April 07, 2003

If transforming paper checks into electronic documents seems tricky, just consider the problem of foreign trade.

Trade finance includes not just the buyer and the seller, but also the insurance companies, freight forwarders, shipping companies, consolidators, inspection companies, and government bureaus involved with each shipment. Also, recent homeland security initiatives in the U.S. have made timely access to information about a shipment more important than ever before.

"The problem that we're trying to solve is really multi-layered," said Dan Scanlan, head of trade product management at Bank of America, Charlotte, N.C. "You can range anywhere from six to 12 parties in a typical transaction, and trying to get all those parties on the same page, in terms of electronic capability, is a very difficult thing."

So, in accordance with Metcalfe's Law, which states the value of a network increases as an exponential function of the number of participants, trade finance document repositories have the potential to provide exceptional value to the global economy as a whole.

For its part, Bank of America, in conjunction with S1 Corporation, developed a trade finance purchase order processing system (known as POPS) that helps the bank to manage letters of credit, documentary collection and open account transactions on behalf of its customers and their trading partners. While participants can certainly benefit by submitting documents electronically, the bank has also made realistic arrangements to handle the paper flow. "They're submitting paper documents, and we have people in our operations centers around the world keying that data into our systems," said Scanlan.

With its information repository, the bank can provide both buyers and sellers information about the status of their transactions. For instance, exporters no longer have to jump through numerous paperwork hurdles in order to get production moving out of the factory. "They've gone from 10 to 12 phone calls and five to six courier runs, to sitting at the PC, loading up the master form from the letter of credit directly, and then creating the shipping documents from that," said Scanlan.

On the importer side, many companies have been looking for banks to outsource their entire back-office trade capacity. "We're seeing a great deal of interest in having the bank take over this function," said Scanlan. "It helps them to reduce costs, and they can eliminate some of the most cumbersome parts of their accounts-payable processes related to cross-border receipt of goods."

In taking on these kinds of tasks, banks have been steadily transforming away from being strictly financiers into becoming essential conduits for trade. "The financing aspect of this business is one that we obviously are interested in, but it's not our primary motivator," said Scanlan. "It's going to become more and more a fee-based business and less and less of a finance business for an umber of different reasons."

Indeed, the state of the global markets has made fee-based businesses increasingly attractive to the largest players. "We see lending as something we do, not as an end in itself, but as a means to bring in more transaction business around the working capital side of the balance sheet for our customers."

That's a fundamental shift in the role of the banking industry. "It used to be that banks were very keen to lend in all markets -- the idea was that you made your money from making loans," said Scanlan. "People realize that that's a risky way to make a living."

This article originally appeared in Bank Systems & Technology eNEWS,a weekly e-mail newsletter. To order a free subscription, click here:www.submag.com/sub/by?tc=1&wp=wpdly1&pk=WMNE