Looking back, historians of 21st century trade finance will characterize the beginning of the era as a paradigm shift. Thanks to technology, age-old ways of financing trade transactions have evolved so rapidly that a new world of trade — much faster and laser-focused on efficiencies — has replaced the old in just a few years.
Only yesterday, we were still in the era of documentary trade. Financing, although available and relatively inexpensive, relied on masses of paper that had been handled in the same way for centuries. But if the process was cumbersome, it was also predictable. The physical documents required for the initiation and processing of a Letter of Credit (LC) gave comfort to all parties in a typical trade transaction.
Today, despite the financial crisis, the era of documentary trade seems to be ending as the march towards open account transactions continues unabated. The utilization of Letters of Credit actually declined during the crisis and subsequent downturn, while the demand for the financing of customer supply chains sharply increased in order to ensure business continuity.
Simpler and smarter
Even with open account, today’s international trade environment is made fiercely complex by multiple trading partners, cross-border networks and new, overlapping regulatory regimes. Trade flows constantly change while global trade markets show both growth and volatility.
Against this backdrop, global companies are seeking simplicity — or more to be more precise, they are seeking efficiencies in their trade activity through the promise of technology. It is not surprising in this period of still-tight credit that companies are making a significant drive for better visibility into their supply chains and cash flows. Technology can give companies unprecedented insight into the day-to-day workings of their business and now allows them to leverage information in ways they never anticipated.
For many companies in 2012, the question is not If, but How they can best access this quickly-evolving technology. Managers in the trade space — risk managers, assistant treasurers and treasurers — are making a big effort to expand their understanding of the leading edge solutions now available.
What banks are hearing from customers
Global trade banks are just as eager to understand the ways that new technology can support their corporate customers. They have made the innovative application of technology a major focus.
What we at J.P. Morgan hear from clients time and again is how much they want to get away from Letters of Credit – from their onerous documentation requirements and all the delays and frustrations encountered in processing. But they will also admit that however much they dislike LCs, they need some level of risk mitigation — and consequently need banks to take a role in their trading activity. When companies talk to a bank like J.P. Morgan, the trade question they most often ask is quite straightforward: “I want to simplify my trade finance process, lower my costs, and optimize my cash flow without incurring unacceptable levels of risk. How can you help?”
The answer is a technology-based solution that combines the risk mitigation and liquidity of a Letter of Credit with the cost benefits and operational efficiencies of trading in Open Account. It is called a Bank Payment Obligation, or BPO.
Introduced by the Society for Worldwide Financial Communications (SWIFT) in 2009, the Bank Payment Obligation (BPO) is a financial instrument that requires the obligor bank to pay the exporter bank when data has been successfully matched within SWIFT’s Trade Services Utility (TSU). The TSU is a bank-to-bank platform on which banks can exchange data extracted from a company’s trade-related documentation — purchase orders, commercial invoices, insurance and transport payments are examples — and match payment terms.
A BPO is similar to a Letter of Credit, but it deals with electronically exchanged data rather than documents. A bank can issue a BPO directly to a seller, or confirm another bank’s BPO using TSU. In lieu of typically required shipping documents, the parties to the trade transaction establish a baseline of key data points that could also be found in a Letter of Credit — amount, shipping dates, etc. — and match those data points, rather than physical documents.
BPOs do not eliminate the need for paper entirely — shipping documents may still need to circulate outside banking channels — but they are a very significant development in the history of trade banking, what we can likely call a game changer. With BPOs, using the TSU as a platform, banks are settling on the basis of data, rather than paper.
BPO market impact
The benefit of using the BPO to buyers in terms of their cash flow optimization is huge. Settlement is so much quicker that a BPO can occur almost as soon as the data elements match. (Compare this to a process that may take anywhere from two to seven days and involves the sharing of physical documents.) When data is matched automatically, the buyer retains ability to control payments via dashboard access to the BPO process. For sellers, a major BPO benefit is the streamlining of their internal processing. While they must still comply with purchase order terms and contractual obligations, they are no longer burdened with the complexities of handling a Letter of Credit. The simplification of their process accelerates their Days Sales Outstanding (DSO) significantly.
Global companies and their banks are showing an increased interest in BPO adoption. Since China banks have been early adopters of the Trade Services Utility platform, particularly likely candidates are Brazilian mining companies and Indian steel manufacturers involved in large China trade flows. Currently, in order to make use of BPO capability, both banks involved in a company’s trade transaction must be TSU members. But the International Chamber of Commerce (ICC) is currently drafting international BPO rules and standards that will be similar to the standards contained in the UCP 600. When banks are able to use these international standards to link up directly, utilization of the TSU will no longer be necessary. This should considerably ease the adoption process for banks and their corporate customers, and influence the change in corporate behavior.
More pain relief: SWIFT for Corporates
More trade relief is now on the way in the form of another major innovation from SWIFT. A handful of leading global banks, including J.P. Morgan, have joined up to conduct a group effort known as SWIFT for Corporates, or SCORE. SCORE is based on SWIFT’s new MT 798 messaging program for ERP-compatible SWIFT members. The MT 798 is a sort of electronic “envelope” for multiple SWIFT member messages to standardize communications. When a bank receives the MT 798, it executes the orders “wrapped” within it, and the information also flows back into the clients’ systems so that they can track liabilities and balances from multiple banking providers.
SWIFT provides financial messaging for more than 10,000 banks and corporations in more than 200 countries, and its innovative MT 798 addresses a major pain point for large multinationals. For more than 25 years, these companies have routinely maintained many different banking relationships around the world because they have needed Letters of Credit for both imports and exports, along with Standby LCs and insurance bonds to support their trade flows and financial obligations. It is still not uncommon for a corporation to have a significant number of banking relationships, each requiring a unique trading platform. Adopting a standardized messaging process like SWIFT’s will allow corporations to streamline their banking relationships and keep their Letters of Credit in a single repository, where they have a total view of their exposures around the world. This is in sharp contrast to what most companies do today – download the information and consolidate it manually, so that it is neither real-time nor widely accessible.
To make this new standard a useful reality for clients looking for support of their global trade flows, J.P. Morgan has built a 2012 roadmap for implementing MT 798.
Real time Trade: Portals and mobile transacting
A key component of successful international trade in today’s economy is instant access to critical trade flow information. Trade Channel, J.P. Morgan’s web-based global platform, helps clients gain visibility into the entire range of their trade activities — from purchase order to payment. The net effect of Trade Channel is improved efficiency, reduced expenses, less risk and a more streamlined trade-related payables and receivables process. For clients that are expanding internationally, the Trade Channel platform provides a portal through which they can fund and manage their trade activities end-to-end.
Portals like Trade Channel are deployed to help manage cash flow and levels of counterparty risk, providing a holistic view of trade activities from a single point of access. The Trade Channel platform supports traditional trade finance instruments such as Import and Export Letters of Credit, Standby Letters of Credit, and Direct and Documentary Collections, as well as Open Account transactions with an automated Purchase Order capability. Users have the ability to customize trade-related workflows, view images of shipping documents, create reports, and securely submit inquiries and exchange information — anywhere, anytime. Besides English, Trade Channel’s unique multilingual capabilities include Spanish, Portuguese and Simplified Chinese, with the addition of more languages planned for the future. Trade Channel enhancements have included a customized dashboard feature that allows users to create interactive charts from underlying data for trend analysis, and to access proprietary J.P. Morgan training and reference materials.
Trade Channel features and functionality are the result of research, discussion and partnership with J.P. Morgan’s trade clients and provided in response to their most pressing concerns. Some its new features, particularly its multilanguage capabilities and the analytic and informational value-adds of the client dashboard, are unique industry offerings. They help clients respond more efficiently and effectively to the challenges of international trade.
J.P. Morgan is embarking on an additional Trade Channel enhancement — a mobile initiative that will provide some clients with access to trade activities via standard mobile devices such as smartphones and tablets. Besides being able to view key trade data, the mobile initiative will enable transaction approval and support text alerts for any type of transaction or event.
The Future is now
Technology advances have already revolutionized the way we manage and finance global trade. Technology continues to provide solutions to the challenges that arise from expanding regulation, constantly changing compliance requirements, and the persisting importance of cross-border risk mitigation even as open account transactions become the norm. The holy grail of supply chain and working capital management — total, end-to-end visibility — was never closer. In fact, it is arguably already here.
About the Author
Gerry Scalgione is the Regional Product Management Executive for J.P. Morgan’s Global Trade unit. Based in Chicago, he specializes in the development of innovative, client-driven trade solutions that serve J.P. Morgan customers across the globe, including the firm’s web-based product and service delivery platform, Trade Channel. Gerry previously managed J.P. Morgan’s Global Trade and Logistics operations team. In his nearly 30-year career he has worked for multiple international banks in senior roles, supporting major corporate clients.