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Years ago I worked as a sales rep for Taiwan Computers, a major motherboard manufacturer in Taiwan. My customers were mainly based in Australia, Hong Kong, New Zealand and the Philippines. The more tedious parts of my job included filing import/export documents at the trade department and going to different banks to chase customer payments, mostly sent via letters of credit (LC).

Government documentation was relatively easy since there was only one department and the forms and the filing were standard. These forms are important today; logistics companies like FedEx, BAX Global and DHL will ask for these before they begin processing your order.

Processing an LC is another matter. In an ideal world, a customer places an order with a manufacturer in a foreign country, goods are shipped and payment is made. However, as most traders would attest, the industry doesn't work on trust alone. Suppliers will not manufacture and ship goods to customers halfway around the world without some assurance of payment. Buyers will not pay for a product that he has not seen nor checked against his specifications.

The key to unlocking transactions between exporters and importers is the LC, issued by a financial institution as an irrevocable guarantee of payment. Once the beneficiary has presented to the issuing or negotiating bank documents complying with the LC terms, the bank is obliged to pay irrespective of any instructions of the applicant to the contrary.

Let's say my company banks with Commercial Trust Bank (CTB) in Taiwan, which has a branch in Hong Kong. My customer is Acme Computers in Sydney. They have an account at National Australia Bank (NAB). Acme sends an order for $100,000 worth of computer parts. I agree to sell the goods and give Acme 30 days to pay, provided they send me a 60-day LC for the full amount.

Acme goes to NAB and applies for a $100,000 LC, with Taiwan Computers as the beneficiary. NAB issues the LC against Acme's account at the bank. NAB sends a copy of the LC to CTB, which notifies my company that payment is ready and we can ship the goods Acme ordered with full assurance of payment. Acme sends a letter confirming receipt of the goods. I go to CTB with all the documentations stipulated in the LC, NAB transfers the $100,000 to CTB, which then credits the account of Taiwan Computers by that amount.

"Now imagine if you have 100 customers scattered across 20 countries. Each have their own preferred bank and the payment conditions vary depending on the value of the order and the relationship with the customer," said Claire Buchanan, senior vice president of global operations at Bolero, which runs a global electronic trading platform.

Inefficiencies

There are documented cases of beneficiaries waiting as long as 30 days before getting paid even after the customer has confirmed receipt of the goods. In many cases the delays are the result of back-and-forth processing between the banks. Naturally, the banks are making money from interest, but the customer gains nothing and is meanwhile feeling the pressure on its cashflow. On top of this are the processing fees and bank commissions that will be charged.

The inefficiencies in the existing financial supply chain have been tolerated for many years simply because it was the only one that existed.

Many of the improvements on the supply chain have involve the physical elements, ranging from containerization to fulfillment management, and not the financial side.

According to management consultant Killen Associates, "a typical billion-dollar company spends approximately $27 million annually on unnecessary working capital and inefficient processing functions because they lack visibility into the financial supply chain and receivables." The total value locked up in inefficiencies associated with the global supply chain is estimated at between $500 billion to over $1 trillion.

That is because of 'performance gaps' in the financial supply chain, such as the time taken over documentation and the manual errors that arise from manual input and reconciliation.

Now companies from outside the financial sector are moving to plug those gaps. It's an opportunity keenly eyed by logistics giants such as TNT and pure play financial service providers.

"Traders on both sides of the chain are under constant pressure to identify areas where they could cut cost and improve efficiency," said Ambrose Lin, Managing Director of TNT Express Worldwide Hong Kong, an express logistics provider. "They are passing this pressure on to their logistics providers expecting value-added services that are not their core focus."

Imagine if you have a system where the information about your business is stored electronically and when you need to issue an LC, you simply connect to a service provider, identify the bank you want to deal with and provide the details of the track. The system extracts the appropriate information and electronically fills in the form. This becomes one task that allows your finance controller to see from one dashboard your financial position as it relates to the different transactions you have ongoing, including credit standing and default payment schedules. Such a system would allow you to see receivables as and when they are due via a single console.

These days, traders have options beyond traditional banks. A number of financial services organizations such as JP Morgan and Sumitomo have vastly improved their financial supply chain systems to allow complete end-to-end processing of trade transactions. Because security is of primary importance, these proprietary systems are not accessible to non-partners. What's more, these facilities are only available to large enterprises, leaving small and medium enterprises with an antiquated system that is costing them time and money.

Logistics providers are already extending their value-added services and can potentially offer transaction processing through tie-ups with multiple banks, financial service providers, such as Morgan Stanley.

"As an internationally recognized and trustworthy express service provider, TNT does not currently engage in expediting payment processing requirements of our customers. In the not too distant future, an innovative e-invoicing services will be launched and made available to all customers with account relationship with us", Lin said.

Another option for traders is a neutral, secure platform enabling paperless trading between buyers, sellers, and their logistics service and bank partners.

This is the opportunity Bolero targets, sitting between banks and international traders offering a single dashboard from which to complete a transaction for any country or bank. Bolero is a neutral secure platform enabling paperless trading between buyers, sellers, and their logistics service and bank partners.

"Our solutions integrate the physical and financial supply chains, providing visibility, predictability, accuracy and security. This delivers significant improvements in operational efficiencies and reductions in working capital," notes Buchanan.

Buchanan admits that larger banks offer similar services using proprietary systems. In the open market, she claims only Bolero has a platform built for international trade. "There are several things you have to have in place to make this work, not the least of which is security. When you have transactions that cross international borders you need a system that is not only secure but has a framework that is legally enforceable across the different countries," she adds.

However this plays out, it is clear competition is finally coming to the international financial supply chain.