Evolving Payments Methods
Further complicating the process for banks, payments methods for international trade are changing. For years, buyers and sellers paid for goods using letters of credit, where the bank would authorize the seller to draw drafts on a predetermined amount on the buyer's behalf. Banks would examine the shipping documents and notify the customer when discrepancies arose, thereby eliminating errors and lowering some of the risks involved in the transaction.
Now, however, companies increasingly are moving to open account payments in which payment typically is required after goods have been shipped. In this case, banks need only make the wire transfer. But this method places the onus on the buyer to examine the invoice information to make certain it is accurate. And a level of risk is introduced into the transaction, particularly for the seller, because the goods ship with just the buyer's assurance that it will pay, explains SWIFT's Conn. But banks are wending their way into the open account process, he adds, eliminating some of the risk introduced with this method of payment by providing new supply chain services based on specific transaction flows.
Wachovia already is acting on the move from letters of credit to open account payments. According to the bank's House, letters of credit have been on the decline for some time, so Wachovia is making it a priority to jump on the open account bandwagon by helping to manage the risk associated with these transactions around the documentation.
"We're creating new Web applications to support a digital open account so the buyer and seller have visibility into the transaction," House explains. "On top of the open account transaction, we're leveraging data in the transaction to provide advantageous financing. It's an increasingly in-demand service among corporates and even middle-market firms. They want to leverage their own credit as they expand their partnerships overseas."
Of course, SWIFT is in the thick of things, too. The cooperative currently is piloting what it calls the trade services utility (TSU). According to SWIFT's Conn, TSU was created at the behest of some major trade banks that approached SWIFT four years ago seeking a solution that would provide banks with open-account-related products. "TSU is meant to be the infrastructure for banks to provide the next generation of supply chain services to corporate clients. It enables them to build new products around the open account space," such as just-in-time financing, he explains. "TSU helps automate the matching of invoices against purchase orders and shipping information against purchase orders. [Currently], this is a very manual process at some financial institutions." Conn reports that SWIFT is three-quarters of the way through the pilot and expects a commercial launch of TSU in the spring.