E-commerce application to create electronic purchase orders, invoices, shipping notifications, and packing lists, which are routed to an Asian supplier to trigger payment.
"We issue a purchase order and the system does whatever is needed to make sure it complies with regulations, handling the other documents required under the trading agreement," says Todd Armstrong, assistant controller at the Topeka, Kansas-based shoe retailer, with $2.9 billion in revenues.
"All the pieces required for the transaction to occur are brought together in the ABN AMRO system, which matches everything up," Armstrong adds. "Any exceptions are kicked out in an E-mail to the associates responsible for that part of the process." The last step in the process — sending a payment request to the bank to pay the supplier — is done using PeopleSoft at Payless, but Armstrong says the AllTrade system can handle this task, too.
What about ROI? "We haven't calculated hard savings, but in terms of the finance group's ability to manage the flow of working capital and increase efficiencies in cross-border trade activities, we believe it's significant," says Armstrong.
Tying It All Up
Such case studies are promising, but electronic trade finance solutions are still tactical, says IDC's McPherson. "We're not going to see critical mass develop until we see these platforms link up with other platforms and then have the whole thing feed into the corporate treasury platform and the ERP system worldwide," he says.
Not that these tactical solutions aren't generating sales. A Gartner survey estimates that two-thirds of corporations with revenues exceeding $100 million annually are sending 20 percent of their invoices electronically, with expectations that this will grow to 60 percent by the end of 2005.
As for broad, integrated electronic trade finance, that is dependent on the varied participants in the global supply chain signing on to an ecumenical system for all. Bolero.net is supposed to be that system, and in anticipation of its success, both JPMorgan Chase and ABN AMRO are embedding elements of Bolero into their platforms. They are also significant investors in Bolero, which provides a common platform and legal framework for international trade. But Bolero's technology has been the vision for 20 years now and has not yet achieved its intended purpose.
Hence the decision by individual banks to leverage their existing relationships with companies by offering electronic trade finance solutions. "We're just a little further than the beginning of the beginning," says Les Haig, a consultant with The Bank Relationship Consultancy in London. "It's hard enough trying to make two or three constituencies happy. Setting up arrangements with basically everyone involved in world trade will take time."
Russ Banham is a contributing editor at CFO.
Eight online trade finance service providers.
1) ABN AMRO (www.maxtrad.com)
- MaxTrad: LC initiation and collection.
- AllTrade: Cross-border trade management solution, encompassing risk and order management, financing, fulfillment, settlement.
- MaxTrax: Online transaction status inquiry tool.
2) Bank of America (www.bankofamerica.com)
- Trade Direct: LC initiation, management, and collection. Also supports amendments to commercial and standby LCs, documentary collections, and discrepancy notification/acceptance/rejection.
3) Bolero.net (www.bolero.net)
- Common platform and legal framework for online international trade.
- BoleroSurf compliance engine: Allows buyers to verify that terms of settlement have been met before releasing payment.
- Title Registry Application: Enables electronic bill of lading for transferring ownership of goods.
4) CCEWeb (www.cceweb.com)
- @GlobalTrade: Trade services ASP, supporting documentary credits, standby LCs, collections, and open accounts.
- Connects to trade service providers, including freight forwarders and insurers. Payment guarantees provided by banks.
5) JPMorgan Chase (http://ts.jpmorgan.com)
- TradeDoc: Automates preparation of trade documents by integrating with exporter's systems.
- Trade Information Exchange: Online access to transaction status, incl. LCs, documentary collections, purchase orders, and courier deliveries.
- Trade Origination Process: Allows importer to prepare and submit LCs online.
- Also supports TradeCard and BoleroSurf.
6) LCconnect (www.lcconnect.com)
- Online portal for LC applications: Works with existing bank LC processing systems. Provides access to product and pricing information, as well as transaction status. Helps with selection of issuing or confirming banks.
7) TradeCard (www.tradecard.com)
- Compliance engine verifies terms of settlement have been met. Focused on open-account market. Payment guarantee offered through Coface credit insurance. International payments provided by Thomas Cook.
8) Wells Fargo (www.wellsfargo.com)
- Commercial Electronic Office (CEO) Business Portal: Central access to all online commercial banking services.
- Trade Services Online: Automates preparation and receipt of export LCs, advices, and amendments. Supports transaction-status inquiries and reporting.
- Trade Finance Online: Allows exporters to sell accounts receivable to Wells Fargo for quick payment.