April 25, 2003

Banks endeavor to link their trade platforms with the physical movement of goods

In one of his observations on life, Ed Norton, the sewer worker from the classic TV series The Honeymooners, once said, "A sewer worker is like a brain surgeon. We're both specialists." While not exactly brain surgery, trade finance boasts enough technical jargon (e.g., letters of credit, treaties, tariffs, bills of lading, etc.) to intimidate most laymen. With centuries-old customs, the field is in some ways reminiscent of a medieval guild. Indeed, the bank's role in handling the risks involved in shipping and paying for goods hasn't changed much since the 17th century. Nor has the desire of buyers and sellers to minimize administrative costs.

What has changed is technology. Sailing vessels have given way to container ships and airlines. Quill pens and parchment have given way to faxes and e-mail. And as the world gets smaller, banks are being pressed to adapt trade finance to the electronic age.

Exporters and importers are conducting their business on the Internet, and expect their banks to do the same. "The fact that they are able to view and manage information more effectively means they're going to demand that services be delivered more effectively," said Bruce Proctor, head of product management in JP Morgan Chase's global trade services division.

Customers have been blunt in expressing their demands, he noted. "They don't want to be sending paper or faxes. They require that a bank take a direct feed from their purchase order system, extract the data and use it to create a letter of credit, and provide real-time information on transaction status."

In response, banks are scrambling to make trade processing more efficient. "The trade business has come out of a long slump from a technology point of view," Proctor said. "We're seeing a rapid adoption of state-of-the-art technology."

Being able to match up financial documents with documents required for shipment and settlement puts banks in a position to save customers a bundle of money. "There's much more integration of data and workflow," said Philip Simpson, trade services delivery executive at Australia-based ANZ Bank.

International laws and customs are also catching up. The International Chamber of Commerce has issued a supplement to its Uniform Customs and Practices, which governs the issuance of letters of credit. Called eUCP, the supplement defines rules for the issuance and acceptance of electronic trade documents. "After 10 years, there will be virtually no paper-based trade documentation," according to Neil Chantry of HSBC London, a member of the task force that created the supplement.

Yet eUCP also raises challenges, such as the question of what constitutes an original document in the electronic world. "We're all working toward the goal of taking export documents and making them electronic," said Mike Yavorsky, head of product management at Bank One's global trade services division. "But the legal framework doesn't exist yet where we can keep them electronic."

Bureaucratic red tape is primarily to blame. "What causes these documents to turn into paper is government regulations," he said. "Bangladesh has no ability to receive electronically. You've got to have a stamp on a certificate."

HUBS AND SPOKES
Still, that hasn't deterred banks from Web-enabling their trade finance businesses. Bank One, for example, offers Trade Channel, an Internet-based tool for creating, modifying and sending letters of credit and collections. "It allows our customers to conduct a range of transactions, including import, export and standby letters of credit, collections, inquiries and intraday reporting," Yavorsky said.

Trade Channel is powered by Trade Finance, a software product from Atlanta-based S1 that provides templates for letters of credit and collections, and facilitates straight-through processing to improve efficiency and accuracy for both bank and customer.

Trade Finance is aimed not at large multinational corporations, which tend to favor custom-tailored solutions, but at the vast tier of middle market companies.

"We've got a bunch of high-end users we're customizing products for, but there's a broader segment of the population that's mid-corporate. S1 fits that marketplace like a glove," Yavorsky said.

Trade Finance acts as a front-end for Bank One's back-office system, One Global Trade, which is used by all Bank One customers, especially those in Asia, where Bank One has a strong presence. "The S1 product is the customer's window into that database," said Yavorsky. "Customers in Hong Kong can view all their transactions easily and quickly."

The Trade Channel/One Global Trade solution provides an alternative to a hodgepodge of desktop applications. "Rather than having multiple PC products which we have to go out and fix, it's all a database here at the bank," Yavorsky said. "We don't have to be out supporting multiple installations."

At FleetBoston Financial, Web-based delivery is a prominent component of Trade Key, its trade processing platform. Fleet has added an online imaging function, enabling customers to view letters of credit, collections and other documents from a Web browser instead of waiting two to three days. Built with help from American Management Systems, the imaging system has been installed at Fleet's U.S. and Hong Kong processing centers.

The paradigm that Bank One, Fleet and other banks are following is that of a hub-and-spoke model, with the hub used for processing and the spokes for providing a Web-enabled front-end. "We consolidate the back office into a processing hub, and leave the customer-facing activities in a distributed network-the spokes-where our customers are," said ANZ's Simpson.

CASHING IN
ANZ employs various tools to move information between the spokes and hub, including Proponix, a trade finance platform from American Management Systems that provides real-time processing for letters of credit, guarantees, collections, cargo releases, banker's acceptances and the like.

Proponix eases the task of packaging trade finance with other treasury services such as cash management. "We're trying to provide automation and linkage across the product sets, so the customer doesn't see us as a series of product providers but as a single service provider," said Wayne Jobson, head of strategy, global transaction services at ANZ Bank.

The ability to integrate the cash business and the trade business is a key to survival, Proctor said. "We've done a number of things to break down the barriers between the payments business and traditional trade, largely because our customers demand it. They don't want us pitching five different product lines."

Added Bob Johnson, head of trade services at FleetBoston Financial, "It's not so much a question of intentionally tying trade finance to cash management as of customers demanding tighter integration."

To customers, it's all about managing cash. "Treasurers think of trade as being one source and use of cash, just as they think of their domestic payables and receivables as uses of cash," said Yavorsky. "To the extent that trade is a payable and receivable, then it's part of e-commerce."

Yet even as corporate treasurers clamor for a one-size-fits-all solution, the complexities of international trade demand a more specialized approach. "A lot of the e-commerce solutions are domestic e-commerce solutions," he noted. "They don't work for international."

Increasingly, said Chase's Proctor, banks are being asked to address issues that fall outside the realm of traditional trade finance.

"Every time I call on a corporate client, someone asks me to simplify their process with a freight forwarder or an insurance company," he said. "To have some relation to the physical supply chain which traditionally wouldn't have involved a bank."

The larger the customer, the more handholding is needed. "I as a bank must be willing to customize, be flexible, and fit into their process," Yavorsky said. "To work with their consolidators, freight forwarders and customs brokers."

Added Proctor, "It's like a large Venn diagram. You're trying to get as much into the middle of the picture as you can, where the interests of the shipper, buyer, and other parties to the transaction coincide."

WORLD VIEW
Ideally, banks would act as a hub to all parties to a transaction-buyer, seller, bank, carrier, freight forwarder, insurance company and customs authorities. "If you're going to use the consolidator model, why not extend it to the logistics and procurement side of the business," said Proctor, adding that the physical supply chain will soon have to adopt electronic communications. "All of them are going to have to find ways to work on a cooperative basis."

Chase views trade finance, not surprisingly, as a scale business, dominated by a few organizations possessing the requisite mix of technology and skills.

"Part of it is technology, and part of it is that in order to be viewed as a serious player, you need the knowledge base to use the technology," said Proctor. "We're going to continue to see consolidation among the major providers."

Smaller banks will continue to deliver global trade services to their local customers via correspondent relationships.

"It's important to have a global network, but you don't need to have it as one individual bank," said ANZ's Jobson. "All banks rely on correspondent relationships. From a customer's perspective, it's no different than if it's a single bank."

Said Proctor, "If you don't have bricks and mortar in 100 countries, but you have a strong client base that views international trade as their lifeblood, you as a bank in Chile can partner with a bank like Chase, which has a much broader physical network."

Chase has taken the partnership concept a step further by offering to license its trade technology to other banks. "Other financial institutions have been overlooked as a market segment," said Proctor. "We can provide technology and access to a global network, which they in turn can provide to their corporate clients."

He added, "It used to be viewed as an admission of weakness if you had to find somebody to do it for you. It's what you do that's important, not how you do it."

Chase takes a similarly pragmatic approach toward technology. "We're not a technology company," he said. "If we can't build it, we'll buy it."

ONE-STOP SHOP
Chase has supplemented its standard trade offerings with electronic services from TradeCard, a New York-based supplier of transaction software for cross-border and domestic trades, and Bolero, a joint venture of banks and logistics companies that's used chiefly for ocean shipments and large commodity purchases.

"We decided to go into the market, partner with companies like Bolero and TradeCard, and integrate them into our electronic offerings," Proctor said.

The goal, he said, is to provide a one-stop shopping experience. "When a client comes on to our Web site, he can request an electronic letter of credit or a collection, and channel the transaction through Bolero, which we can deliver private-labeled. When he goes into our Internet-based reporting tool, he'll see the letter of credit issued by Chase, the collections and the Bolero transactions."

TradeCard, meanwhile, is going about building a global network of financial services providers.

For example, Shanghai Commercial & Savings Bank, Taiwan, is using TradeCard to enable exporters to apply for trade financing electronically. Under the TradeCard scheme, the exporter and Shanghai Commercial first negotiate the terms of their financing arrangement offline. After receiving and accepting a purchase order from the buyer on the TradeCard platform, exporters then transmit a secure online application for financing to Shanghai Commercial. Because it has real-time access to the application, the bank can provide quick approval.

TradeCard users aren't required to switch banks. JP Morgan Chase, acting as TradeCard's funds transfer agent, handles settlement between TradeCard and non-TradeCard banks.

Postbank, one of Germany's leading consumer banks, provides access to TradeCard services through a Web connection that has the look and feel of its brand. Postbank, whose parent company Deutsche Post World Net recently acquired DHL, regards TradeCard as an opportunity to expand its corporate banking license into trade finance.

Concerned over the apparent ease with which TradeCard is forming partnerships, some banking industry observers suggest it's trying to muscle its way into banking territory. "TradeCard tries to replace the bank. Then they'll bring the bank in as a partner," said Bank One's Yavorsky.

According to Kurt Cavano, TradeCard's chairman and CEO, TradeCard is focused not so much on increasing its share of the market as on making the market bigger. "Greater transaction volume means greater demand for our financial services, such as export finance."

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