A More Effective Way
of Financing the Sale of Capital Goods in the Cloud
The coronavirus epidemic has catalyzed the need for us to think differently about global trade and to pursue rapid collaboration in financing and logistics.
Improving the US Ex-Im Bank
Financing the export of capital goods by Bank Caixa (Madrid) and Societe Generale (Paris), is far more expeditious than that of U.S. banks. The French and Spanish banks rely on forfaiting (a forfait means without recourse) to provide financing 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. These enhancements are called avals. An Avalis a guarantee given by a bank, on the face of bills of exchange/promissory notes, for the payment obligation of the principal debtor, for the amount stipulated in the relevant instrument or for a part thereof. Avalization changes the ultimate obligor so that if the buyer defaults, the guarantor pays.
Process
ECAs (Export Credit Agencies), support entrepreneurship and innovation by mitigating the political and commercial risks of exports through insurance and guaranties. The terms of insurance policies cover the risks of non-payment by the foreign buyer to the seller in a global trade transaction.
Guaranties cover the risk to the lender of not being repaid should it finance an export. Insurance covers the exporter whereas guaranties protect the lender. Insurance is conditional as is elaborated in policies; guaranties are unconditional.
Guaranties, especially those provided with the full faith and obligation of a sovereign government, are unconditional unlike insurance.
Insurance and guaranties cover:
Political Risks:
?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 invoice.
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, 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.
Settlement and Financing
What we propose is an alternative process for financing U.S. capital goods exports.
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, provides an alternative and rapid means of financing the trade transaction.
Forfaiting is part of the decisive role and advantage of European commercial banks and insurance companies in global trade.
What is required as a solution is the computer visualization and comparison of actual trade transactions against the terms of contracts digitally stored at SWIFT. Verification would take place at the speed of light, not snails.
How Insurance Dominates Global Trade
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 federal administration has provided a competitive advantage to private and quasi-public enterprises like Infor/Coface and other insurers.
Eximbank is too slow, too uncompetitive.
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 would have been an estimated $85 trillion in global trade flows by 2025, but for pandemic. This business requires financing, insurance, and settlement.
Through letters of credit, both commercial and standby, large commercial banks have traditionally controlled the financing and settlement 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 and outracing the U.S. in financing and settling trade in capital goods.
Now Asia threatens to outcompete the US with the new 15 country RCEP headed by China.
Forfaiting; the discounting of exports without recourse to the exporter, is faster. Sometimes forfaiting requires avalization. This avalization or use of avals (using insurance or guaranties), provides a rapid means of financing and settling trade transactions.
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 of global trade. Except for Infor 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 underlying 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 - at the speed of light.
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 a secure digital depository and subject to ICC “rules.” The certification of quality and quantity can be compared digitally and graphically to the underlying contract. This is presently 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.
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.
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 by avals, 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.”
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 the forfaiting bank, is the competitive advantage that European nations have over the US in global trade.