For a small firm looking to import a relatively small value of goods from abroad, especially from some emerging market countries, there is always a dilemma to be answered. Is it worth opening a letter of credit (LC)
On the plus side they give a certain level of security, on the downside they’re expensive.
That’s especially the case if the transaction is only for US$40,000 for example. However, should the exporter be anything other than upright and honest, then it could turn out to be a very expensive transaction indeed.
Usually in such circumstances where an exporter has failed to perform there is little in the way of redress for the buyer, at least not cost effectively.
Generally speaking the importer, weary of costs, probably won’t use an LC and will send a purchase order by fax to the seller. A confirmation is received back, the money is wired over to the seller and the buyer keeps their fingers crossed that what ever they ordered will turn-up by the pre-arranged date.
However, a UK-based payment infrastructure and services firm, Earthport, has spotted a gap in the market for a solution that can provide the buyer with a greater level of confidence than simply keeping their fingers crossed for the promised delivery of goods
Earthport is listed on the Alternative Investment Market (AIM) of the London Stock Exchange and can be described as being the Paypal of financial institutions and corporates.
Executive director of sales and marketing, James Bergman, describes Earthport’s ‘sweet spot’s as being the sub-US$200,000 transaction, a business area under-served in terms of transaction choices.
Yet with the explosive growth in global trade over the last few decades and the emergence of the Internet, there has been a correspondingly spectacular growth in small international transactions. Small firms now, more than ever, engage in international trade by using the internet as a marketing channel.
Recognising the pent-up demand for a more secure trading solution, Earthport signed a deal with IT heavyweight and secure document specialist, Adobe.
The two are developing a secure trade services solution to be aimed mainly at small to medium-sized enterprises (SMEs). Although there is no reason why even very large corporates wanting to carry out small international transactions securely and cost effectively shouldn’t use the service as well.
They could conceivably even use it for trying out new suppliers with small orders with a view to later including them in their supply chain finance platforms if they pass with flying colours.
“This is a joint initiative, which both companies believe will capitalise on Earthport’s unique business model for bank-to-bank transfers and Adobe’s long established and market leading capabilities for rich customer engagement,” comments an Adobe spokesperson.
To be announced
The solution is actually being developed for an unnamed major UK bank, which is a leader in the SME market.
That bank will be targeting the service at SMEs with turnovers of under US$30mn, which engage in international trade. The bank in question was at the time of writing very close to making an announcement about the new service.
For the first time SMEs will be offered the possibility of using a payments solution akin to a ‘light LC’s to carry out those smaller transactions and at a lower cost than using traditional LCs. The idea is that the whole transaction would be carried out through an internet portal.
“In essence the purchaser would exchange in a secure environment their intents of purchase and the exporter would upload their commitment to send the goods or their bill of lading,” explains Bergman. “Earthport would be the escrow mechanism sitting behind that and would hold the funds committed by the purchaser and on exchange of documentation, it would then release the funds to the manufacturer or exporter.”
He explains that should the goods never turn up, then the importer’s funds will not leave the escrow account. Funds are only released: “once the documents are exchanged and there is absolute proof of shipping and everything is properly on its way,” says Bergman. Also: “We only deal in cleared funds, so there’s never a dispute around moneys and there’s never a risk of a transaction being declined.”
The bank in question will also be offering an insurance product from one of the large insurance groups. So if the goods are damaged, for example, the importer will be covered against losses.
The whole service and the portal will be in that particular bank’s name. From the client’s point of view they will be dealing directly with their bank. Bergman describes Earthport’s offering as being a bit like the Intel chip inside the PC.
As an example of this Bergman cites its relationship with money transfer business Xoom. Although not directly related to international trade, Xoom enables its users, usually individuals, to send small amounts of money around the world for a fee. It has the backing of private equity group, Sequoia Capital and was founded by ex-Paypal managers.
“When you log into your Xoom account it looks like you’re paying money directly into Xoom, but you’re actually paying into Earthport,” he explains. “it’s actually Xoom’s virtual bank account with Earthport and we then reflect that in Xoom’s account balance with us.” And so it will be the same experience for SMEs when logging into their bank’s portal to carry out small transactions using an Earthport powered platform.
Earthport earns its income from the solution on a per transaction basis. Depending on the volume and whether foreign exchange services are used or not, that fee can range from US$1-10 per transaction. This is paid by the bank, which then charges its clients separately for the service.
However, the key to being able to offer a competitive solution for conducting small transactions securely is Earthport’s payments infrastructure. This is important because: “If bank A in Australia has a correspondent relationship with bank B in the UK and is sending a client’s funds to London, they will incur costs on sending it, plus there are landing charges and foreign exchange costs,” says Bergman.
However, Earthport owns and runs an international money movement platform called the Universal Payments Network. This enables it to make secure low cost international bank payments and collections world-wide.
Backing all that up is the fact that the firm is registered as a money service business with the UK’s Revenue and Customs department and holds an E-money Issuer certificate with the UK’s financial regulator, the Financial Services Authority.
It also has similar arrangements with the US authorities, which are particularly valuable in light of the restrictions following the terrorist attacks of 9/11. International money transactions and the providers of such services are now much more closely scrutinised.
Meanwhile, all client funds are kept in segregated trust accounts and Earthport is a member of Swift.
It appears the solution has stimulated a lot of interest from banks. At the invitation of another heavy weight IT partner, IBM, Earthport was present at the last Sibos gathering in Boston last year. It was among 17 of what IBM considers to be the most innovative payment solution firms ranging from Earthport’s offering through to mobile phone payment solutions providers.
“We went along expecting to have a couple of good conversations with some banks. To put it mildly it was like drinking from a fire hose. We walked away with 35 qualified opportunities with some of the world’s leading financial institutions,” says Bergman.
He adds that they recognised that by using Earthport’s platform they would have a more cost effective and efficient way to deliver payments as opposed to the traditional correspondent model. “We feel that we have quite a compelling offer for the banking industry,” says Bergman. And reach isn’t an issue either. “Anywhere we don’t reach through our network we reach through Swift, thanks to our membership of that organisation,” he says. It is apparently from Sibos that Earthport met with the UK bank, which will be the first to launch Earthport’s offering in the SME trade services space.
“We are aggressively progressing with a number of other financial institutions which are also very keen to take on this service,” says Bergman.
He explains that banks can use the service to gain SME market share from rivals. “It is also an additional revenue stream for them, it helps reduce customer churn and the risk of companies going out of business,” says Bergman.
“The Earthport aspect of the service is ‘traditional vanilla Earthport,” which is used by a number of clients. For us it is no different to the service we’ve been offering our clients for the last decade or so,” he says. “It will give people doing international trade more confidence. It helps facilitate international trade and will go some way to rebuilding the perceived risky image of doing international trade with some parts of the world.”
Indeed, the UK bank has had discussions with a number of its SME clients and the feedback has been positive. It will conduct a phased roll out of the service with an initial tranche of customers. Later on the bank’s relationship managers will position the product with their clients.
IBM is also showcasing Earthport’s solution at other payment and supply chain finance exhibitions.
Earthport uses IBM’s DB2 pureXML technology to support its payment solutions. XML stands for Extensible Mark-up Language and in plain English is a technical standard for electronically transporting and storing data. IBM’s XML product claims to carry out those tasks more efficiently.
New invoice standard
Another interesting product making its way through Earthport’s pipeline is the mandated invoice solution, which could have relevance for supply chain finance, says Bergman. Indeed, it sounds very similar to the trade portals being set up by various banks to enable supply chain finance.
“It is a new invoicing standard a client of ours has approached us with, which is going to be a new mandated standard for a wider geographic region,” says Bergman. “It will not be too dissimilar from Sage as an accounting platform.”
Sage is a UK based and leading software developer of accounting, payroll and business management solutions.
Back to Earthport. “It will enable corporates not only to generate invoices but to actually receive remittances. It would have a banking network that would sit behind it and that banking network is now going to be Earthport’s ,” says Bergman. The product is expected to be launched sometime in May and Bergman said that for confidentiality reasons he can’t name the client or the region until then.
In essence, the solution will be a portal from which invoices can be generated and settled and remittances collected and moneys paid out. The user will also be able to view balances in multiple foreign currencies and carry out transactions all from one customised portal. The project also has the involvement of a big name in the payments industry, which Bergman can’t name yet.
“It will make the process of dealing with invoices more efficient and automate and facilitate trade within a particular geographic market where trade has not always flowed as easily as buyers and sellers would like,” says Bergman.
Indeed, solutions created by companies such as Earthport are helping to make all the administrative processes that sit behind international trade more secure and more efficient. Such developments can only be good for international trade and for its various participants whether they are corporates or financial institutions. What Earthport is offering is the potential for more SMEs to step into the international trade arena in a way that safeguards them from fraudulent activity by sellers. Banks, especially those who value SME business, should be very interested in Earthport’s offering. If nothing else it enables them to broaden their offering to their clients. Also, Earthport’s offerings could quite possibly be adapted for supply chain finance as well.