International e-commerce is a now environment: Customers want their orders fulfilled now, and sellers want their payment now. Furthermore, the internet has opened markets hitherto unscratched, particularly in emerging countries. Theinternet has put an end to cash-with-order and letters of credit in many cases. So, how can a company be sure it's going to get paid? The answer, as it has been in Europe for many years, is credit insurance.

A New Answer to an Age-Old Question

International trade has always been founded on trust. For most US companies, that trust has usually been built on stringent credit terms, primarily requiring either cash-with-order or letters of credit. These terms have worked well as an answer for those companies asking the age-old question, "Can I trust my customer to pay me?"

Companies in Europe, however, have a long history of cross-border trade, and they have learned that international commerce needs more flexible terms if it's going to work well. The solution they devised to the problem is export credit insurance, wherein, for a reasonable premium, an insurance company guarantees payment to the seller if the buyer defaults.

Understandably, European credit-insurance companies have compiled extensive databases on buyers throughout the world. This information is costly to maintain, so credit insurers have sought to gain bigger international exposure, provide greater financial capacity, and seek economies of scale as a means of cost reduction. Therefore, the credit-insurance industry has in recent years gone through mergers, acquisitions, and the creation of information-sharing networks to make it happen.

Today, the international short-term credit-insurance business is dominated by five major players, which account for more than 75% of the world market: Coface, Euler, Gerling, Hermes, and NCM (see table).

The Internet Adds New Variables

In the past, international commerce came down to three entities that had to work together to make a transaction work: the seller, the logistics provider, and the buyer. The internet has added two new variables: the internet service provider and the portal.

Most businesses involved in e-commerce have gone a long way toward solving reliability and system-security problems associated with these variables. They have access to vast on-line product catalogs from hopeful suppliers, have resolved major issues regarding identity and on-line signature. The one problem that remains, however, is financial security.

Financial Security Resolved

A coherent database where information is shared and enriched by the experiences of many clients for the benefit of all is the basic requirement for internet-based credit-insurance. Insurers limited by the size or condition of their databases have created products based on a buyer-credit model. The basic principle is that the insurer will approach a large on-line purchaser and agree to insure its performance to any of its on-line suppliers up to a monetary ceiling. This, for instance, could mean approving a line of credit on a large retailer for $50 million. The whole product is comparable more to a financial guarantee rather to credit insurance, if it serves its purpose.

Secure Transparency: Not a Contradiction

Financial markets were the first to be faced with the challenges of immediate and secure assessment of debt, which were met mostly through debt ratings. Today's e-commerce faces the same challenges: immediate and accurate trade-debt risk assessment world wide, and an easily internet-available, low-cost product with the same meaning everywhere. An up-to-date, seasoned credit-insurance company can fulfill this need.

Today's internet-savvy credit-insurance company can also provide the kind of financial disclosure with which secrecy-minded companies can be comfortable. Disclosure, particularly when it relates to financial information, has always been a concern to US companies. E-commerce, however, even more than other business models, requires complete transparency if it is to succeed. There is a need for a third party in which both sides of a transaction can have confidence.

A credit-insurance company that understands international e-commerce will respect the confidentiality of the rated company by protecting the information with an iron-clad confidentiality agreement. Insurers that have made this commitment are reaping the benefits of garnering business from companies in countries such as the United States and Switzerland, where companies are reluctant to see their key information published. In what seems a contradiction, they provide information only because they are sure it will not be published.

The Future of Reliability

In the new, electronic world, there are few things that consumers are willing to pay for twice over. They expect and demand one product. Henceforth, with credit insurance, that product will be a combination of information and debt protection.

Companies will continue to use the web for gathering information, buying, and selling. But they will do so on sites with demonstrated reliability and credibility that can guarantee timely order fulfillment, a reasonable amount of customer service, and, most important, that can ensure that payment can be guaranteed.