A More Effective Way of Trading and Financing the Sale of Capital Goods

I have observed that fnancing the export of capital goods by Bank Caixa (Madrid) and Societe Generale (Paris), is far more expeditious than occurs with the US Ex-Im Bank. The French and Spanish banks rely on forfaiting to provide financing without recourse to the exporter of capital goods. The insurance and guaranties of Coface (now BPI France) and of the export credit agency (ECA), of Spain, are utilized to enhance the credit and efficiently finance the capital goods exports of these two countries.

Process

ECAs (Export Credit Agencies), support entrepreneurship and innovation by mitigating the political and commercial risks associated with exports through insurance and guaranties. Whereas insurance against political, commercial risk and "all risks including war" policies were used to give comfort to banks, incentivizing them to finance domestic and foreign receivables, the desire to increase the yield on their investments, in a low interest rate environment,(Zirp), now compels insurance companies to become direct lenders. 

The terms of insurance policies cover the risks of non-payment by the foreign buyer to the seller in a global trade transaction. 

Political Risks include;

?Insurrection (revolution, strikes);

?War;

?Expropriation;

?Confiscation; and 

Commercial Risks,

?Protracted Default (the exporter’s invoice is 90 days past due and remains unpaid); 

?Transfer Risk (the risk of non-payment due to insufficiency or inaccessibility of foreign currency, sufficient to pay the seller’s invoice), also known as a type of FX risk.

The Problem

Small business exports from the US are efficiently and quickly covered by insurance provided by US Ex-Im Bank or private insurance. Exports of capital goods, however, are covered by guaranties and by the time US Ex-Im Bank issues such guaranties to lenders, the deal is long gone for the US exporter. His or her competitors in foreign countries such as France, Germany, Italy and Spain, can close the deal in a fraction of the time the U.S. Ex-Im Bank requires. They're eating our lunch;

Settlement and Financing

The existing structure of SWIFT/ICC, with the TSU (Trade Services Utility), and BPO (Bank Payment Obligation), can be used to efficiently settle and finance capital goods exports. Forfaiting with insurance and guaranties, (avalization) provide for an alternative and relatively rapid means of financing trade transactions that involve the sale of capital goods (big, expensive stuff).

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Forfaiting with avalization are part of the decisive role of European commercial banks and insurance companies in global trade. 

What is required as solution is Correlation—computer visualization of actual trade transactions to verify that a trade transaction has taken place. Verification will take place at the speed of light, not snails, slugs or sloths;

How Insurance Dominates Global Trade

To paraphrase Charlie Munger, Warren Buffett’s sidekick, there are hundreds of ways of losing money in insurance and underwriters are coming up with new ones every day. 

Inhibiting Global Trade

These words, spoken by a successful and masterful businessman, explain how several businesses function. 

US Ex-Im Bank

The principal business of US Ex-Im Bank is to motivate lenders by insuring against non-payment and the inability of businesses large and small to collect their foreign receivables. Stymied by an incompetent administration, private and quasi-public enterprises like Infor/Nexus, other insurers and foreign lenders relying on the much faster speed with which forfaiting is executed. have eaten the US Eximbank and the US capital goods exporter’s lunch. 

Decoupling Settlement and Financing

Insurance companies dominate global trade by separating global trade settlement from global trade finance. They participate, empower and gain fees from the world’s largest business; what will be $85 trillion in global trade flows by 2025. This business requires financing, insurance, and settlement. Through letters of credit, both commercial and standby, large commercial banks have traditionally controlled the settlement and financing of global trade transactions. More importantly, banks have controlled the information flow that informs risk-taking and the determining of whether political and commercial risks can be successfully mitigated—by insurance and government guaranties. 

Speed Counts

In financing trade in capital goods, banks have utilized information and information flows to settle as well as finance trade transactions. In so doing, Europe is outcompeting the U.S. in settling and financing trade in capital goods. Forfaiting; the discounting of exports without recourse to the exporter, with insurance or guaranties, provides a rapid means of financing and settling trade transactions. I will elaborate on my experience with Societe Generale and other European banks in this regard.

The digitization of global trade through SWIFT/ICC and Bank Payment Obligations (BPO), is an attempt by global banks to recoup some of the global trade that banks have lost by being too slow to effect both settlement and financing global trade. Except for Infor(now Infor/Nexus) and factoring, the speed at which the U.S. alternatives to European trade finance and settlement processes operate, renders the U.S. uncompetitive. By the time risk mitigation through insurance or Export Credit Agency guaranties are arranged for U.S. businesses, the deal is long gone.

Correlation: All Can Win at Global Trade 

Settlement and Financing in global trade must be changed, digitized and made faster and more responsive to every day business needs and the speed at which it occurs. 

Settlement

Settlement should be performed as an extension of the export credit role of insurance companies. SGS and Saybolt already serve to verify goods laded aboard trucks, ships or aircraft. These companies issue certificates to verify the quantity and quality of goods. This certification role should take place in coordination with insurance, financing, logistics and title to goods. The title to goods is determined by the underlying contract which can be lodged with SWIFT and subject to ICC “rules.”  The certification of quality and quantity can be compared by OCR, Optical Character Recognition, to the underlying contract. This will be done at the TSU, the Trade Services Utility of SWIFT.  This occurs presently when invoices presented by the seller’s bank are compared to purchase orders presented to SWIFT in its Trade Services Utility (TSU) by the buyer’s bank. This presentation of documents by the buyer and seller, buyer’s bank and seller’s bank, is called four-way interoperability by SWIFT. 

A match of terms among the underlying contract and evidence of the actual trade transaction, establishes a base whereby payment by Bank Payment Obligation or BPO; payment for the exported goods, can be executed. 

I foresee several great changes in the future of trade finance.

●First, e-commerce platforms will play a much greater role in providing "full stack"  services to SMEs;

●Secondly, the presentation of the manifest of goods at wheels up or embarkation will be monitored differently and will differently utilize the AMS and ISF systems of the US government and their foreign equivalents;

●The continuous monitoring of the manifest of shipments will occur with geolocation so that all parties to a trade transaction know precisely what has been shipped and where the shipment is.

This process is proprietary and uses existing resources and processes to accommodate the needs of both seller and buyer. 

The other great change that will occur will be that insurance companies will play a greater role in providing direct finance for shipments they already insure. 

Financing 

The US Ex-Im Bank provides guaranties as well as insurances to facilitate the financing of capital goods exports. At present, this is a long, laborious and uncompetitive process. European banks finance exports by use of forfaiting enhanced with insurance and sovereign guaranties. The process of guarantying payment to a lender is subject to determination of compliance with export controls, the assessment of the country risk associated with the buyer’s country and finally, a determination of the “reasonable expectation of repayment” on the part of the buyer. This assessment is enabled by the efficient provision of information on the buyer and the buyer’s country. Such quasi-public export credit agencies or (ECA), as  Coface (BPI France), Euler-Hermes, Atradius, etc., are able to quickly access and assess credit information on the buyer. The expeditious provision of this information and the rapid execution of financing by these forfaiting banks, is the competitive advantage that European nations have over the US in global trade. 

Here is a flow chart which explains the much faster European trade finance process. 

I have developed a process that greatly accelerates the execution phase of this process and will give US companies a large advantage in gaining a dominant share of what HSBC and Boston Consulting estimate to be a $10 trillion increase in global trade by 2030.

Flow Chart

This flow chart is what is known in IT sales as a "peak under the kimono;" It does not reveal a number of innovations that are critical to growth in trade:

The solution is proprietary.