A blink of an eye and we are now in 2002. Looking back at what happened with trade services in 2001, we find a few things that are noteworthy and should make us stop and think about the future. One of these is the Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation, better know as eUCP, which should come into force on April 1, 2002. For most banks, the carryover question from the last year is, ‘what are we going to do with trade services in general?’ Are we going to outsource our trade processing operations in whole or in part to another bank or company? Are we going to maintain our status quo and continue to serve our own customers, or are we going to expand our trade services business and insource business from other banks? Other issues on the 2002 agenda include e-commerce solutions for trade, digital identities for corporate customers, and standards.
Centralization of Trade Processing Operations
Centralization of trade processing operations will continue through 2002 for banks with large domestic and overseas branch networks. Many banks are in the process of establishing regional processing centres in low cost regions of the world where they plan to concentrate experienced document checkers and technology for greater economy of scale.
A number of banks that have already established centralized processing operations have gone further in offering their processing services to other banks. Bank of New York, First Union now Wachovia, and Standard Chartered are just some of the banks that have made a name for themselves in this role. Another example is Proponix, a newly established joint venture between American Management Systems, Australia and New Zealand Banking Group Limited, Bank of Montreal, and Barclays Bank PLC, which has centralized the trade processing operations for three banks and plans to insource trade processing from other banks as well.
Three Groups of Banks
In terms of trade processing today most banks in the world
can be divided into three districts groups: Insourcers, Outsourcers and
Self-Processing Banks. Insourcers are
banks that have made a strategic decision to insource trade processing from
other banks. Outsourcers are banks that
have already outsourced their trade processing or are considering doing
so.
Self-Processing Banks are banks that do not outsource for various reasons and
need to continue processing business for their existing client base. Such banks may be considering insourcing in
the future but not immediately.
Although some banks have a clear strategy of what they want to do in
trade, most banks are undecided as to whether they will insource, outsource, or
maintain their current trade operations.
Proponix’s Market Research
Twenty-Eight major banks from North America, Europe, Asia, and Australia were surveyed in May 2001 by an independent research company commissioned by Proponix on topics ranging from annual spending on global trade/finance operations and key challenges facing the industry, to the greatest benefits of and barriers to outsourcing their global trade processing. The results of the research as reported by e-mmerce magazine are interesting:
• About half of the banks surveyed said
they spend more than US$10 million per year on global trade
processing.
• 34% said technology is their biggest challenge, followed by growing revenue (31%) and improving overall profitability (27%) of their operations.
• The three ‘most urgent’ technology projects for global trade that the banks had undertaken recently, or plan to soon, are: building internet front-end capabilities; installing new or updating back office software; and updating legacy computer systems to meet customer demands.
• The largest benefit of outsourcing is lowering the price of each transaction (62%).
• Of this group, 100% said outsourcing would cut costs, with 41% stating the savings would be in the 20-30% range and a further 12% stating the savings would exceed 30% annually.
• More than half (52%) also said outsourcing gives the bank access to the appropriate technology.
• The global banks acknowledged outsourcing could have customer sensitivity issues (62%) and create problems with their existing, or legacy, computer systems (46%). But these barriers could readily be overcome.
• Two thirds (65%) said they would prefer a ‘variable charge,’ or pay for what you use, system to be offered by the third party outsourcing vendor.
Key to Successful Insourcing
Insourcing of trade processing is not an easy task. A few banks have learned this lesson the
hard way. However, the market
opportunity is definitely there as confirmed by The Bank of New York, Proponix,
and others. There are small and midsize
banks around the world that are prepared to outsource so long as there is no
threat of losing customers to the processing
institution, and the technology is in place for a white-labeled solution with
customer service issues thought through.
According to Dr. Neil N. T. Tseng, Chairman of China Systems Corporation, there are several key factors for the Insourcing Service Provider to consider in order to be successful:
• It has to be compliant with local government regulations.
• It has to have core competence in global trade services.
• It has to eliminate the age-old concern of the outsourcing banks that the insourcing service provider will not take away their customers.
• It has to offer an attractive fee structure that generates more revenue than the outsourcing bank could earn by keeping the processing in-house.
• It has to utilize the power of the Internet and build sophisticated interfaces to link with the existing systems of the outsourcing banks and its clients for B2B STP processing and to improve operation efficiency.
• It has to invest heavily in hardware, software, and communication bandwidth to fulfill its service level agreement.
‘To utilize the power of the Internet, the Insourcing Service Provider must refurbish its transaction processing system and document management to support thin-client or web technology,’ states Dr. Tseng.
Emerging e-Commerce trade solutions are not making the decisions for banks easier largely because these solutions are new, and none to date has gained wide market acceptance. Most banks are looking to their corporate customers to be the drivers behind new technologies and are hesitant to dive into new business models. Familiarity with digital certificates and the eUCP rules should make the transition easier. When discussing insourcing and outsourcing one should be clear that insourcing of paper letters of credit is not new and has been happening for years. However, the insourcing of electronic trade processing is new, and the Internet has changed the landscape of the traditional issuing bank – advising bank environment. CCEWeb’s @GlobalTrade™ solution is looking to improve the efficiency of trade processing by eliminating the need for an advising bank without changing the UCP rules, using PDF and digital signatures as a means to move documents electronically or in combination with paper documents. The solution offered by TradeCard aims to replace the letter of credit and the need for UCP by a new payment instrument, where the risk of the buyer’s non-payment is secured by an insurance company. Bolero has focused its solution around a central registry for handling documents of title electronically together with other documents relating to a trade transaction and developing their own XML standards. Although the goal of all three solutions is to improve the efficiency in cross border trade, they have different approaches, price structures, and business models.
E-Commerce Solutions for Trade
Bolero, TradeCard, and CCEWeb’s @GlobalTrade have taken centre stage as emerging electronic trade `solutions.
Bolero
Bolero (bolero.net) was created by SWIFT (Society for Worldwide Interbank Financial Telecommunication) and the Through Transport (TT) Club. By the end of 2000 Bolero had completed $50 million in private placement. Investors included Baring Asia Private Equity Fund II, Palio Portfolio Ltd, and Apax Partners Europe IV fund.
The backbone of the Bolero System is the Core Messaging
Platform, which enables users to exchange electronic trade documents via the
Internet. According to information
published on the Bolero web site, its system is secure and underpinned by a
unique legal structure that is maintained by a trusted third party. All messages between the Bolero users are
validated and acknowledged, and notifications are provided as requested.
Additional messages determine whether the recipient accepts or refuses the
stated offer. The major feature is the Title Registry
application, which allows for the ownership of goods to be transferred online.
Bolero had been in the development stage for a number of
years and was launched commercially on September 27, 1999. It has signed up a number of large financial
institutions, but was only able to complete a limited number of trade chains
that havesince tested its solution.
Most banks interviewed by L/C Monitor said that Bolero’s price structure
is very expensive. Although banks
applaud Bolero on their work done on standards for international trade, they
claim that Bolero’s rulebook is difficult to explain to customers and that implementation
work is complicated due to the need to purchase third party interfaces. With the launch of SURF, Bolero plans to build on the constructed components of the
Bolero
service offering. The core messaging system
allows trade data and documentation to be exchanged online in a secure environment. Market reaction to SURF and the Bolero
concept in general will continue to be tested in 2002 as users gain a better
understanding of the value proposition.
TradeCard
TradeCard
(www.tradecard.com), originally conceived by the The World Trade Centers
Association (WTCA) in 1994, is a financial supply chain service provider.
TradeCard claims that its secure transaction infrastructure greatly reduces the
inefficiencies and uncertainties found in traditional domestic and cross-border
trade transaction processes. By streamlining and enhancing the steps necessary
for purchase order approvals, payment decisions, and
settlement, TradeCard provides a cost-effective, practical, and patented
service for financial supply chain management.
With its mission to provide a range of financial settlement
options supporting both cross-border and domestic trade transactions, TradeCard
is designed to meet customers’ needs with respect to transaction procurement,
fulfillment, risk mitigation, payments, and settlement. In addition, TradeCard
provides the benefit of a patented data compliance engine, assurances of
payment, money movement, and access to logistics, inspection, insurance, and
financing
services.
TradeCard was formally established in 1997 and in 1999 became an independent company with private equity funding from Warburg Pincus. The next year TradeCard launched its web-based service and in 2001 started to offer a single financial supply chain platform hosting a full suite of financial management and settlement products.
When TradeCard first launched its automatic compliance engine, the banks perceived it as a threat since they did not know how they could profit from participating in the TradeCard initiative. With a new management team that formed after the Warburg Pincus investment, TradeCard has reinvented itself and now finally has a number of banks supporting its initiative.
The fact that TradeCard has thrown out the UCP 500 rulebook for letters of credit and replaced the L/C with a TradeCard payment instrument makes trade finance bankers uncomfortable, to say the least. TradeCard argues that L/Cs are too expensive and paper intensive and that there must be a better way - and that is provided by TradeCard. A Canadian company CCEWeb has challenged TradeCard’s argument by introducing a FastTrack electronic documentary credit product in a similar price range as TradeCard. Unlike TradeCard’s patented automatic compliance engine, CCEWeb’s @GlobalTrade system still relies on the banks trade services operation to check for compliance of electronic and/or paper documents manually as they always have done.
@GlobalTrade
CCEWeb Corp. (www.cceweb.com) is a global service provider to
financial institutions and facilitator of the @GlobalTrade™ Internet-based trade
processing and document management system.
It introduced its idea to the market in September 2000 and has developed
a working prototype of the system in less than one year. Today a number of international banks, their
corporate customers, and trade service providers are piloting the @GlobalTrade
system.
Following the adoption of the eUCP supplement to the UCP 500 rules,
@GlobalTrade plans to go live in the summer of 2002.
The main goal of @GlobalTrade is to allow financial institutions to exchange and process electronic trade documentation with their customers and the customer’s trade chains. The system uses the integrated approach for straight through processing of both paper and electronic documents. Main benefit of such approach is managed transition from paper to electronic imaged and then to electronic data documents for banks and their customers.
Banks that are currently insourcing trade processing, or that would like to expand into this area, will find the greatest benefit in the @GlobalTrade solution, because it provides a complete solution for insourcing of electronic trade processing. The insourcing solution is also capable of accepting electronic and paper documents. Banks that do not want to outsource and would like to continue to do their own trade processing can also use @GlobalTrade solution. There is no fee to register with the @GlobalTrade network,and end users pay for its use on a per-transaction basis.
eUCP
In December 2001 L/C Monitor reported that the ICC Banking Commission approved the Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (‘eUCP’) by a vote of 63 to 3 at its November 2001 meeting in Frankfurt. The overwhelming support may be surprising to those who feel that the B2B boom is dead, but not surprising to those who feel that the use of Internet for serious business applications is the future.
‘The eUCP represents the first step on the ladder for Trade Service products to move into the “e” arena,’ said Gary Collyer,Vice President and Senior Trade Advisor e-Business Citibank (UK) . ‘The letter of credit has, historically, been based upon paper principles and ideals; the electronic environment of tomorrow creates new challenges and processes which can only be for the good of the trading community. The eUCP will go some way to helping industries achieve their goals,’ added Collyer.
I agree with Mr. Collyer that the eUCP should help the industry move forward and help evolve trade processing. The telex was replaced with the fax machine, and now we no longer ask for a person’s fax number but rather for their e-mail address instead. In the same way, the need to send pieces of paper around the world will be replaced with PDFs, Word, and other electronic formats that will be secured with the sender’s digital identity. The trade finance bank will definitely play a major role in this development. The year 2002 should be interesting. Let’s pray that it will also be safe for our families so that we can focus our attention on growing trade and doing real business.
Jacob Katsman is Chairman & Chief Executive Officer of CCEWeb Corp., the parent company of this publication. Prior to founding CCEWeb, Katsman was the Director of Finance of a multinational steel trading company. He also managed trading companies in Asia, Europe, and North America. Katsman is a recognized expert on international trade. His book ‘How to Make Money without Money: The Art of Transferable Letters of Credit and Assignments of Proceeds’ is regarded by the international banking community as a standard guide to the practical use of letters of credit in trade finance. He has co-developed the @GlobalTrade Secure Payment and Trade Management System, and founded the International Trade & Banking Institute www.itbi.net.