"Here I Go Again:" How Platform Companies are Transforming International Trade Finance
William Laraque, Managing Director at US-International Trade Services
19.08.2015 01:00 am
Transformation is the politically correct term for revolution. Disruption is overused and tiresome. It is so Schumpeter, just as the term "revolution" is so Marx and Hegel. Transformative sounds exciting and denier cri.
EDI or Electronic Data Interchange evolved from the Berlin Crisis when its precursor was used by military logisticians to efficiently process massive amounts of logistical data in resupplying the beleaguered city. I am a former military logistician and I know what my brothers and sisters-at-arms can, have and will accomplish in logistics. FedEx and HomebDepot are cases in point. Itbwas Churchill who said that battles are won with tactics but wars are won with logistics.
EDI as a standard and peer-to-peer mode of communication is now used by merchants and certain industries not only as a means of transmitting large amounts of data in the purchase to order process, but also as a facilitator to trade settlement through the exchange of electronic documents. EDI is a cross-border business document exchange and trade settlement facility.
The just-in-time needs of the auto industry led to the creation of an industry-specific standard for the exchange of information within this industry. Other industries have benefitted as well, the retail industry in particular.
The big news is that platform companies have incorporated ECAs and ECI to provide trade settlement. Confused? I will explain.
EDI use and EDI-based matching of data has allowed merchants and some industries to replace the LC. This does not preclude banks from using a VAN or their own functionality to interface with the EDI process and make money by being paid by vendors for paying each P.O. in a trade settlement process.
Merchants use EDI to transmit purchase order information. It used to be that merchant's vendors used thevEDI messaging standard and methodology imposed by the large merchant to report shipping or logistics status. Purchase order notification is a typical merchant or buyer message. An ASN or Advanced Shipping Notification which provides shipping and packaging status, is an example of a vendor communication. EDI is also used to match purchase orders to bills of lading and cargo receipts. This match results in payment, in the settlement of trade transactions. The role of banks in this exercise seems to be limited to funds transfer. This trade settlement methodology is therefore called "open account." The Edifact or other messaging standard precluded the need for SWIFT-specific XML message types and the trade settlement function renders unnecessary the use of the SWIFT Trade Services Utility (TSU) and that of the Bank Payment Obligation or BPO. SWIFT provides safety against the cybersecurity threat to financial services. This will continue to be its primary and critically important role.
It is assumed that these are open account transactions because banks are not directly involved in financing the trade settlement process. Platform companies and banks in some instances interface with the EDI process and arrange for payment of matched purchase orders and charge the vendor for the payment of each purchase order. This is a large and profitable business in Asia. It is also the business of GT Nexus, now merging with Infor. Platforms can be used
to facilitate trade among buying and selling trade counter-parties. In other words, there is no need for a vendor to be part of the supply chain of a larger enterprise in order to access trade finance.
In the late 90s, a dear friend of mine worked to develop TradeCard, the predecessor to GT Nexus. I was able to mine his knowledge of the TradeCard process. I learned then that an essential part of the trade settlement methodology of TradeCard was Export Credit Insurance, (ECI) provided then by Coface. The receivables insured against non-payment for political and commercial reasons, by ECI could then be financed once POs were matched to receivables. This is fine for financing the cash conversion cycle of enterprises. What about the pre-export operating cycle needs of the SME? What SMEs need is pre-export financing to fund the inventory purchase and work-in-process, pre-shipment operating cycle? This is where the Working Capital Guaranty facilities of such Export Credit Agencies (ECAs) as SBA and U.S. Ex-Im Bank come into play.
The savings as a result of replacing the manual processing of paper and avoiding errors from the reentry of data are well documented and have been recognized as a means of cost cutting and efficiency for more than 15 years. When compared to manual LC processing, the efficiency of operation and savings are huge.
Both the accounts payable of the merchant buyer and the accounts receivable of the supplier may be financed by banks or financial institutions.
The trade settlement process involves matching massive amounts of data within the EDI functionality and messaging standard.
The matching process is convenient and works efficiently. ERP systems can be smoothly integrated into the matching and trade settlement process. There is no need to digitize or de-materialize trade documents because in EDI the data is already electronic and conforms to a standard, the EDI standard. EDI has also been adapted to serve industry-specific requirements. In addition EDI uses the adherence to a communication standard as confirmation of the integrity and legitimacy of the trade counterpart in the same way that SWIFT does.
What is the role for trade finance banks in the future? They will own these trade facilitating platforms.