Global Trade Finance for SMEs
“To reach a port we must set sail –
Sail, not tie at anchor
Sail, not drift”
The Flaw in Our Stars
Such banks as Citi and JPMorgan?are reorganizing in order to improve their profitability. This occurs in a world in which e-commerce and innovation in payments and investment are increasingly engaged in global trade. Global trade totaled $19 trillion last year.?
What We Have Here is a Failure in Strategy
Citi?
The Trade: Citi CEO lays out reorganised strategy for 2022 as Q4 profits drop 26%
The bank is making some major changes to its reporting structure as it moves to consolidate business operations. By?Laurie McAughtry
Citigroup kicked off the Q4 earnings season on Friday with the release of its latest figures. Recently-appointed chief executive officer Jane Fraser, who only joined the bank 10 months ago and has embarked on a radical revamp of the bank’s priorities since her appointment, outlined the ongoing strategy in a detailed earnings call, as well as explaining the mixed bag of results.
JPMorgan
Fixed income trading decline weighs on JP Morgan’s Q4 revenues as the bank highlights colossal tech investment
Jamie Dimon says JP Morgan is investing $12 billion a year on its global technology strategy, as trading revenues drop in Q4. By?Jonathan Watkins
A decline in fixed income trading revenue weighed on JP Morgan’s revenues during the final quarter of 2021, as income from its markets division fell 11% compared to the previous year. Fixed income revenues were down 16% year-on-year, while equity markets were down 2%,?driven by lower revenue in derivatives. The bank said revenues in its prime services division offset some of the declines.?
During its quarterly earnings call, JP Morgan chief financial officer?Jeremy Barnum?said the fixed income results reflected “a more difficult trading environment early in the quarter, especially in rates, as well as continued normalisation from the?favourable?trading performance last year in currencies, emerging markets, credit and commodities.”?
Aside from the drop-off in its market-related revenues, JP Morgan brought attention to its technology spend during its earnings call, which CEO Jamie?Dimon?said has reached $12 billion annually.
My Comment: It’s time to innovate, to imagine, to visualize trade.?
Strategy
“The rules of strategy are few and simple. They may be learned in a week. They may be taught by familiar illustrations or a dozen diagrams. But such knowledge will no more teach a man to lead an army like Napoleon than a knowledge of grammar will teach him to write like Gibbon.” ~ General Thomas "Stonewall" Jackson??
Correlation*?
Strategy fails because of a lack of vision, a lack of process, and a lack of imagination.?
Background
Buyer-Seller Agreements
In global trade, buyer-seller agreements are founded on the 1934 UN Convention on Contracts for the International Sale of Goods. The roles in a trade transaction have been refined and expanded to include buyers, sellers, cargo carriers, freight forwarders, customs house brokers, the buyer’s bank, the seller’s bank and insurers of cargo and ECI, export credit insurers who mitigate political and commercial risks.?
A settlement and financing process was advanced by La Huppe, Belgium based SWIFT and described as "four-corner interoperability." This process, developed by Andre’ Casterman reintroduced EU banks as playing a central role in the conduct of global trade. SWIFT collaborated with ICC to consider the important logistical contribution and players in the global trade process.?
The Paris-based ICC created Incoterms or International Commerce terms which define the role of every party to a cross-border trade transaction. Incoterms 2020 by which some 200 countries voluntarily abide, represents the latest evolution of this process.
The advent of Supply Chain Finance considers another set of agreements between the seller/exporter and its vendors.
Supply Chain Finance and Dynamic Discounting play critical roles in providing cash flow to vendors and a more profitable use of cash for the buyer/exporter as compared to the stretching out of payables by multinationals, a process which hurts the cash flow of the smaller vendor.?
Supply Chain Finance
The seller/exporter issues invoices that represent their sales to the buyer. In addition, the seller/exporter will arrange to prepay or pay early invoices selected by the vendors. This prepayment not only benefits the cash flows of the vendors but also benefits the seller/exporter by achieving a discount in the price of the select items sold to this exporter. Dynamic Discounting gives flexibility and dynamism to this SCF process by providing a greater discount the earlier the payment.?
Straight-Through-Processing
Straight-through-processing involves the matching of invoices with purchase orders. Innovation has provided the ability to match serialized QR encoded purchase orders of the buyer with the serialized QR encoded invoices of the seller:
by a trusted entity, namely the TSU or Trade Services Utility of the local lender.?
SWIFT has not yet adopted some innovations despite their facilitation of e-commerce in global trade, a global trade now dominated by Small, Medium-sized Enterprises (SMEs).
Risk Mitigation?
Walter Wriston called Risk a four-letter word and predicted that one day, all that banks will sell is information. Six key processes additionally refine the role that financial institutions play in the global trade finance process. They are risk mitigation, forfaiting, straight-through processing, the aforementioned serialized QR encoding of invoices and purchase orders, geolocation and the matching of invoices to purchase orders by a trusted entity:
7. Payment or Financing
Prior to the encoding of purchase orders and invoices, a credit check on the buyer is performed by a credit insurance agency such as Coface, Euler-Hermes or Atradius which insure the export against political and commercial risks. Coface, Euler-Hermes and Atradius have a winning edge in providing such risk mitigation because of their ability to gather credit information on buyers based in former colonies of France, England, Germany, the Netherlands, Belgium and several?other countries.?
2. Forfaiting
Forfaiting is derived from the French "a forfait" or without recourse and is the financing of sales to a buyer, a foreign buyer in the case of global trade, without recourse to the seller but with full recourse to the buyer.?
Forfaiting provides a clear strategic advantage to European banks because it is rapid and facilitates straight-through-processing and expedites financing of capital goods, while the processes of banks which do not utilize forfaiting are notoriously slow.?
3. Straight-through-Processing?
Guy Tozzoli of World Trade Center Associates came up with the concept in the late 1970s, that as long as purchase orders match invoices and the underlying sales are credit insured against political and commercial risk, straight-through-processing is feasible and practicable. This is done for both domestic and cross-border trade transactions.?
4. Serialized QR Code Encoding?
A little-known aspect of QR Codes is that they can be serialized with a unique watermark or other unique characteristics. The entire manifest of a vessel or aircraft can be encoded and described by a QR Code manifest. This allows the full or select inventory of a shipment manifest to be described and importantly, compared to purchase orders, by a trusted entity.?
5. Geolocation
It is now possible to not only describe the contents of a vessel, truck or aircraft by QR Coded manifests but to locate these manifests with geolocation and EDI. EDI was utilized by the U.S. military to provide a Soviet-surrounded Berlin with everything its residents needed to survive during the Berlin Crisis.?
6. Matching of Invoices to Purchase Orders?
SWIFT innovated with the Trade Services Utility
and the Bank Payment Obligation
to streamline the matching of the seller’s invoices with the buyer’s purchase orders (P.O.s) in order to effect payment. This matching process by a trusted entity facilitated straight-through-processing.?
Because it was aimed at assisting MNCs (Multinational Corporations) and did not sufficiently address the needs of SMEs and did not utilize such e-commerce innovations, it had limited success.?
7. Payment or Financing
The Following Sea provides the instruction whereby these combined?processes and the use of Non-Fungible Tokens (NFT):
?embedded in Blockchain:
a process we call Correlation*, can be implemented in even the smallest of lenders, to provide a decisive strategy for success in a $19 trillion market.?
*Correlation: William A Laraque March 2022: All Rights Reserved?