These days everybody is talking about financial supply chain management (FSCM). But what does it mean, how does it affect traditional trade and what in particular has changed?
The guarantee and letter of credit (L/C) business is the mainstay of importers and exporters trading in foreign markets or with new, unknown clients. While an L/C and a guarantee are two different instruments, they achieve similar ends - they both provide a guarantee that the supplier of goods or services will be paid so long as they have fulfilled the conditions of the trade contract.
The L/C is a legal document guaranteeing that the buyer's bank will pay the agreed sum to the supplier, upon receipt of trade documents proving that the trade contract has been honoured. A bank guarantee ensures the supplier will be paid, or that the buyer will be compensated, if part of the trade contract is not fulfilled - for example if the buyer cannot pay the supplier, or the supplier cannot deliver the goods as per the contract.
The development of electronic communication (e-communication) standards and the adoption of these standards by banks and corporates have had a fundamental impact on the landscape. There is great interest in electronic messaging (e-messaging) from multinational corporates (MNCs), as well as mid-caps. Many are looking for multi-banking capable solutions to process their guarantee business.
We have also been seeing a shift from the complex L/C business to open account transactions in recent years. But the financial crisis in 2008 and the current sovereign debt crisis have slowed this development. Now, about 80% of the economic trade volume is processed via open account transactions. The crisis and the following credit crunch have forced corporates to involve more banks in their L/C and guarantee business, which of course increases the need for multi-banking.