Trade finance used to be a pretty sluggish part of cross-border transactions, an antique activity whose practices were rarely revamped. Letters of Credit, the classic tool, haven't changed since the European Renaissance. Exporters used to call it an activity for "guys wearing green eye shades."

But, things have changed, big time. Above all, the Internet has begun to revise the way that trade documents are created and transmitted, producing a dramatic improvement in the way that both information and cash are moved. The result has been an acceleration of collections that strengthens cash flow, boosts investment income, and bolsters balance sheets. Many financial officers are smiling.

And there's more. Use of export credit insurance, an old staple of European traders, has been enjoying rapid U.S. growth. Seven insurers now compete for the business. It means that offering 90-day terms to overseas buyers has become less risky. And that makes it possible in many cases for exporters to discount receivables backed by insurance, thereby improving their balance sheets.

Plus, many exporters are now able to obtain larger lines of credit, when banks are comfortable that the insured receivables are secure enough to support a bigger borrowing base.

Meanwhile, exporters of machinery and equipment these days are increasingly likely to build a finance package into their marketing operations. That boosts their competitiveness vis-ˆ-vis European and Japanese suppliers, and enables many to close deals that otherwise might be beyond reach.

And, making most of these finance packages possible is the U.S. Export-Import Bank, which now works closely with about a dozen lenders that structure stand-alone deals (transactions with exporters that are not otherwise their clients). The banks and finance companies involved have made a profitable business of supporting sales that meet Ex-Im Bank's credit standards.

The Internet impact

But the blockbuster in this revamped trade finance world clearly is the Internet. Its impact is more rapid and more far-reaching than anything else. Like the global supply chains it has already created, the web has hoisted the role of information onto a level not previously possible. That has brought traders more control, and more profit.

Electronic trade finance has emerged in stages, and the next one is just now coming into sight. It began in the 1980s when traders acquired personal computers, and banks provided their clients with templates to fill out Letters of Credit. Proprietary software prevailed and, if a problem occurred, traders had to call the bank's technical help desk. Communication was handled through dedicated phone lines and networks.

Then, gradually, major banks began building a new system, wielding new software to advise (notify) exporters about the L/Cs for which they were beneficiaries. Over time, the process migrated to the worldwide web, and the tempo of change has been accelerating for the past two years. At an International Financial Services Association meeting in January 2004, for example, it was noted that the top 25 banks in the U.S. all now advise L/C beneficiaries through the web.

Today, some ten large banks (American, British, European) have carried the Internet role a step farther through sophisticated trade portals that support document creation and transmission, and make it possible for all parties to a transaction (exporter, importer, bank, freight forwarder, ocean carrier, cargo insurer) to exchange information through the same secure site.

A look at Wachovia Bank is revealing. The Charlotte, NC-based bank, the U.S.' fourth largest, has long been a leading trade finance supplier. Its CyberXport Service, a web platform, now lets exporters receive and review advised L/Cs as soon as Wachovia receives them, which eliminates paper, and speeds up the whole LC and collections process.

"Previously, bank-to-bank information exchange was invisible to the exporter," says John McFadden, Wachovia Director-Global Trade Product Development. But now, the exporter "can track the visibility of payments at each step through the web." And, the enhanced information flow makes it possible to minimize and eliminate discrepancies, a traditional burden in using letters of credit.

L/Cs have frequently carried such discrepancies as misspelled names, inaccurate descriptions of products, and faulty dates. That has meant amending information, adding bank fees and higher port charges (to cover delays), slower movement through overseas customs, and the possibility of failing to perform within the legal timetable of the L/C.

The Wachovia program, by linking exporters and importers, helps avoid discrepancies in the first place, and supports quick and easy corrections when needed. The exporter's secure site on the web platform serves as "an e-vault" for depositing documents. "If the transaction requires a marine cargo insurance certificate, the agent can just deposit it in the vault, since he has easy access," McFadden explains.

It adds up to accelerating the export cash cycle, moving receivables into income accounts.

Voridian Corporation in Kingsport, Tennessee, a large producer of chemicals and plastics, is a satisfied Wachovia customer that began using its CyberXport platform in early 2003. "It's all there in one place, accessible with just a couple of clicks," says Ken McDermitt, Latin American export credit manager.

The continuing flow of information is a big plus. "When Letters of Credit are opened or amended, when a payment occurs, the system sends out an e-mail." He then accesses the web site, pulls the L/C up on the screen, and uses the information for the next step. Voridian, which handles up to $600,000 L/Cs in a day, generates about half of its $5 billion in annual sales in overseas markets.

"The program is valuable in accelerating cash, but we sometimes discount the L/C, if there is a need," McDermitt remarked.

At ABN Amro Bank, the large Dutch financial institution, its pioneering MaxTrad web portal supports the gamut of trade finance-Letters of Credit, collections, air releases, steamship guarantees, clean bankers' acceptances, and standby L/Cs.

It lets users pull transaction data from anywhere in the world, 24-hours a day, with an hourly update. ABN Amro works with an independent supplier to offer a document preparation service. And the program is regularly enhanced with new ancillary services, such as a facility to help with compliance on cross-border regulatory requirements and a calculator to tally landed costs.

DuPont, the large chemicals producer, is a satisfied ABN Amro customer that was looking for an upgraded system two years ago when the bank approached it. "lt was quite a benefit over what was available," says David Weidinger, global credit manager. "We ran it with two of our customers as a test, to see how it worked, and found that processing orders became much faster. And that accelerated cash flow."

DuPont then expanded coverage to the entire company, and found that it had cut processing time by six days. "We can track the status of letters of credit and drafts on line, which was not possible before, and the learning curve was fairly simple," Weidinger reports. It has begun a pilot stage in using the ABN Amro document preparation service.

Meanwhile, the Internet is not only transforming trade finance into a source of improved cash flow and stronger balance sheets, it is also consolidating the business on a global scale. In ABN Amro Bank's view, today's market is highly fragmented, with each of the top players commanding a 5 to 8 percent share.

But consolidation now underway may produce a marketplace in which six giant banks jointly represent a 60 to 70 percent share. An important reason for the trend is outsourcing, through which the heavy-hitters deliver their capability to other banks worldwide. Wachovia got into outsourcing eight years ago, and now works with 45 banks globally, while ABN Amro Bank works with 26.

The outsourcing-consolidation trend also means that a growing number of mid-sized traders will be pulled into the new world of web-based trade banking. The major banks usually start offering this kind of service to large exporters and importers, then gradually move down market. The outsourcing strategy will accelerate the trend.

And, then, there's the next stage of automated trade finance just over the horizon. A new strategy is getting underway at SWIFT, the international banking communications network. It wants to launch a program providing a document examination process. Ten large banks are involved, and a prototype is scheduled to be unveiled in September 2004.

If this approach gets the green light, it would be offered to any bank on the SWIFT network. And that would mean a lot of banks and a great many exporters and importers drawn into the digital trade finance world.

Export credit insurance

The growing use of export credit insurance has been a key trend in U.S. trade finance for the past decade, despite a much more conservative underwriting approach triggered by the September 11 events and the crash of the Argentine economy. Insurance has to some extent displaced the use of letters of credit.

Exporters welcome a chance to transfer risk to the insurer, but some like it even more as a resource in discounting receivables, where a bank is willing to accept the insurance as a credit enhancement. A lot more banks now do so, but they also monitor the credit standing of the insurers closely, often placing a ceiling on how much exposure they accept for each.

Even when credit insurance does not support receivables discounting, it may serve as an enhancement for arranging working capital. In Miami, Nexel Company, the largest exporter of Hewlett-Packard inkjet cartridges to Latin America, finds it can be a significant help in obtaining credit from both banks and vendors.

"We've been able to arrange a $2 million line when our receivables are covered by insurance," says Frank McGowan, Chief Operating and Financial Officer. "The credibility of the cover can be a deal maker."

One sure sign of the growth in export credit insurance is the larger number of companies supplying the coverage. Seven now support short-term sales (where payment terms run from 30 to 180 days), including four U.S.-based insurers and three European transplants that have acquired U.S. firms.

Additionally, the development of the private insurance market has brought a parallel shrinkage in the U.S. Export-Import Bank's short-term insurance business, which diminished as inroads by private underwriters expanded.

However, the private insurers wax and wane: when markets get rough they tighten up, raise premium rates, lower the ceilings on policies, and close down in the riskiest markets. That's when the Ex-Im Bank business picks up; it happened in 2002 and 2003. But, as global conditions improve, the private insurers ease up and resume their growth curve. That is just starting to happen.

Not surprisingly, the Internet has begun to transform credit insurance. American International Group (AIG) now offers short-term coverage on export sales to 24 countries through a web site, with rapid automated decision-making.

The AIG product is aimed at mid-sized and smaller exporters that need additional credit management support. It helps firms monitor the payments and collections experience of their customers, establish credit limits and manage insurance coverage.

Equipment finance

Meanwhile, for exporters of machinery and equipment, where payment terms are typically five years, a growing trend has been to include a financing package within their marketing strategies. Here the Ex-Im Bank plays a double role.

First, it offers "Letters of Interest," an expression of broad willingness to support a transaction. These documents are not firm commitments, but state that if the deal lives up to the standards in the exporter's request, the U.S. agency can generally be expected to provide financing.

"Some exporters use it regularly, others more sporadically, but invariably it makes a big impression on the buyer," says Peggy Houlihan, of Houlihan International, a trade finance arranger in Reston, Virginia, who helps put Ex-Im deals together. "The real boost to marketing is the credibility of a U.S. government agency."

Issuing Letters of Interest has kept Ex-Im Bank busy. It approved an average of 800 of them a year in the 1999-2000 period, but, with exports flattening in 2001-2003, the number slipped to between 450 and 600 a year.

Secondly, the availability of Export-Import Bank medium-term insurance and guarantees has encouraged about a dozen banks and finance companies to put together deals on a stand-alone basis, what the banks like to call "one off" transactions. Here the exporter is not an ongoing customer, though often a relationship does grow out of the experience.

This now visible strategy contrasts with traditional "relationship banking" in which banks would only offer credit to existing clients. The lenders pursuing the recent strategy, however, have figured out how to make Ex-Im-backed deals a profitable and growing business.

Middle-market and smaller exporters are the beneficiaries. These lenders are out looking for them, and also scout for business on the buyer side. For example, at Compass Bank, a multi-state Alabama-based institution (with its international HQ in Houston), the trade finance staff spends much of its time on the road. The exporter client list is, therefore, nationwide, and bank executives visit Latin American and a few Asian markets regularly.

On the other hand, RZB Finance, in New York, a unit of RZB Bank, one of Austria's largest, was created specifically to handle Ex-Im Bank equipment and machinery deals, initially with Latin American buyers in mind, but more recently in Turkey and Africa. Its staff chalks up the miles.

There's a bottom line here: savvy U.S. traders are now making effective use of innovative financing resources, with benefits to their cash flow and profits. As for those guys with the green eye shades, well, it could be they have retired.

Sidebar: Naveed Riaz Leads CitiGroup Into the New Age

Naveed Riaz

Naveed Riaz, Managing Director and Global Head of Trade at giant Citigroup, sits in an executive dining room high atop Manhattan talking passionately about the future of trade banking.

Elegant and polished as befits a clear rising star who has spent 25 years on the ground as an international banker (all with Citi), the native Pakistani (and naturalized American) took over responsibility for all trade products in 2003, making him responsible for one of the key core competencies of the world's biggest trade banks.

"Trade has changed," he says between bites of seared tuna, "from the classic export letter of credit business." Now, to hear him explain, 'trade' (which he consciously differentiates from conventional notions of 'trade finance' or 'trade products') is much more about end-to-end solutions designed to positively impact the customer's balance sheet and working capital.

Underlying this are the vast expansions in international trade flow coupled with the need for companies to squeeze inefficiencies (including financial) out of their supply chain. The maturity of many global trading relationships, particularly amongst long-standing partners in developed regions, is revising the historic definition of 'risk' and with it the ability of banks to charge customers a premium to manage it through letters of credit.

Riaz's mandate is to advance Citi into the forefront in devising new banking arrangements--'products' is too limited a word--to respond to the new needs of international trading clients. "We were leading the market in terms of revenue and size," he says candidly, "but we weren't necessarily leading the market in terms of cutting edge product development. Our focus has to be to lead in product development as well and we will become much more aggressively focused on meeting the needs of the new value chain.."

A breakdown in the value chain--be it on the supply side or the distributive side-- is increasingly the 'risk' that companies want their international banks to help manage. Correspondingly, the emerging mission at Citigroup is developing the expertise and experience to finance the reliability, flexibility and responsiveness of their clients' global value chain through a myriad of what Riaz calls 'comprehensive' approaches. "In effect," he says, " we want to provide value across the entire commercial value chain which may involve the supply chain, inventory chain and the buying chain (the people they sell to) of our clients. We believe that focusing on the entire chain will help to facilitate orderly, on-going trade between our clients and their sellers. And it some instances, the seller's sellers."

How does this holistic approach work? Riaz offers the example of a 'hypothetical' Citi client, a large U.S. retailer which had historically dealt with a large number of suppliers in Asia through letters of credit. A letter of credit, however, is an expensive product that is carried on the balance sheet as a liability. Instead, the U.S. buyer wanted to conduct business with the Asian suppliers through simple purchase orders. The retailer was big enough--and the suppliers dependent enough on the retailer--to be able to do this. But that posed a problem for the suppliers since a purchase order, unlike a letter of credit drawn on a bank, cannot be used to secure financing necessary to produce the ordered goods. What to do? Citi solved the problem by arranging to finance the deal for the suppliers (and rendering considerable value added service to their retail client in the process).

Obviously it takes a giant the stature of Citigroup (with 'fully functioning banking franchises' in 103 countries) to be able to pull off such complex transactions but, as Riaz points out, that's their competitive advantage. "We now define ourselves as being in the trade solutions business," summarizes Riaz, "that's our differentiator. If financial institutions don't keep their game up and consistently provide value in the trade arena," he warns, "banks stand to get disintermediated."-Neil Shister, Editorial Director

Sidebar: How To Choose A Trade Bank

Remember, your bank is also choosing you.

Armed with new products and strategies, banks that offer trade finance services have been reconstructing their competitive terrain. That means exporters and importers have to catch up, revise their own road maps: choosing an institution for cross-border payments and credit takes more know-how these days.

Here's a glimpse of what you can expect when seeking a workable fit with a bank for trade services (Letters of Credit), export working capital, or structuring credit for a foreign customer:

Size matters. Major banks tend to work with the large corporate exporters, and actively pursue their business. They may welcome middle-market or smaller firms as trade clients, but, if so, like to see growth potential on the domestic side. Mid-size and community banks, on the other hand, mostly look for customers below the large corporate level.

Consolidation has reduced the choices. The march of mergers and acquisitions over a decade has sharply trimmed the number of banks, and even more so the contenders in trade finance. And, on top of that, the preferred strategy of the big players is retail banking (checking, credit cards, mortgages), not specialized products such as Letters of Credit or putting together equipment deals. This has forced exporters to devote more time to finding the right match.

The choice can depend on which trade finance product you need. The larger exporters, or those managing a steady flow of transactions, will be marketed aggressively by the major banks with their new blockbuster trade portals. But, mid-size firms can often find a local bank prepared to deliver trade services, frequently working with a large bank in the background. Or it could be using software and other services now available that meet mid-size exporters' needs.

Working capital borrowing is different. Banks of all sizes now rely on guarantees from the Export-Import Bank or the Small Business Administration to cover their risk in lending exporters short-term funds. About 250 banks, including a lot of local community lenders, are therefore available. And, a few large U.S. banks maintain nationwide small business finance units that cover export deals as well as domestic business.

Medium-term structured deals are also different. Most of the larger banks that structure finance packages for an exporter's equipment sales have hefty minimum size requirements. A million dollar credit is often needed and two million is not uncommon. But, a growing group of banks and finance companies are now out there to fill this gap. The withdrawal of some larger players, not surprisingly, has created a brand new business opportunity.

Here, then, are some suggestions on how to search for the right bank and evaluate the services out there:

Start with your regular bank, especially if you have arranged credit with it before. Smaller and mid-sized exporters (and even some large ones) prefer to work with people they can visit, and like to put a face on the institution. Consolidation among the majors has produced a hub and spoke structure, so Letter of Credit processing and working capital lending may be handled far away. A smaller bank in Richmond, Virginia, now markets itself as the only one left in town with a local trade services presence.

Ask if the bank has a correspondent relationship that could help. Figure that the local bank has a network of links to other, often larger, institutions. If the bank doesn't have the capacity, skills, or interest in trade finance that you need, it will often refer you to one of the banks with whom it maintains a relationship. Otherwise, it stands to lose your business. Many exporters don't know that their Letters of Credit are handled by a third party, and the Internet makes it easier.

For working capital requirements, mention ExImBank and SBA. More local banks are getting training to deliver government agency-backed loans in order to hang onto their exporter customers, and hold their own in today's increasingly trade oriented economy. If the bank wants your business, it may contact ExIm or SBA if it hasn't done so already.

Some banks do stand-alone deals. They will finance an equipment export sale even if you are not otherwise a customer. This is a fairly new development (banks usually want an ongoing relationship). But, the risk has to be acceptable to the Export-Import Bank, which provides guarantees and insurance for this kind of transaction. These lenders operate on a nationwide basis, so don't hesitate to contact them even if they are not around the corner. And, a few finance companies have entered the field, offering working capital or export equipment financing.

Finding a list of banks can be handled in several ways. The Export-Import Bank web site (www.exim.gov) has a roster of lenders whose executives have gone through its training program. It's usually dated, but offers a start. ExIm also has a roster of banks that have been given delegated authority to approve working capital guarantees without its prior approval. Also, try your local World Trade Association or World Trade Center; banks are always members and exporter members can share experience.

Services are available to help locate and work with a bank. The ExImBank has created a group of state and city government agencies that help local firms work with it. These units can suggest a 'short list' of banks that might be helpful. And, they often process applications for ExIm insurance and working capital programs. Plus, try your local U.S. Export Assistance Center, a national network created by the Commerce Department, the SBA, ExImBank, and state agencies. These export specialists can suggest candidates. In some cases, your industry association may also be useful. Trade banks are now trying to market through them. -Richard Barovick

Sidebar 3: The Major Trade Banks

A handful of major banks are battling for a bigger piece of the trade finance business now being reshaped by the Internet, bank consolidation, and growing global trade flows.

ABN AMRO BANK
The big Dutch institution, largest foreign bank in the U.S. in assets, delivers trade finance through 15 branches and subsidiary LaSalle National Bank in Chicago. ABN Amro is a world leader in export credit agency deals, usually in the top five in Ex-ImBank business (#1 one year). Its MaxTrad Internet program has been a pioneer.

BANK OF AMERICA
B of A won an Ex-Im Bank award in 2003 for its leading role in export working capital, which it delivers through a national network of small business credit units. And it will be dramatically enhanced in letters of credit when its bid to acquire Fleet Boston concludes, since both are large volume suppliers.

CITIBANK
Citibank does it all, including the world's largest volume of letters of credit through a 103 country presence. It's usually #1 in Ex-Im Bank business, boosted by a top role in aircraft finance, and sizable deals in emerging markets. It even uses Overseas Private Investment Corp. guarantees for lending in emerging markets.

J.P.MORGAN CHASE
J.P. Morgan Chase, already in the very top ranks in trade services, and a pioneer in web-based business, will be even more visible once its proposed merger with Bank One is done. It has long been a major player in project finance in emerging markets, recently got tapped by Uncle Sam to manage the new Iraq Trade Bank.

WACHOVIA BANK
Wachovia delivers trade services through 32 international offices in Europe, Asia, Latin America, 3,000 correspondent bank relationships in 130 countries. It has long been a major player in letters of credit, has multiple processing centers. It's also a leader in outsourcing trade finance to other banks, using its CyberXport web-based platform.

WELLS FARGO BANK
Wells Fargo, a large supplier of export working capital through small business finance units, has a unique joint venture, Wells Fargo HSBC Trade Bank, with London-based HSBC (6,000 branches, 81 countries) that delivers export credit with Ex-Im Bank, special private credit insurance arrangements, the HSBC global presence.