Solutions: Trade Finance

The BDC Trade Finance Information Network

Background

Millions of physical interactions take place each day in global trade, representing 30% of the world's GDP. Each of these transactions represents a step along the way of a trading relationship and needs to be tracked and reconciled by multiple parties: suppliers, shippers, buyers and financiers.

Global trade involves two parallel and interrelated supply chains: the physical and financial. Both supply chains begin with the ordering process.

The management of the physical supply chain has evolved from an emphasis on individual logistics functions like transportation and tracking shipments through delivery to a holistic, unified approach. In doing so, corporations have realized financial benefits (reduced production costs and lower inventory costs) as well as reduced time to market for new products. The financial chain is mature and well understood - using letters of credit, export insurance policies and other financial instruments, players in the supply chain make sure trade is adequately financed.

The Problem

In many ways, the physical supply chain has been largely automated. What is still to be optimized is the financial chain that surrounds global trade.

Much of this today is done on a blanket basis. Without detailed physical visibility into exactly where goods are at a point in time, banks provide blanket cover for insurance, factoring and letters of credit, often on a rolling basis. Just like stock markets of old, the transaction fees and costs of such finance are high: what is needed is a shift to a new model where traders can take out transactional financial services, matched closely and accurately with physical steps in the chain.

What makes this difficult is the following:

Most systems involved in the chain are paper or fax-based, involve isolated databases, and contain information which is rarely shared for trading purposes.
Financial Institutions have insufficient visibility to track shipments en route, in order to validate trading risk levels.
Even in domestic trading situations, it is remarkable how much paper is involved: for example, electronic invoicing is still not ubiquitous in North America.

The opportunity exists for progressive traders and financial institutions to establish a Trade Finance Information Network which deploys innovative technologies to support new models for Trade Finance. Anybody who succeeds in this, will unlock huge potential for interest and transaction fees, and provide massive benefit to trading companies.

What is at stake for Financial Institutions?

At BDC, we believe that Trade Finance will be transformed from being the under-served end of the manufacturing process to a rich source of new and innovative financial services. These new services will save money for buyers and suppliers and shift the balance of power within the financial services community from traditional LOC providers to those bold enough to use technology to exploit transaction-level trade information on a massive scale.

BDC expects to be at the forefront of this change. Our business model is to align with Financial Institutions and support them as the industry is transformed: in doing so, we will enable securitized trade transactions and primary and the derivative financial products that go with them.

Primary financial products will include the progressive payment patterns enabled by business documents and events: for example, an order may be 25% financed on order acknowledgement, and 40% financed upon RFID-generated inspection as product leaves the factory, with the remainder payable on receipt of goods.
Derivative financial products will herald a new era of trading risk management. For example, where a bundle of trade transactions is reliably tracked and physical existence of products can be visible in a non-repudiated information network, then financiers will develop options and futures contracts for successful supply of these products. Such contracts will develop to satify a growing need for risk mitigation and management in an under-served sector.

Our Trade Finance solution is designed to be run as a service, rather than deployed as enterprise software. This makes us uniquely suited to partnerships with Financial Insititutions and other organizations such as trading groups. By aggregating and matching business documents across multiple companies, we provide secure and reliable visibility to trade transactions to multiple interested parties. This in turn enables:

Finance Providers to offer transactional trade services (payment, factoring, asset-based lending) for one or more transactions
Finance Providers to see a pipeline of finance transactions so they can proactively offer services to customers

What does BDC offer?

BDC has developed an on-demand Information Network to track the steps along the trading workflow, aggregate this information and display it to support innovative financing as well as support reconciliation and matching of transactions.

Our solution involves the following main components:

Ability to securely collect documents electronically of all types and aggregate to a data hub
Ability to securely collect business events as well as business documents
Aggregation of all documents into an information network for reporting, matching and reconciliation
Presentation of matched transactions, open items and disputes through a browser of through Service-Oriented Architecture (SOA) integration capabilities

Download the white paper on the BDC Trade Finance Information Network (PDF format).