Technology and Trade Finance: The Future

is Now

LOOKING BACK, HISTORIANS OF 21ST CENTURY TRADE FINANCE will characterize the beginning of
the era as a paradigm shift. Thanks to technology, age-old ways of financing trade transactions have evolved
so rapidly that a new world of trade much faster and laser-focused on efficiencies has replaced the old in
just a few years.

Only yesterday, we were still in the era of documentary trade. Financing, although available and relatively
inexpensive, relied on masses of paper that had been handled in the same way for centuries. But if the
process was cumbersome, it was also predictable. The physical documents required for the initiation and
processing of a Letter of Credit (LC) gave comfort to all parties in a typical trade transaction.

Today, despite the financial crisis, the era of documentary trade seems to be ending as the march towards
open account transactions continues unabated. The utilization of Letters of Credit actually declined during
the crisis and subsequent downturn, while the demand for the financing of customer supply chains sharply
increased in order to ensure business continuity.

Simpler and smarter
Even with open account, todays international
trade environment is made fiercely complex by
multiple trading partners, cross-border
networks and new, overlapping regulatory
regimes. Trade flows constantly change while
global trade markets show both growth and
volatility.
Against this backdrop, global companies are
seeking simplicity or more to be more
precise, they are seeking efficiencies in their
trade activity through the promise of
technology. It is not surprising in this period of
still-tight credit that companies are making a
significant drive for better visibility into their
supply chains and cash flows. Technology can
give companies unprecedented insight into the
day-to-day workings of their business and now
allows them to leverage information in ways
they never anticipated.
For many companies in 2012, the question is
not If, but How they can best access this
quickly-evolving technology. Managers in the
trade space risk managers, assistant
treasurers and treasurers are making a big
effort to expand their understanding of the
leading edge solutions now available.
What banks are hearing from
customers
Global trade banks are just as eager to
understand the ways that new technology can
support their corporate customers. They have
made the innovative application of technology
a major focus.
What we at J.P. Morgan hear from clients time
and again is how much they want to get away
from Letters of Credit from their onerous
documentation requirements and all the
delays and frustrations encountered in
processing. But they will also admit that
however much they dislike LCs, they need
some level of risk mitigation and
consequently need banks to take a role in their
trading activity. When companies talk to a
bank like J.P. Morgan, the trade question they
most often ask is quite straightforward: I want
to simplify my trade finance process, lower my
costs, and optimize my cash flow without
incurring unacceptable levels of risk. How can
you help?
The answer is a technology-based solution
that combines the risk mitigation and liquidity
of a Letter of Credit with the cost benefits and
operational efficiencies of trading in Open
Account. It is called a Bank Payment
Obligation, or BPO.
Game changer
Introduced by the Society for Worldwide
Financial Communications (SWIFT) in 2009,
the Bank Payment Obligation (BPO) is a
financial instrument that requires the obligor
bank to pay the exporter bank when data has
been successfully matched within SWIFTs
Trade Services Utility (TSU). The TSU is a
bank-to-bank platform on which banks can
exchange data extracted from a companys
trade-related documentation purchase
orders, commercial invoices, insurance and
transport payments are examples and match
payment terms.
A BPO is similar to a Letter of Credit, but it
deals with electronically exchanged data
rather than documents. A bank can issue a
BPO directly to a seller, or confirm another
banks BPO using TSU. In lieu of typically
required shipping documents, the parties to
the trade transaction establish a baseline of
key data points that could also be found in a
Letter of Credit amount, shipping dates,
etc.and match those data points, rather than
physical documents. BPOs do not eliminate
the need for paper entirely shipping
documents may still need to circulate outside
banking channels but they are a very
significant development in the history of trade
banking, what we can likely call a game
changer. With BPOs, using the TSU as a
platform, banks are settling on the basis of
data, rather than paper.
BPO market impact
The benefit of using the BPO to buyers in
terms of their cash flow optimization is huge.
Settlement is so much quicker that a BPO can
occur almost as soon as the data elements
match. (Compare this to a process that may
take anywhere from two to seven days and
involves the sharing of physical documents.)
When data is matched automatically, the

2013 JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC. All services are subject to applicable laws
and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and
services is subject to final determination by J.P. Morgan and/or its affiliates/subsidiaries. Produced by Treasury Services Global Marketing. Page 1 of 2
buyer retains ability to control payments via
dashboard access to the BPO process. For
sellers, a major BPO benefit is the
streamlining of their internal processing. While
they must still comply with purchase order
terms and contractual obligations, they are no
longer burdened with the complexities of
handling a Letter of Credit. The simplification
of their process accelerates their Days Sales
Outstanding (DSO) significantly.
Global companies and their banks are
showing an increased interest in BPO
adoption. Since China banks have been early
adopters of the Trade Services Utility platform,
particularly likely candidates are Brazilian
mining companies and Indian steel
manufacturers involved in large China trade
flows. Currently, in order to make use of BPO
capability, both banks involved in a companys
trade transaction must be TSU members. But
the International Chamber of Commerce (ICC)
is currently drafting international BPO rules
and standards that will be similar to the
standards contained in the UCP 600. When
banks are able to use these international
standards to link up directly, utilization of the
TSU will no longer be necessary. This should
considerably ease the adoption process for
banks and their corporate customers, and
influence the change in corporate behavior.
More pain relief: SWIFT for
Corporates
More trade relief is now on the way in the form
of another major innovation from SWIFT. A
handful of leading global banks, including J.P.
Morgan, have joined up to conduct a group
effort known as SWIFT for Corporates, or
SCORE. SCORE is based on SWIFTs new
MT 798 messaging program for ERP-
compatible SWIFT members. The MT 798 is a
sort of electronic envelope for multiple
SWIFT member messages to standardize
communications. When a bank receives the
MT 798, it executes the orders wrapped
within it, and the information also flows back
into the clients systems so that they can track
liabilities and balances from multiple banking
providers.
SWIFT provides financial messaging for more
than 10,000 banks and corporations in more
than 200 countries, and its innovative MT 798
addresses a major pain point for large
multinationals. For more than 25 years, these
companies have routinely maintained many
different banking relationships around the
world because they have needed Letters of
2013 JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC. All services are subject to applicable laws
and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and
services is subject to final determination by J.P. Morgan and/or its affiliates/subsidiaries. Produced by Treasury Services Global Marketing.
Credit for both imports and exports, along with customized dashboard feature that allows
Standby LCs and insurance bonds to support users to create interactive charts from
their trade flows and financial obligations. It is underlying data for trend analysis, and to
still not uncommon for a corporation to have a access proprietary J.P. Morgan training and
significant number of banking relationships, reference materials.
each requiring a unique trading platform.
Trade Channel features and functionality are
Adopting a standardized messaging process
the result of research, discussion and
like SWIFTs will allow corporations to partnership with J.P. Morgans trade clients
streamline their banking relationships and
and provided in response to their most
keep their Letters of Credit in a single pressing concerns. Some its new features,
repository, where they have a total view of particularly its multilanguage capabilities and
their exposures around the world. This is in
the analytic and informational value-adds of
sharp contrast to what most companies do the client dashboard, are unique industry
today download the information and offerings. They help clients respond more
consolidate it manually, so that it is neither
efficiently and effectively to the challenges of
real-time nor widely accessible.
international trade.
To make this new standard a useful reality for J.P. Morgan is embarking on an additional
clients looking for support of their global trade Trade Channel enhancement a mobile
flows, J.P. Morgan has built a 2012 roadmap
initiative that will provide some clients with
for implementing MT 798. access to trade activities via standard mobile
devices such as smartphones and tablets.
Besides being able to view key trade data, the
Real time trade: portals and
mobile initiative will enable transaction
mobile transacting approval and support text alerts for any type of
A key component of successful international transaction or event.
trade in todays economy is instant access to
critical trade flow information. Trade Channel,
J.P. Morgans web-based global platform, The Future is now
helps clients gain visibility into the entire range Technology advances have already
of their trade activities from purchase order revolutionized the way we manage and
to payment. The net effect of Trade Channel is finance global trade. Technology continues to
improved efficiency, reduced expenses, less provide solutions to the challenges that arise
risk and a more streamlined trade-related from expanding regulation, constantly
payables and receivables process. For clients changing compliance requirements, and the
that are expanding internationally, the Trade persisting importance of cross-border risk
Channel platform provides a portal through mitigation even as open account transactions
which they can fund and manage their trade become the norm. The holy grail of supply
activities end-to-end. chain and working capital management total,
Portals like Trade Channel are deployed to end-to-end visibility was never closer. In
help manage cash flow and levels of fact, it is arguably already here.
counterparty risk, providing a holistic view of
trade activities from a single point of access.
The Trade Channel platform supports
traditional trade finance instruments such as
Import and Export Letters of Credit, Standby
Letters of Credit, and Direct and Documentary
Collections, as well as Open Account
transactions with an automated Purchase
Order capability. Users have the ability to
customize trade-related workflows, view
images of shipping documents, create reports,
and securely submit inquiries and exchange
information anywhere, anytime. Besides
English, Trade Channels unique multilingual
capabilities include Spanish, Portuguese and
Simplified Chinese, with the addition of more
languages planned for the future. Trade
Channel enhancements have included a
Page 2 of 2