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Apr 20

Automation, new bank models drive trade finance

Posted by dbedell in trade financerisk managementOpen AcocuntLetters of Creditfinancial supply chaincash managementCash


As trade counterparty risk increased and liquidity became scarce during the global economic slowdown, many companies revamped their trade finance tools in order to better manage that risk and ensure the smooth flow of goods internally and externally for global operations. Traditional risk-mitigation tools, such as letters of credit (LCs) and agency guarantees, once again grew in popularity for trade within both developed and less-developed countries, as we pointed out here . In addition, corporates generally invested more in software tools to help control trade documentation and trade finance management.

But the biggest changes have been made on the banking side, as financial institutions increasingly recognize that trade finance desks can no longer operate in a silo. Many banks have reorganized their trade finance functions to integrate them with cash management, payments, and collections in order to help companies manage their supply chains from end-to-end.

As the technology backing all of this has progressed, traditional trade finance solutions - along with newer tools, such as Open Account trade financing - are much faster to arrange, more automated and thus much simpler to initiate. LCs, for example, can be arranged online, electronic imaging can be used to make documentation examination easier and faster, and document collections and management can be handled online.

So a company could initiate a letter of credit online for a purchase of goods from abroad; and have their bank send confirmation of the LC to the supplier’s bank electronically. Then upon shipment of goods the supplier could use electronic imaging to send the commercial invoice, bill of lading, insurance documents, and any other required documents to their bank for electronic forwarding to the buyer’s bank. Finally, after receiving those documents, the buyer’s bank can send the funds to the supplier’s bank, which can then transfer funds into the account of the supplier.

However, the investment needed to provide best-practice trade finance and document management solutions that are both fully integrated with other systems and cover all of the countries in which their clients conduct trade is extensive. This means that many banks have either set up partnership arrangements with other regional or local banks, have outsourced trade finance management to one of the few big global banks that can manage it, or have bought white-labelled solutions from banks or third-party vendors.

In addition, a number of corporate-driven models for trade finance have developed, which we will discuss in a later blog.

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