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    Electronic Finance: A Cornerstone to Trade and Compete Internationally


    © International Trade Centre, International Trade Forum - Issue 3/2000

    Understanding e-finance trends helps both firms and trade development professionals to be more internationally competitive.

    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.