August 2014

e-Trade Solutions Not to be Ignored
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.
Quick Facts about e-Trade Solutions
  • E-Trade solutions are the 3rd most important factor in winning a deal according to corporates

  • Corporates give e-Trade solutions provided by banks a satisfaction rating of 2.09 (on a scale of 1 to 5, where 1 is very satisfied)

  • Corporates rate e-Trade solutions at 1.10 in terms of importance. (on a scale of 1 to 5, where 1 is very important)

  • Over the last 10 years, the importance rating for integrated e-banking by corporates increased from 1.98 in 2004 to 1.09 in 2014. (on a scale of 1 to 5, where 1 is very important)


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