New Payment and Financing Alternatives

Since the 1990s, there has been a rapid expansion of online business-to-business transac­tions. One of the most significant challenges to this continued growth has been the lack of a payment mechanism for large cross-border transactions. Existing trade payment processes have not evolved and continue to be labor and document intensive. Any discrepancy in letter- of-credit documents, for example, can delay or even hinder the entire delivery and payment process. Open-account sales also pose a risk of nonpayment by the buyer (Yuan, 2007).

Innovative online payment and financing platforms are beginning to revolutionize the way international trade is conducted. Companies such as TradeCard, TradeBeam, and Bolero now offer a business-to-business e-commerce infrastructure that enables buyers and sellers to initiate, conduct, and settle international trade transactions securely over the Internet.

These online platforms have several advantages over traditional payment methods such as letters of credit:

• Reduced paperwork and enhanced visibility: Export-import companies are often faced with complex financing and extensive documentation that can increase the cost of goods shipped by 4 to 6 percent. It is estimated that more than 70 percent of docu­ments are found discrepant, leading to delays in payment or nonpayment. The online platform stores the documents electronically and allows parties to view them and cor­rect any discrepancy online. There is also the benefit of enhanced visibility into the movement of products and payments throughout the transaction lifecycle.
• Cost savings: Online platforms require less investment on hardware (they use the Inter­net) and are less costly than letters of credit. They handle documentation, payments, and other services.
• Value-added services: They also provide access to a community of service providers that offer logistics, inspection, export financing, and credit checks of customers.

MS Mode, a Netherlands-based women’s-apparel retailer with more than 400 stores throughout Europe recently deployed TradeCard’s online platform to increase sourcing from Bangladesh without using letters of credit (Anonymous, 2012). Several other retailers such as Levi Strauss, Columbia Sportswear, Guess, and Rite Aid are also using these platforms to streamline transaction flows ranging from purchase orders to shipment and payments.

Banks are competitors as well as logistic partners to these online platforms, which offer letter-of-credit and open-account services. They also partner with banks for financing ser­vices to their customers (see International Perspective 11.5).

In spite of the benefits that the new payment platforms provide, they have yet to achieve universal acceptance within the business community. The benefits of such platforms can be efficiently exploited only when all partners and service providers subscribe to the same platform (David and Stewart, 2010).

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.