Trade Services & the Supply Chain - CGI

Trade Services & the Supply Chain - CGI

Trade Services & the Supply Chain LC Automation A blurry picture Technology in the supply chain finance field is blurring the differences with traditi...

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Trade Services & the Supply Chain LC Automation

A blurry picture

Technology in the supply chain finance field is blurring the differences with traditional trade finance, Justin Pugsley writes. Technology is steadily blurring the lines

pre-agreed roles, the bank can create an

between ‘pure’ letters of credit (LCs) and

LC for the client based on their purchase

open account transactions. As banking

order or just go to open account.

platforms become increasingly automated

“LCs should be an integrated part of a

and flexible, users are more easily able to

corporate’s procurement strategy, but

pick and mix the best features from the

as customers increasingly move to open

two payment methods.

account, they don’t need LCs in the

Indeed, trends such as automation are

volumes they used to,” says Quinn.

not only supporting supply chain finance

Indeed, leading banking software

(SCF), but are also speeding up the

developer, Misys, no longer differentiates

processes surrounding the issuance and

between the technology for automating

the management of letters of credit. The

LCs and open account transactions. ABN

trend towards greater transparency and

AMRO, on the other hand, simply talks

availability of data is also playing a role in

about devising trade finance solutions that

merging the two processes.

best fit their clients’ circumstances.

Many trade finance banking portals, such

Increasing capacity

as ABN AMRO’s award-winning MaxTrad product, allow users to choose between issuing an LC or going for an open account transaction when paying suppliers.

Quinn at JPMC: Still has faith in LCs

Meanwhile, Steve Starace, director, trade services banking and investments, with specialist trade finance software developer

The data for the two payment methods

ERP or enterprise resource planning is

CGI says that although the concept of

still originates from the same purchase

an attempt to integrate all the data and

automation has been around for a while,

order. Meanwhile, SCF uses the same

processes of an organisation into a unified

new technologies are increasing capability.

finance infrastructure that has been built

system. Practically all large organisations

Coupled with that, there has been

around LCs.

operate one or many ERP systems.

a veritable drive in recent years by

“We want automation to be seamless

Meanwhile, the leading ERP vendors,

multinationals to improve transactional

with other procurement activities,” says

Oracle and SAP, are steadily releasing

efficiency and reduce financing costs.

Michael Quinn, senior vice-president,

more sophisticated modules designed to

A fundamental change brought about

product executive for global trade with

handle different aspects of international

by SCF is that the burden of financing

JPMorganChase. “We’re really focused on

trade. Indeed, ERP and SCF are becoming

international trade transactions has

bringing in the customer’s information into

increasingly closely integrated.

increasingly been shifted to suppliers.

their ERP or payable system.”

Quinn explains that based on a set of

However, innovative SCF solutions enable

66 | Global Trade Review

Trade Services & the Supply Chain LC Automation those suppliers to leverage their finance

purchase order and confirming that the

costs off the often higher credit ratings of

payment will be made against a proper

their multinational customers.

invoice and other relevant documentation,”

“Technology, if focused in the right

says Oliver Berthier, Trade Portal product

way, in the right areas, can be really

and business development manager with

transformational in terms of cost and driving efficiency,” says Starace. He adds that defining the optimal processing model is one of the key elements of that transformation. However, it is defining those models that many in the banking community have been struggling with. In the meantime, various banking sources reckon LCs now account for just 12-20% of world trade and that share is shrinking by the year. In fact, it could be argued that LCs are steadily becoming a subsegment of SCF or even a market niche. Basically, they are relatively expensive to use and complex to administer. “People use LCs for specific purposes, such as when they start a trading relationship with a new supplier,” says Quinn.

Berthier at Misys:

Despite their falling share of world trade,

Banks should respect clients

Quinn along with other bankers believes that LCs will still have a role in the future.

This reduces costs, speeds up transactions and reduces the administrative burden associated with international trade

Not least, they are designed to provide

Misys Banking Systems in Paris. In other

both buyer and seller with a degree of

words, a sort of ‘light’ LC.

safety when doing business in the early

“We have been able to combine for our

days of their trading relationship.

clients different aspects of LCs with

At times of global instability, LCs could

open account as long as invoices are

well come back into fashion as trading

accepted by the buyer and we have all the

partners suddenly become much more

necessary data,” confirms Adnan Ghani,

focused on risk.

global head of trade services, transaction

Indeed, LCs are a type of risk mitigation

banking, with ABN AMRO.

tool and like all such tools they come at a

Building on that, Ghani says the bank


can then provide supplier finance against

And for that purpose, the LC is probably

those documents. Industry sources reckon

still the best instrument available for

such innovation is likely to grow as banks

fulfilling that role. After five centuries

strive to offer their clients tailored, but

of use, it is likely to remain so for the

competitively priced solutions.

foreseeable future.

Indeed, these are all benefits that derive

However, once a relationship is cemented,

from greater transparency of the supply

trading partners can and increasingly

chain. The more aware the bank is of

do move towards transacting on an

various events in the supply chain, the

open account basis. This reduces costs,

more it is able to devise very specific

speeds up transactions and reduces the

payment and financing solutions for

administrative burden associated with


international trade.

For the more advanced banks there is also the opportunity to offer, in an automated

Light LCs

fashion, a range of products such hedging

But even then aspects of LCs can still

solutions or insurance at the various

be useful. It can be a case of banks

stages of the transaction.

providing similar levels of security in an open account transaction that they would

Fewer errors now

provide under a traditional LC.

But there are other ways in which

“So for example it could be confirming a

technology is supporting LCs. “Technology

MAY/JUNE 2007 | 67

Trade Services & the Supply Chain LC Automation is dramatically reducing not only the

“That’s where we came up with our

paperwork, but the error rates involved in

document preparation solution. The

manual processing and the checking and

idea was to improve efficiency for the

mailing time and the delays that involves,”

client,” says Ghani. “We have automated

explains Ghani. “And then finally this

document preparation and the checking

impacts on providing the financing.”

process as much as possible and we also do some following up with third parties to ensure that their cash is collected as fast possible.” Where there is a trading hub or a community of trusted suppliers serving a large multinational, the opportunities for automation are substantial. For example: “The supplier can obtain from the buyer much of the necessary information to populate his documents within our system,” says Quinn. “Much of that data can then update the buyer’s ERP system. We have a facility that allows end-to-end documents.” Service level agreements (SLA) help define the relationship between bank and corporate customer. Although bank/ client relationships might be based on

Ghani at ABN: Tailored and competitive offerings

a particular level of service – subtle variations can creep in, as each corporate is essentially unique. Some may even require a completely tailored service. Monitoring and properly implementing

It is not uncommon for a large

SLAs therefore poses challenges of its

multinational with turnover in billions

own. “SLAs are a key to LC automation.

of dollars being able to save hundreds

They are a way for banks to set different

of millions of dollars a year in financing

levels of service and it is very important

costs. If the time involved in processing

for banks to respect those commitments

LCs can be reduced by 20 days, this

to their clients,” says Berthier.

can translate into shorter funding

To do this, banks need to know easily

requirements. Something that is not lost

what their commitment is to each

on chief financial officers and treasurers.

customer. Automating SLAs makes these

Quinn says if existing automation methods

tasks a lot easier and straightforward. It

are used to the full, a corporate can

also allows the bank to monitor its own

generate savings of 20-25% on its LC-

performance relative to the commitments

related transactions. And emphasising

in those SLAs.

those benefits, Starace says automation can reduce error rates by 50%. This is

Offshore processing

largely because the same data doesn’t

Yet another benefit of automation is being

need to be re-entered several times.

able to offshore much of the preparation

The fact that purchase orders and invoices

and administration behind LCs. Many

can be made electronic relatively easily

banks are doing this to reduce costs by

dramatically increases the potential for

locating much of that work in low-cost


countries. This is being made possible

Cross-referencing data between the

thanks to the ability to transfer data

content of the invoice and the purchase


order is much more effective when

An example of this is CGI. It incorporates

done electronically. Errors can be more

imaging into its trade services solutions.

quickly detected and corrected. And once

Again, this is not a new technology, but

the invoice is approved by the buyer

it is the way it is used that makes it so

– electronically – this can automatically


trigger other events such as supplier

“We’ve integrated it in a new way with the


right kind of workflow management tools

68 | Global Trade Review

Trade Services & the Supply Chain LC Automation that can allow banks to work in a truly

Despite potentially significant cost savings

supplier to the TSU.

effective way,” says Starace. This means

and creating greater levels of efficiency

No doubt many of the legal issues that

that banks can more easily circulate

and transparency, the initiative has never

stumbled Bolero will be resolved in

documents between branches and

really gained wide industry acceptance

the coming years as governments and

processing centres.


supranational institutions make the

Starace explains that some banks are

Some industry sources think the idea

trading framework more e-friendly. There

using this solution to help support

may have been ahead of its time and the

are many efficiencies to be mined in that

centralised processing centres in low cost

rest of the world simply wasn’t ready for

area, which would benefit international


it. Others note problems with trying to


“Documents can be presented locally

achieve standardisation and a raft of legal

In the meantime, TSU will continue to

and indexed locally and then routed to a


drive efficiencies that are supportive

centralised hub for processing,” explains

In the end, the world trading community

of SCF. Also, Bolero is continuing in its


has opted to go for a more gradual and

efforts to dematerialise trade-related

Such solutions open up a variety of

evolutionary approach. Indeed, had it


different operating models. For instance,

taken off it would have dramatically

Casio Computer of Japan is using Bolero’s

different aspects of LCs can be processed

transformed the trade services landscape.

platform to dematerialise some export LC

in different centres. Or an over-burdened

This was one revolution that apparently

documentation such as bills of lading. This

centre can route some work to a centre

had too many stumbling blocks to

covers goods being shipped direct from

with spare capacity. Indeed, this might be

seriously take hold, say industry sources.

Hong Kong to a buyer in South Korea.

crucial for a bank to meet its SLA with a




However, ABN AMRO, which has a


processing centre in Chennai, India,

solutions build on

working 24/7, has taken the process

existing systems

further. “For us India is not just about cost

and frameworks

reduction. It’s about being able to offer a

and simply make

superior service to our customers,” says

them more



He cites the example of a client

This is one reason

approaching the bank after business hours

why web-based

urgently needing an LC to be issued.


“Most of the work can be done in our

service solutions

centre in Chennai and the LC will be ready

are gaining popularity. The user requires

accounting for an ever-smaller proportion

next day,” says Ghani.

little or no change to their existing legacy

of world trade transactions, nonetheless

Other banks will route the work to other

systems to interact with a web-based

as a product they are becoming

regional offices around the world as the


quicker and cheaper to issue thanks to

work “follows the sun”.

Nonetheless, innovation is not stopping


there. The next big event for the trade

This doesn’t mean to say they’ll be

Revolution or evolution?

services sector is the roll-out of Swift’s

making a comeback anytime soon. If they

LC automation could however go much

Trade Services Utility (TSU). It was

do, it will be down to other factors such

further than it does today. After all, the

devised with open account transactions

as an increasingly risky global political/

technology is readily available.

in mind. It is essentially a matching

economic environment.

The road block is that much of the crucial

and workflow engine. Banks use this to

In the meantime, open account

documentation can’t be dematerialised.

support the matching of trade-related

transactions remain cheaper and more

Electronic documents and signatures

transaction data. TSU can match purchase

cost effective for corporates to transact

simply aren’t legally binding in many

orders and invoice data along with

with already trusted parties. There will

jurisdictions. In many instances the

transport documents.

always be a niche for LCs in international

capability doesn’t exist either. For

TSU is an attempt to restore the visibility

trade, particularly where there is a need

example, there is often an issue with

of the supply chain to banks, which they

to help manage risk.

chambers of commerce or embassies

once enjoyed when most international

However, technology is enabling banks

issuing certificates of origin. Often they

transactions were done via LCs. Open

to more easily pick apart components of

don’t possess the means to make them

account transactions, by contrast, offer

LCs and combine them with open account


little in the way of supply chain visibility

transactions. This is useful to meet the

Bolero made a valiant attempt to

to banks.

particular needs of corporates looking for

dematerialise a lot of that documentation.

The greater level of transparency offered

effective, yet competitive solutions to their

It created a centralised document

by TSU will enable banks to offer more

trading challenges. As such, technology

repository. It also attempted to establish

innovative financing solutions and where

is increasingly blurring the boundaries

a legal framework to enable more

necessary integrate aspects of LCs.

between traditional trade finance and the

documentation to be dematerialised.

Interestingly, Bolero is a major technology

newer area of supply chain finance.

For us India is not just about cost reduction. It’s about being able to offer a superior service to our customers

However, Casio intends to expand the initiative across its Asian operations. The initiative dramatically reduces the paper chase and speeds up the time for LCs to be issued. It also reduces the importer’s traderelated costs. LCs may well be

MAY/JUNE 2007 | 69