While Letters of
Credit (LC) have been around for centuries as a de-facto mechanism for
cross border trade, it is bogged down with a heavy amount of
paperwork. In some cases, especially for importers who deal with a
high volume of trade, an army of staff is employed just to process the
paperwork. Hence, corporates are always looking for ways to reduce the
paper trail, reduce transaction costs and increase operating
efficiencies.
Over the recent decade there has been a trend for corporates towards
conducting trade on open account terms to cut down on paper and also
reduce transaction cost. However, the financial crisis in 2008 was a
stark reminder of the realities of payment default risk inherent with
open account trade, and many corporates eventually reverted back to
the security of using the conventional LC instrument.
In more recent years, trade has evolved with the increased adoption of
technology, making trade increasingly paperless. BPO or the new Bank
Payment Obligation is one example where open account trade is
conducted with the seamless communication of data elements between
corporate-to-banks and bank-to bank electronically. Another example
would be the emergence of the electronic LC model or eLC, where
information critical to the functioning of LCs are transmitted
electronically between the various parties involved in the
transaction.
Either way, be it the trend towards electronic LCs or open account
trade, the landscape in trade will certainly evolve towards a more
electronic form of end-to-end communication, even though the
underlying mechanism of trade remains the same. |
Results from East
& Partners Asia Trade Finance Program show that Asia’s Top 1,000
corporates rate the importance of processing accuracy for trade
finance at 1.07, and the quality of documentation at 1.06 on a 1 to 5
scale, where 1 is most important.
By enabling straight-through-processing of trade documents to the
banks, this will result in reduced errors and discrepancies in trade
documentation presentation, and prevent costly re-work and delays in
the transaction.
Host to host communications between the corporate’s enterprise system
and the bank is not something new in this current day, as much of the
technology is already present in the transaction banking world with
the integration of corporates cash management system directly with the
banks system. Yet, the electronic revolution of trade is still very
much in its infancy.
Not surprisingly, when asked what would be the key factor in picking a
Trade Finance bank, Asia’s Top 1,000 corporates cite the deployment of
e-Trade solutions as the third most important factor in the deal, an
aspect that is scrutinised right after the facility amount and loan
conditions.
In the era of quantitative easing, where access to credit is no longer
an issue as it was just after the financial crisis in 2008, it is the
prerogative of banks to be aware of the high importance put on e-Trade
solutions, instead of solely relying on assets and margins to win
market share. |
