While open account has emerged as the method of payment predominantly used in international trade, traditional instruments such as letters of credit and documentary collections still bring trading partners an additional level of security. For this reason many companies still use them, despite the associated complexity. With this in mind, Commerzbank has developed sophisticated solutions to help corporates overcome the obstacles that they may encounter when using these methods.
Payment in international trade
In international trade, a range of payment methods have been developed, all of which distribute the risks faced by exporters and importers differently.
Open account trading, in which the importer receives goods and then pays the importer, has become the favoured method and is used for around 80% of trade transactions worldwide. However, this method exposes the exporter to the risk that payment may be late or may not be received at all. Consequently, some companies still use more complex payment methods, which have been designed to provide both trading partners with a degree of protection from counterparty risk.
Letters of credit Letters of credit are used for around 15% of global trade and are particularly valuable at the outset of a business relationship when trading with an unknown counterparty. In a letter of credit transaction, the buyer’s bank issues a letter of credit in favour of the seller. The letter of credit includes a number of documentary conditions that must be met before the seller can receive payment, such as the presentation of particular documents like commercial invoices, bills of lading and insurance certificates. Once the conditions of a letter of credit are met, payment is either effected or guaranteed by the bank. Meanwhile, once the documents have been handed over, the buyer can collect the goods.
Documentary collectionsIn a documentary collection, the importer does not receive the documents which enable them to claim ownership of the goods until payment has been received (documents against payment) or alternatively until the obligation to make a payment has been accepted by the importer (documents against acceptance). Documentary collections are less secure than letters of credit because the importer’s bank offers no guarantee of payment. As a result, this method of payment is less expensive than a letter of credit.
While these methods of payment provide a level of security lacking in methods such as open account, they can also be time consuming to process. Letters of credit are complex transactions which require a lot of details and conditions to be stipulated. The successful processing of letters of credit therefore requires extensive knowledge.
Trade Finance
Commerzbank has developed its Trade Finance application to facilitate cross-border complex documentary business and to support corporates through the entire documentary process. It is able to process documentary letters of credit, collections and guarantees online.
The online services involved include:
Import letters of credit.
Export letters of credit.
Import documentary collections.
Export documentary collections.
Guarantees on behalf of corporates.
Guarantees in favour of corporates.
Reporting.
Accessibility
The solution is internet-based so users need no special software, although a software option is also available. Using an internet-based solution removes the usual concerns of initial set-up and ongoing maintenance needs. By logging on to the Corporate Banking Portal at www.commerzbank.com, corporates can access the complete range of services. The connection within the application allows documentary business data to be processed quickly and then passed straight to Commerzbank.
The automated and electronic process reduces the amount of paper-based communication, which in turn reduces costs and enables a quicker exchange of messages and information with Commerzbank. Through constant online access to relevant information and documents, corporates can be well-equipped to deal with documentary transactions wherever they are and whatever the time of day.
Extensive reports can be produced whenever requested. These reports can be presented in a range of formats, such as Microsoft Word or Excel, PDF, HTML or RTF. Corporates can therefore choose the most suitable format for their internal purposes.
Furthermore, they can opt to receive email updates whenever new information is available, increasing visibility of the process and alerting them to any potential issues as soon as they emerge.
Error prevention
In a letter of credit transaction a lot of data (goods description, documents required, shipment information and other important conditions) has to be captured. The web-based Trade Finance solution includes a range of functions designed to ensure that the transactions are as accurate as possible.
Copy function. The Trade Finance application contains a copy function, which is useful for corporates who frequently trade with the same business partner, who trade the same goods, or who use the same text for different guarantees. Once this data has been entered, it can be automatically copied time and time again. This removes the risk of manual inputting errors, such as spelling mistakes and erroneous figures. The copy function facilitates data entry, which can be very time-consuming without using such applications.
Plausibility checks. Automatic plausibility checks also help to identify less obvious errors, such as inconsistent and unusual figures.
Information management. The application provides complete documentation of any amendments and settlements that may have been made prior to the final payment. This can include information relating to documentary letters of credit, collections and guarantees. The documenting of all this information helps track the process and maintains a record that can be referred to in case of discrepancies or disagreements.
Interview
Commerzbank
Sven Müller
Product Manager Trade Finance
What sort of developments are you seeing in the trade finance market at the moment?
From my point of view, there are at least two important topics that we will have to cope with in the near future.
The first issue we are seeing is that the number of letters of credit being used has decreased in the last couple of years, compared to foreign trade transactions overall. Letters of credit will never be out of the market altogether, but financial globalisation comes along with a high degree of transparency, and this causes the market to tend to waive one of the key reasons for using letters of credit – the financial protection provided by bank payment obligations. Therefore, we have to work with new developments like SWIFT TSU (Trade Services Utility), for example.
Commerzbank is one of the first banks in the world to become a part of the SWIFT TSU User Group. TSU is a financial supply chain solution. The TSU, as a matching engine, intends to provide additional competitive services to corporate bank clients in the supply chain area. It enables banks to offer individual services to suppliers as well as buyers. Corporates that tend to switch from complex and expensive LC business to simpler Open Account transactions, or corporates that encounter the need for pre- or post-shipment financing to the buyer or supplier, should really get in touch with Commerzbank in order to find out how up-to-date trade solutions could support their supply chain.
The second issue is that at least in Germany we have to cope with the strong need for multi-banking, even in the foreign trade business. This is becoming more and more important, even in other European countries. We will definitely have to adapt our applications and interfaces to enable customers to handle all their transactions with different banks within just one application.
Why was the web-based Trade Finance solution developed?
The documentary business is very complex and, after having talked to a lot of customers, we saw the strong need for technical solutions. Many internet-based applications were, of course, developed much earlier in the electronic banking area, but those applications had to be installed at the customer side, whereas plain internet applications do not require any installation at all. This is the key advantage of internet banking in general. Customers are looking for applications that are available anywhere in the world, 24 hours a day. And this need has been brought to the trade finance business.
When was this product developed?
It was initially developed in some of the bank’s European branches on an electronic banking basis. It was first offered as an internet application through our European entities in 2003; including our home market. In 2006 we started working with customers in Asia and South-Africa, which we are very proud of because it is pretty difficult to meet customers’ requirements all over the world with a single product. But we are convinced we have done that.
Who is your target customer?
The target customer for these applications is primarily the mid-size company with up to 500 foreign trade transactions each year. Customers processing more transactions than that rarely use bank products of this type because they are confident about using their own in-house applications.
What differentiates this product from other offerings on the market?
We believe that the function and skill of this application is unique in the market. The application offers the whole range of transactions in the foreign trade business, from import letters of credit to guarantees on behalf of customers. The information flows are completely integrated into the bank’s back office system, so this enables a very detailed and transparent communication with the customer.
An import letter of credit, for example, does not end with the customer’s application. We offer to trace the complete transaction from beginning to end, providing all the necessary information to the customer electronically, such as: issuance confirmation, amendment confirmation, take-up of documents online by the customer and advice of the acceptance or payment. So, we cover the whole process from the first to the last step. This applies for all other modules as well, eg export letters of credit, collections, guarantees.
How much demand are you seeing for the product?
We are already dealing with around 700 customers with this application in place, which is pretty good in the foreign trade business. We are still seeing a huge demand. Looking forward, we are aiming to sell this product to even more customers, focusing outside our domestic market.
Security
Transferring sensitive data between organisations over the internet can pose security risks. The information is vulnerable to hackers and unauthorised parties, so the Trade Finance application uses SSL-encoded1 procedures to prevent unauthorised access to any of the data sent over the internet.
The application has a secure username and password system and a user-defined facility for granting access privileges. It is also possible for users to define the identity and number of signatories needed to verify each transaction. The level of security can therefore be tailored to meet the customer’s needs.
Value for doc
The issues associated with letters of credit have meant that some companies have decided to outsource some or all of the processes relating to letters of credit, rather than carry them out in-house. Commerzbank has responded to this need with another of its offerings in the trade finance space, ‘value for doc’. Through this service, Commerzbank takes on some of the tasks that need to be performed when handling documentary business, such as:
Assistance with LC contents prior to contract finalisation.
Provision of country-specific examples of LCs.
Checks for inconsistencies between incoming LCs and conditions, as well as discrepancies in the underlying delivery contract.
Correspondence with foreign banks regarding changes, supplements or clarification of LC conditions.
Close monitoring of processing deadlines.
Document creation, correction and collection.
Arrangement of document authentication and legalisation.
Assistance with insurance and logistics, as well as duty payment.
As a result of outsourcing these processes, companies may be able to free up internal resources, which might otherwise have been dedicated to time-consuming document processing activities.
Services such as checking documentation also mean that corporates can benefit from bank’s competence, ultimately preventing LCs from being rejected in the first instance.
Conclusion
Commerzbank has monitored the challenges associated with letters of credit and has come up with sophisticated solutions that are likely to appeal to corporates. The Trade Finance application uses the internet to speed up communication and the transfer of documents involved in the LC process. The automation of procedures, such as error checking, ensures a higher level of accuracy in the accompanying documentation, helping corporates to process letter of credit transactions more efficiently and more reliably.
Meanwhile, value for doc gives corporates the option of using the bank’s knowledge while freeing up resources from processing letters of credit altogether. This enables companies to avoid any disruption that may result from staff sickness and vacation while ensuring that documentary discrepancies do not prevent LCs from being accepted.
SSL (Secure Sockets Layer) is an internet encryption protocol which uses two keys to encrypt data: a public key, which encrypts the information, and a private key, which decrypts it. The private key is known only by the recipient of the message.
Commerzbank/a major integrated bank
Since taking over Eurohypo, Europe’s largest institution specialising in financing real-estate and public-sector projects, Commerzbank has been Germany’s second-largest bank and one of the leading banks in Europe. Its consolidated balance-sheet total stands at €616.5 billion. More than 36,700 employees, 9,121 of them active outside Germany, look after more than 8 million customers worldwide.
Commerzbank sees itself as an efficient provider of financial services for private and business customers as well as for small to medium-sized companies (Mittelstand), but it also serves numerous major corporates and multinationals. For each of its core target groups, it aims to be the ‘best bank’.
Commerzbank is unreservedly committed to its home market, Germany. The group’s network of more than 1,000 branches is spread throughout the country. Its corporate business also sees West, Middle and Eastern Europe as its core market. In both the USA and Asia, the Bank is active at all the major economic centres. In total, Commerzbank is represented in more than 40 countries with its own offices.
It is also important that the bank be easy to reach, especially via online access. In this case Commerzbank’s Corporate Banking Portal offers to both Mittelstand and major corporates 24-hours-a-day access to all relevant information, numerous services and solutions.
