Holly Harrington, director of purchasing at U.S. toy maker International Playthings, in Parsippany, New Jersey, used to rely on letters of credit to handle all of the payments to the Asian supplier network that manufactures 90 percent of her company's products.

But, four years ago, an Asian vendor introduced Harrington to TradeCard, one of the newer breed of Internet-based payments platforms that are now reshaping global trade finance. Adopting the platform has saved International Playthings a lot of hassle as it moved from a paperwork system to an electronic operation.

And, it replaced letters of credit entirely. "They used to cost us a bundle, we've probably saved $50,000 a year in bank fees," Harrington says. Now, for each transaction, its vendors pay a small fee ($100), and it pays nothing.

When Harrington decided on an electronic strategy, International Playthings had 10-15 Asian vendors. Each of them met with TradeCard (New York HQ, Asian offices), to test the new approach. "We began to get feedback, and they began to sign up for the program," she remarks.

After six had made the switch, she made it a requirement for all to come on board. And over the next four years, as the company grew, its vendor roster expanded to 35, most of them in Hong Kong, Thailand, and Japan. They range in size from very small firms to large corporations. One ships from Hong Kong, but arranges financing in Japan.

Some of the cost cutting achieved is very tangible, but hard to quantify. "We used to manually enter data into the letter of credit system," Harrington says, "but now the purchase order is uploaded." The process of creating a purchase order also produces an invoice and a packing list, and eventually a cargo receipt from a third-party logistics firm.

"It's one set of documents, with everyone feeding off it," she explains. "If something is missing, we get a discrepancy notice by e-mail, and then negotiate about the gap with the vendor through e-mail." When the transaction progresses, another e-mail notice is generated on the need to pay, and the money is moved. TradeCard has a strategic alliance with JP Morgan Chase Bank to handle the transfer of funds.

Meanwhile, International Playthings has managed to cut costs in other ways through its Internet trade finance strategy. For one thing, with vendors now getting paid a lot faster, it is in a position to negotiate with them for better terms. It can now pay in 10-15 days after an invoice is received, and improve its own cash flow.

In addition, it has saved on staff. During the days of paper-based letters of credit, it had a dedicated specialist who handled the LCs in Harrington's shop, which manages purchasing, fulfillment (delivery), and payments. But, with the paperwork mostly gone, that employee has moved to another corporate unit.

More benefits on the horizon

The experience at International Playthings is typical of the benefits that Internet trade finance has been bringing to exporters and importers, banishing paperwork, and trimming financing expenses.

Transaction costs have been reduced, and the huge improvement in information flows has given traders a much enhanced control over their funds. That, in turn has freed up cash held in reserve for unpredictable events. All of this has added to profits.

But, there's also The Big Picture: technology is reshaping the competitive marketplace among payment service suppliers, and revamping the choice of tools available. The role of letters of credit, a major trade finance tool since the European Renaissance, was shrinking anyway, but Internet technology has added to its decline. The added information and certainty has reduced the need for an LC, increased the use of open account (payment due a certain date from time of invoice, or shipment).

Savvy traders are watching this evolving drama play out, expecting that added choices are now emerging to deliver further cuts in costs. A key factor, says Lee Kidder at Tower Group, a financial services research and consulting firm, is that "value in payments is no longer just moving funds. Now, it's the information flows around the payments that has growing value."

That has opened up a more competitive marketplace: the historic role of banks in trade payments is somewhat diminished. Not that anyone expects banks to lose their predominant position anytime soon. They have invested heavily, mastered the new technology. And, the large institutions (ABN Amro Bank, Wachovia Bank, for example), with their huge capacity, are outsourcing infrastructure and software to other banks, thus spreading the Internet benefits widely.

But, a new breed of trade finance suppliers has emerged. Actually, two groups. One is a small band of highly entrepreneurial start-ups that have assembled venture capital funds, experienced managers, and advanced technology. TradeCard and TradeBeam (in San Mateo, California) are the leading contenders. Or survivors: several tried but close their doors. One would have helped traders find banks to bid for their LC business. Another would have offered an Internet platform to buy and sell trade paper.

The other group is the transport-logistics sector, with UPS Capital, the finance arm of UPS, now the major player. Several freight forwarders tried their hand at finance, but most dropped it. And, briefly, a few banks even bought freight forwarders, hoping to merge the movement of cargo and the movement of funds, but then sold them off.

The new players

The entrepreneurial contingent is not replacing banks, but working closely with them. TradeCard, which claims to have 800 clients, has made financial services a top priority for the past five years. Its web portal and communications-messaging service enable buyers and sellers to create purchase orders and invoices in electronic form. Its technology then compares documents, identifying and resolving discrepancies.

That leads to payment decisions, moving funds, protecting credit, and bringing in a bank network to provide credit. Some buyers and sellers are pre-qualified, so credit can be accessed immediately.

TradeBeam, now four years old, pursues a strategy of working with traders during "the entire life cycle of a transaction, from the order to logistics to settlement," says Duncan Jackson, Vice President, Marketing and Business Development. The San Mateo group claims to have 3,000 clients, and at least 150 use its growing financial service.

TradeBeam, which has recently begun to give its financial platform higher visibility, has been working with major corporations, such as Dell, Siemens, Eaton, Cisco, and Nieman Marcus, in using its software and platform for managing letters of credit and open account, reconciling discrepancies, and maintaining electronic security. "Many countries still require paper documents, so we work with both paper and electronic practices," says Jackson.

TradeBeam, which partners with banks on transactions, and is building a factoring and receivables discounting role, has begun partnering with CGI-AMS, in Fairfax, Virginia, an international technology consultant with a sizable financial focus. That includes a trade finance program, called Proponix, which is offered to banks on a transaction basis, thus saving them from large investments in their own systems. Proponix was developed in partnership with several international banks.

Meanwhile, UPS Capital has built a comparable Internet system to deliver payments, credit, and insurance on trade receivables. It is working with small, middle market and international companies, integrating its finance and supply chain management services.

The UPS line of trade finance includes letters of credit and open account management, collections and risk taking, and working capital.

Down the road

However, to get more perspective on how the Internet is cutting costs, a closer look at how it has affected letters of credit is revealing. The International Chamber of Commerce, which produces the regulations for worldwide LC use, adopted a new set of rules for the Internet, called eUCP.

The eUCP would help submit documents over the Internet, and slash costs. It would require an e-mail address for beneficiaries and/or the physical address. The rules were adopted April 1, 2002, but implementation since then has been pretty spotty. At an International Financial Services Association conference, most bankers said they found no demand for the practice.

Why? John Dunlop, who heads San Diego-based InternetLC, a software provider that helps traders create LCs, finds three possible reasons.

One is economic: banks working with exporters on an LC now earn $453 on average, not something they want to lose. Second is legal: there's no case law for presenting documents. And, third, a digital signature would have to be exchanged, and generally banks don't have a system for that. So, Dunlop concludes, things won't change for a while.

But, there's more to the picture. As one advocate of boosting the Internet role put it: "The eUCP may have come too late. By the time it's implemented, the LC may be gone." One reason for its decline is that the Internet has brought a flood of information that makes it easier to measure credit risk. Historically, traders relied on banks and LCs because they offered needed security in a world of unknowns and uncertainty.

Now, says Tower Group's Lee Kidder, more banks are global, Citibank is just around the corner; it can assess risks and help traders take them, deliver payments without an LC. And, he adds, Internet portals like TradeCard and TradeBeam "create a virtual network of suppliers, buyers, and banks sitting around the same table." A club is established, so the LC is not needed.

Banks and the new trade finance breed look like they are moving in the same direction-and exporters and importers look like they are the beneficiaries.