More and more, financial products are becoming available in
electronic format, even in developing countries, faster than we
could expect. A silent revolution started well before the Internet,
and is moving beyond electronic payments. Changing the way
financial services are used in international trade, electronic
finance is forcing standardization, adding speed and reducing
costs. These changes can help developing countries improve their
international trade competitiveness.
A silent revolution
Our relationship with banks has changed so subtly over the past
years that many of us have not realized that a silent revolution
has been under way, moving us towards a digital economy. A large
segment of banking and insurance "went digital" years ago. In both
developing and industrialized countries, for example, credit card
issuers and banks have used private electronic networks to transfer
funds - well before the Internet - using service providers such as
VisaNet, SWIFT and FedWire.
Trade-related financial and insurance products are being adapted
to customers' needs. These go beyond payments and transfer of
documents: loan requests, credit insurance, letter of credit
confirmations and other documents can now be submitted in
electronic form.
A changing banker-client relationship
These changes have an impact on the traditional banker-client
relationship. As more services become digitalized, the
interpersonal relationship between bankers and their clients
evolves.
Lower costs
Using the Internet can reduce costs. According to UNCTAD, a
traditional bank-to-branch transaction costs no less than US$ 1;
Automatic Teller Machines (ATM) reduce the cost to US$ 0.20; and an
online transaction brings it down to US$ 0.01. Digital e-payment
therefore appears ideal not only for large deals but also for small
transactions.
The e-payment paradox
The Internet is characterized by openness and information
sharing; financial services are characterized by confidentiality.
E-payment, which is an important part in the e-trade cycle,
represents the ultimate goal of the transaction. The transaction
remains at risk until money is received. E-payment and other
financial services applications require state-of-the-art security
and encryption, which is totally in opposition with the concept of
free information sharing. Highly sophisticated encryption programs
now provide the required security, at a nominal cost, for users in
both developed and developing countries. This sets the stage for
e-payments to offer rapid, cost-effective and secure settlement of
transactions.
Turning drawbacks into advantages: An opportunity for
banks
Some bankers feel that their role is being reduced to that of a
simple intermediary, as settlements are completed directly between
trading parties. The personal contact between banker and client is
diminished, and the banker loses some control over clients.
This potential drawback is offset by the opportunities for
efficiency, which unleashes resources that can be reinvested in
value-added services. Instead of processing low-margin
transactions, banks can utilize e-banking to develop entirely new
products. By creating Internet portal sites, banks can bundle a
wide variety of services. Some banks are looking at new ways to
manage clients' portfolios better with electronic applications, in
areas such as short-term credit applications, cash and payroll
payment services, collection ser-vices and export credit linked
with credit insurance. Banks are also using advances in technology
for outsourcing, subcontracting and a variety of back office
operations.
Addressing constraints
Among the constraints are: the level of telecommunications
services; the need to develop a legal framework; the need to apply
advances made in digital signature and encryption possibilities;
and the need to revise banking procedures.
However, "where there is a will, there is a way". Technology has
developed beyond our expectations already, and we cannot predict
the next technological leaps, which still occur frequently.
Government commitment to facilitating an e-commerce environment can
make a real difference, as can creative approaches by firms and
their customers. A milk cooperative in India, for example, has
created its own electronic card payment system among its members,
who are the clients of the cooperative.
Developing countries: What they can do
Understanding e-finance trends and making the most of them is a
key to helping developing countries become internationally
competitive. A cash-based society, in today's globalized world, is
the modern equivalent of trading with salt and shells. Steps that
encourage e-finance include the following:
• Small and medium-sized enterprises can group together to share
the costs of creating the service or consulting company they need
to trade internationally using e-commerce. This has worked very
well in some Latin American countries.
• Banks, heavy users of electronic and digital technologies, can
adopt new procedures entailing low marginal costs, to respond to
clients' new demands. Growing standardization gives banks the
opportunity to enlarge their offer of traditional services through
new channels, as well as to develop specifically designed new
products.
• Governments can boost infrastructure development by putting
into place effective regulations (without overregulating a quickly
changing area) for registration, taxation, monitoring and
reporting, and legal issues. They can also adopt e-commerce
practices and become a major online client for local businesses.
This encourages local enterprises, but also gives governments
direct feedback on practical problems faced in the e-banking and
e-payment sectors.
The e-payment revolution predates the
Internet
New opportunities and changing needs of customers require the
constant introduction and updating of systems. Among them:
- Cash and Automatic Teller Machines are increasingly used to
deposit and withdraw money.
- Credit cards are widely used. The latest versions address
security issues by using an ID or encrypted credit card
number.
- Electronic cheques are replacing traditional cheques.
- Digital cash payments are done through banks, ensuring
anonymity.
In the business-to-business (B2B) environment, e-transactions are
integrated in supply chain management and in regular process flows.
For high-value transactions, enterprises adopt proprietary and
closed systems, providing high security for payments as well as
facilitating monitoring. All these mechanisms have only one aim: to
add security to an otherwise open (i.e., open to fraud) payment
system. - Electronic Data Interchange (EDI) has been developed mainly for
secure inter-company communication and the exchange of structured
business documents, such as orders and invoices.
- The Society for Worldwide Interbank Financial Telecommunication
(SWIFT) has a similar inter-company system to EDI.
- Bolero, which is an open system operated by SWIFT, allows
documents and data, such as shipment documents and payments, to be
exchanged online between several parties. Bolero has a unique
feature that enables different computer systems to work
together.
- TradeCard, Bolero's direct competitor, is a comparable system
offering electronic payments, as well as shipment facilities.
- Secure Sockets Layer (SSL) is another system used to secure the
transmission of sensitive information using encryption technologies
to scramble messages, in order to avoid third parties reading
during transmission.
- Secure Electronic Transfer (SET) provides a new standard for
secure online transactions.
Carlo F. Cattani
is ITC's Senior Adviser on Trade Financing.