Trade Finance Trails the Internet
Brandman, James, Global Finance
Complexity Plagues e-Trade Finance Evolution
While technological innovation and the Internet have made the provision of many financial services more efficient over the past few years, advances in the business of trade finance seemingly have stagnated. Liquidity has receded and a number of major players have fled the trade finance segment because of a lack of transparency.
Although the trade finance market itself is very fragmented - both geographically and in the provision of products - it is estimated at more than $3 trillion a year.World trade is growing at about 9% a year, and about half of all trade is financed. Thus corporate demand for new and more efficient forms of trade finance is stronger than ever.
Current limits to electronic trade finance are led by the extensive documentation involved, which is often unfamiliar to investors who are more accustomed to the equity and securities markets."In the world of trade finance there may be original documents that need to be scanned," says Timothy Poole, managing director of Intralinks, a communications solutions provider for the financial community.
Similarly historical price data for goods often is scarce, making it difficult to value assets, particularly in volatile markets.
Luigi La Ferla, one of the founders of the electronic trade finance service LTP Trade, suggests that perhaps only secondarymarket trade finance services really lend themselves to the Internet. While trade payments-such as letters of credit, bills of exchange, invoices and bills of ladingshould become fully electronic, the origination of trade finance business is in itself too complex, he says.
"Trade finance is not a homogeneous product," says La Ferla. "If you've got a homogeneous product, you can use the portal approach. While pricing is an important distinguishing factor, it is not important in terms of discriminating from where you will buy the services. Trade finance lends itself to the Internet in terms of the aspects that can become homogeneous-the secondary market rather than origination."
But expectations are that more trade finance will move online. "If you took at the new online exchanges coming through - the industrial and multi-industrial groups - trade finance will surely follow. It is the engine that will make those market places more efficient," says Kristen Fletcher, the senior vice president and head of international trade for ABN-AMRO North America."There is a small group of large global banks that are at the forefront of trade finance Internet provision, as well as a few new entrants. There is a real possibility of some real successes in terms of non-financial institutions coming through," she says.
NEW ONLINE SERVICES EMERGE
One way of curing the liquidity problem in the trade finance market is to open the buying of paper up to a wider audience online. Former Deutsche Bank trade finance bankers La Ferla, James Parsons, and Richard Tull launched LTP Trade as an Internet-based platform for dealing, information, and data to improve liquidity and transparency in the market.
Services provided on LTP Trade allow the online trading of assets, let investors obtain risk information on obligors and on historic pricing information, and include free settlement and safekeeping services."The beauty of this is that it's a fully transparent system that puts borrowers directly in touch with investors and gives them a clear idea of what the borrower is prepared to pay" says La Ferla. …