How secure is Cash Against Documents really?

In international trade one of the most established ways used to procure supplies from far-away places is by settlement of cash against documents (CAD). What this means is that importers only pay when presented with the documents that give them ownership of the goods in transit. CAD is a much cheaper way to settle in international trade compared to the use of LoCs – and also much simpler, as banks can make the issue of an LoC a cumbersome process (see earlier case studies, but just to recap: the key differences between CAD and LoCs are that with Letters of Credit, the process is initiated by the importer, whereas exporters initiate the process when it comes to CAD. When LoCs are used, banks are much more involved in the process, as they are responsible for checking the conditions before importers make any payment, rather than merely holding cash for payment. This makes CAD more affordable for both parties than LoCs. The bank has less to do, takes less risk and hence demands lower fees). However, if we look at security, how secure is CAD really?

The CAD is really a compromise, the documents are usually offered at a late stage in the transaction, meaning following transport when the goods are offered to the buyer for settlement. There is hence no guarantee that the importer will actually pay. If the importer refuses to pay, the transaction has to be reversed and the exporter will have to pay for the costs. If it concerns an item that was specifically manufactured for the buyer, the exporter will lose money on both the extra transportation costs for repatriation and the fact the goods cannot easily be (re)sold to a third party.

Having established these ‘holes’ in the security CAD is still promoted as a method to protect the seller when he does not have a history with the buyer, the order is very large, or the buyer’s credit standing is poor. A way of settling transactions in international trade that is not or hardly ever used, and could offer an alternative is escrow. This is probably because escrow is mostly associated with old-fashioned, manually driven, processes. Escrow is a settlement method whereby the seller pays cash in advance, like in the picture above, but not to the seller. Instead, he pays to an independent third party, the escrow agent. Upon arrival of the goods, the Escrow agent is served with a notice that the goods have arrived at the agreed place of destination. Only then the monies are released to the seller. The escrow settlement method allows for the inclusion of milestones. For example,the parties can agree that a quality check is built into the process. A confirmation of safe arrival must in that case be accompanied with a report confirming the quality of the goods as agreed (a ‘milestone’). If confirmed, settlement will take place.

A completely digitalised and user friendly escrow process, whereby parties can agree everything on-line from behind their desks, thus avoids the administrative burden of an LoC, whilst giving more security than CAD settlement. This more secure, easier and better alternative for CAD can be found at www.mercuriontrade.com . If you recognise the situation as described in this briefing note, why not check it out today?

Secure & Agile Procurement

Taking a flyer on a supplier

Most manufacturers and whole-sale distributors are dependent on a regular flow of goods through import, often from far away. For this type of ‘flow’ traditional security documents, if at all appropriate, are often a bureaucracy that can slow things down. What are the alternatives? It would help the business dependent on a regular and steady flow of raw material (in terms of frequency and volume) to be able to quickly change suppliers if one of its established relationships fails to deliver – potentially due to events beyond the control of this supplier (covid being a prominent recent example). When suddenly having to deal with an alternative supplier relatively unknown to the buyer, he would benefit from a flexible security arrangement that can be set-up quickly, to mitigate any lack of comfort that a longstanding relationship brings.

Supply chain problems

Having looked into the aftermath of the covid crisis a few issues have come to the forth: as officials in China locked down large parts of the country manufacturing came to an instant hold (mostly still on hold at present as 80% of staff seem to be infected with the virus in some areas). Recovery is uncertain as many manufacturing hubs are still without enough staff today. Businesses have hence become more and more sceptical about their reliance on Chinese manufacturing. As supply chains are integrated and currently very much reliant on manufacturing facilities in China, there does not seem to be a quick way out. However, some businesses have taken the risk to try out new manufacturing hubs previously seen as unknown entities in places such as Vietnam, India and Indonesia. In particular the latter has been pushing Western businesses hard to start producing there. In November 2022 over 20,000 Tier 1 suppliers to US businesses were still shut down; overall, including Tier 2 & 3, the number stood at approximately 250,000. If production processes are put on ice due a lack of supply companies cannot possibly fulfil customers’ expectations.

Agile Procurement

As a result of this experience more and more businesses are thinking about being more agile, less integrated. One important issue here is trust. Suppliers that have become part of a supply-chain that was established long were deemed reliable partners (notwithstanding the impossibility to deliver). Suddenly changing tack into the unknown requires taking risks. The question is how businesses can create a set-up that mitigates these risks. The biggest risk is the payment risk. If a manufacturer far away claims he can deliver to the specs required, he may have ‘bitten off more than he can chew’. This is not rare. It happens very often, as in times of stress competitors abroad will oversell themselves to pick up new business. In these situations there is often a stampede to the alternative suppliers, perceived to be able to get the flow going again. Decisions have to make very quickly, which frequently compromises the security aspect.

The traditional way of creating security in trade is by means of a Letter of Credit (LoC). However, when the buyer is asked to make upfront payments (being put under pressure in competitive situations), the main risk is not one of ‘non-payment’ by the buyer, typically mitigated by the LoC, but one of ‘non delivery’ by the seller.

So, apart from the fact that banks are usually not willing to shift to different counterparties within 48hrs or so (the required window that it sometimes takes) LoCs are not really meant for this purpose, either.

So, what are the alternatives? What can be implemented in real time and will offer the protection during these times of procurement stress?

Flexible Security

It should be some kind of mechanism that would allow for settlement when it is as clear as can be that both parties will have delivered on what they agreed on. So, how could this delayed or conditional settlement be effected and how could this be done safely and efficiently? The mechanism described here is called ‘Escrow’.

Escrow means that payment only takes place against delivery and that an independent party controlling the money flow will check whether this has been the case (by looking at the terms and conditions of the agreement). Are there ways of setting up an Escrow agreement quickly? Yes there are. There is a platform run by Mercurion that allows the input of the trade agreement on-line.

Once the terms are finalised between parties, which is done through the platform, there is a record of what needs to be done and the buyer can pay the purchase price to the Escrow agent. The latter being the independent party that will test whether both buyer and seller will have fulfilled the conditions in the agreement.

The Mercurion platform uses the Baltic Exchange as the Escrow Agent. Being an over 300 year old London based institution owned by Singapore Exchange, one of Asia’s premier institutions when it comes to the settlement of financial assets (Aa2 rated), financial security should not be an issue. A digital Escrow arrangement backed by the strength of a strong Escrow agent provides the required security, is accessible instantly and can be set-up in a very short time-span; ideal when changing tag is required in times of supply uncertainty!

Confusing Legal Jargon

Different types of documents explained

The moment one’s valuable cargo is loaded on a ship, the carrier (often via an agent) will usually provide a set of documents that are necessary to claim the goods once they have arrived in the port of destination (effectively being put into storage in a warehouse).

Typically three bills are issued—one for the shipper, one for the consignee, and one for the banker, broker, or third party assisting in the delivery. There is no restriction on the number of bills of lading that can be issued, but the number of bills issued must be stated on the bill itself. Because the bill of lading is a document of title, it evidences and confers ownership.

In practice different sets of documents are issued each having their own specific characteristics. This briefing note will explain the fundamental differences between the three main types of documents used in trade: the Bill of Lading, the Sea Waybill and the more recently introduced E-Bill (of Lading).

The Bill of Lading

There are many different versions of the ‘Bill of Lading’, but since a Bill of Lading is a document of title it means that however turns up with this document is deemed to be the owner of the goods. The Warehouse will hence release the goods to this person. One of the main disadvantages of this document is that it can be lost by a courier or other postal service. The problem then becomes two-fold: if someone else finds the bill he can then (fraudulently) present himself as the owner of the goods, or the cargo simply cannot be released, thereby incurring extra warehouse costs and a lot of frustration.

The Sea Waybill

A Sea Waybill is used when the shipper decides to release ownership of the cargo immediately. This means that the goods can be delivered to the person mentioned in the document, and they will only have to identify themselves instead of presenting a document to prove ownership. Through the Sea Waybill the ownership has effectively already been transferred to the person (or company) named in the document.

It is important to mention that a Sea Waybill is only documentary evidence of ownership and is not a document of title; it hence does not confer ownership to the goods (another word for this is a ‘non-negotiable’ bill). In case one wants to have the flexibility to trade the goods during transport, it is probably better to use a Bill of Lading as it will be difficult, if not impossible to transfer ownership without a document of title.

From a security perspective a Sea Waybill is a better alternative when used in combination with an escrow service as the title to the goods cannot be lost in the post and end up in the hands of an unscrupulous third party. By using a Sea Waybill, the Mercurion platform offers the possibility to settle a transaction safely without running the risk of a document of title (and hence the ownership) getting lost. The way this is done is by using a proof of delivery document at the port of destination. The seller and the escrow agent then know that the goods have arrived and are ready for collection. An important consideration is that the goods will not be tradable during transport.

E Bill of Lading

The E Bill of Lading (offered for example by WAVE BL) replaces the physical Bill of Lading and is hence also a document of title. With the help of block-chain technology the ownership can then be transferred safely to the buyer without running the risk of lost documentation. To settle the transaction one will still need a proof of delivery document to prove to the buyer that the goods have arrived and the money can be released to the seller.

Not a trace – our Bill of Lading got lost

Many companies, indirectly involved in the shipping of goods, underestimate the risk of loss of the ‘Original Bill of Lading’ which forms an integral part of the Letter of Credit process. 

The Bill of Lading is a set of physical documents that have to be transported across the globe, usually by courier, to the place of delivery in order to get the goods in transit released. 

As it happens, they sometimes get lost. These documents are essential as they are documents of title, meaning that whoever owns the bill is entitled to delivery of the goods. This also means that losing this document has major repercussions, which one of our customers experienced recently when they tried to get a cargo, containing chemicals, in Africa delivered. 

The loss of the Original Bill of Lading required them to get a letter of indemnity (LoI) and a bank guarantee, both involving cumbersome processes. The result of the fact that the shipper refused to take any risk in terms of his liability in case of a potential claim of non-delivery, which could occur if he were to have delivered the cargo to the wrong party.

The LoI had to formally discharge him of any responsibility in this regard. The guarantee would then cover a potential subsequent refusal of the rightful consignee to pay, not having received the goods. To get these documents we had to produce a lot of supporting documentation, such as, a written statement of loss, the packing list, the commercial invoice, and a copy of the LC (its validity being conditional on the existence of an OBL). Lastly they needed to put in a formal request to have the goods released without OBL as the issuance of a new OBL would have taken even longer; more work for the lawyers, more costs.

Having gone through all of this, incurring significant costs and ending up with some very unhappy customers they wondered if there wasn’t a better way to manage this risk or even to avoid it altogether. We introduced then to Mercurion Trade Services, a company offering a platform through which transactions can be safely settled without the need for an OBL, and at the same time offering an alternative for an LC.

The process is simple, safe and much more efficient. It’s based on an Escrow process: buyer pays in Escrow and only when the confirmation of delivery at the agreed place of destination has been uploaded onto the platform, funds will be released. All through an entirely digital interface in real time. They are glad to have found this new way of doing business; less bureaucracy feels so much better! 

The benefits of a digitalised escrow service

A digitalised Escrow service is easier to access, reducing cost by eliminating needless bureaucracy typically involved with traditional trade security products offered by banks, such as Letters of Credit. The result is a service that can efficiently cater for smaller as well as larger consignments, shipped by ocean container, air or truck.

The extent of the bureaucracy involved in traditional banking products is such that it can discourage parties from completing the required processes, or even sway them to decline potential business altogether. Additional complications can arise when attempting to mitigate financial weakness of an issuing bank, leaving aside the conditionality contained in the document itself potentially making it unenforceable. The Escrow service is hence simpler and safer:

  • A transparent fee structure, competitive pricing and a less operationally cumbersome alternative to the traditional trade security services as provided by banks.
  • Safeguarding the interests of both buyer and seller, as funds are only released to the seller and the goods transferred to the buyer when both parties have performed under the Escrow Agreement in accordance with the Trade Agreement.
  • A straightforward and efficient KYC on-boarding process finalised promptly.
  • On-boarding less administratively intensive in respect of repeat transactions as the KYC data-set is securely held on the platform. Subject to the KYC data-set remaining the same.
  • Faster and less cumbersome settlement of transactions will bring about quicker receipt of funds leading to an increase of available working capital for buyer as well as seller.
  • Due to the digitalised nature of the process, there is no longer the risk of loss of physical documentation and the potential for fraud is greatly reduced.
  • The lack of the contractual conditionality compared to traditional bank security documentation, such as letters of credit, will enhance the flow of the process, avoiding delays and additional costs.
  • A fully transparent and auditable process comprising the activities of all parties involved.
  • 24/7 access to a secure cloud-based platform  
  • Dashboard functionality, document uploads and (optional) notifications
  • We invite you to have a look at www.mercuriontrade.com

Payments as a Strategy

Introduction

Many corporates are working with various bank sponsored electronic banking solutions which lead to high administration costs, in-transparent cash positions and restrictions to fulfill internal compliance. An alternative solution could be to connect your banks via a single, bank-independent payment factory solution, supporting straight through processing. Since a variety of digital bank services are available to integrate all banks by a single payment hub, it makes sense to understand what could work best for you.

Payment channels, the alternatives:

Access to the ebics/mcft channel

The ebics communication channel, already supported by many international transaction banks is an internet communication standard especially designed for electronic banking purposes. The number of banks that offer this channel is growing fast.

The mcft (multicash file transfer) channel is product specific channel, developed by omikron and is provided by many banks and service providers as well (e.g. Uk bacs service bureau). Mcft will bring additional benefits to multicash users, as it is similar to ebics especially designed to use the internet channel.

Setting up a connection with banks that support ebics/mcft is a plug and play implementation.

H2H connections

This is an individual connection with a bank. H2h connections are bank specific and built to use secured file transfer protocols. Each h2h connection can be a bank specific project.

Access to the swift network (to be purchased from swift)

To access the swift network, there are two alternatives:

1.    Via a swift al2 connection, direct linked to the swift network.

2.    Via a swift service bureau, indirect link, via a third party.

Once the access to the swift network is in place, you need to implement and test connections per individual bank. As swift is using a private network for the data exchange, this will lead to additional costs because companies are also charged by the amount of traffic over the channel.

Independent of the (combination of) channel(s) you use, you still need payment software which allows you to read the incoming bank statements and create and send payment files in a secure way.

Payment file formats

Another important aspect of payments is the ‘payment file format’ question (mt101/xml/local standards/ bank-specific standards). Which formats are currently used by the corporate systems and will their bank accept them in the new standardized set up, or does the client wish to harmonize formats and workflows? This discussion is important when replacing a variety of eb systems of a corporate with multiple international subsidiaries and bank connections.

Strategic considerations

The choice of payment channels depends on various factors. For instance, a client with 20 banks, of which 16 can be connected via ebics/mcft would probably connect the remaining 4 via separate h2h-connections because this is most efficient set-up. Alternatively, a client with 20 banks of which only 5 can be connected via ebics/mcft would connect the rest via swift. 

In the end, it is the corporate who decides which channel is preferred and how channels can be combined efficiently. The payment factory must be as flexible as possible to support the corporate strategic goals, even with a change of banks and strategy.

Recommendation

Moving away from traditional electronic banking systems to a modern independent payment factory solution is a challenge. It starts with an analysis and leads to a strategy. Several operational and it-specific questions need to be answered: which new digital services, channels and formats are offered by the bank, and what is the best operational approach for my company?

Since most people in treasury prefer to outsource these analyzes to external experts, it makes sense to seek professional advice.

Who should change? You? Or your treasury system?

Medium-sized companies often use extensive Excel files, that have grown over the years to manage their liquidity management. Some even use complex macros, but in most cases, the four eyes principle is not enforced. If someone changes a value or a formula, this can hardly be proven, but can have significantconsequences for the company. 

Complex calculations sometimes lead to rounding differences, formula errors lead to incorrect results and, finally, the tables do not offer any search functions because they are not databases. 

Switching to a professional Treasury Management System (TMS), in which all financial and hedging transactions, all bank accounts and sales, even sucurities and guarantees can be properly managed, analyzed and simulated, is often not dared for various reasons: 

It costs too much: possible, but you can quickly check which way of working is more economical and easier.

No time to get started: probably because you can’t work efficiently with the current systems. 

No staff left: You don’t need it. Our people have managed implementations at many customers. Our staff take a lot of work out of hands. Alternatively, an external consultant can help.

But then my colleagues have to work overtime: This may be possible, but if that is the case, usually only for a short period. With our help, you can get started in a few weeks. We relieve you of some of the work and we tailor the training to you. 

But for that I definitely need special, new hardware and software?: No, internet access and a web browser are sufficient, as the application is implemented individually for you in our ISO27001-certified data center in a private cloud. 

Trinity TMS is definitely difficult to use? You have to learn everything first, including Excel. However, we have designed our system in such a way that you think in many places that you are working in EXCEL. The workflows in the various modules are also designed in a similar way, so that you can quickly find your way around. 

But we have grown so special and over the years with complex processes, you certainly cannot map everythingWe like to give it a try. We cannot do everything, but so far there has only been a little that could not be represented in our flexible configurable solution. 

Is our financial data safe in the cloud? With Trinity yes, because we do not implement in the global public cloud, but rent hardware exclusively for you in a protected data center (therefore private cloud) with numerous security precautions. The failure data centers are all located in 3 locations in Germany And access is via the Internet? It is compatible with all common browsers and even allows you to work from your home office during these times. 

Try it out, we look forward to your call! 

EU-US privacy shield valid or not? Trinity users can relax

In 2015, the European Commission’s Safe Harbor decision was declared invalid by the European Court of Justice (ECJ). Five months later, the EU and the United States reached an agreement, regarding the set of rules which intend to protect the personal data of citizens of the European Economic Area, stored in the United States. 

A number of provisions should bring the level of data protection in the United States to a level that is in line with EU requirements. Already before Donald Trump published numerous decrees, US law took precedence allowing the FBI and NSA to gain access to the data stored on US servers in justified suspected cases (e.g. to combat terrorism). 

After living with this artificial, not really secure data protection shield for over four years, the ECJ invalidated this “adequacy decision” known as the “EU-US Privacy Shield” on July 16, 2020.

Standard contracts, with agreements on data protection that were still valid, were often agreed on a small scale. Large software providers in particular were happy to simplify referring to the EU-US Privacy Shield, which is now invalid.

Trinity offers its customers a “private cloud solution” in which the data is only stored on servers in Germany. As an ISO 27001 / IKS PS 951 and PS 983-certified full-service IT provider, our data center is specialized in highly available IT services for banks, stock exchanges and financial service providers and meets the highest data security requirements. State-of-the-art building technology and physical security measures are used at three locations in Germany to ensure business continuity management. As a result, the EU-US Privacy Shield is completely irrelevant for our corporate-, municipality- and bank customers using the Trinity TMS.

Does Artificial Intelligence protect you against a crisis?

Weather forecasts are based on artificial intelligence. In general, they work fine but they often fail to predict hail damage. This is because hail usually forms at very short notice and the grain size depends on factors that the model doesn’t take into account. Next to that, one could wonder how management would deal with a predicted anomaly. For instance, would they have believed that oil prices were to turn negative?

Artificial intelligence” is not a clearly defined term. Some people already consider simple ‘rule based’ software as artificial intelligence (AI). True AI requires “if-then rules” to be supported by more complex and self-learning algorithms. 

Deep learning, which is the use of artificial neural networks (ANN). This is effective to improve predictions. The layered model of the ANN develops “thought patterns” similar as in the human brain. In the end, the ANN learns the “right” ways through conclusions based on experiences, whereby many unconscious factors also have an impact on the result. Even if they weren’t originally considered in the rule-based programming.

In certain cases, the likelihood that a predicted result will occur, can be significantly improved with such methods. Complex algorithms can now make autonomous driving possible. 

In order to effectively secure the company’s liquidity, flexibility and a reliable information-base are crucial. Information can be collected via internet and automated interfaces. Plausibility checks and system monitoring are used to prevent incorrect entries and missing messages. The ability to stress tests with any interest and currency scenario are the strengths of a modern treasury management system.

In order to enable financial managers to quickly switch from EXCEL-based planning sheets to Trinity TMS, Trinity has already pre-installed a number of installations in the “private cloud”. Existing structures and data from EXCEL can be adopted in a few days and companies will receive a workable solution in just 5 days. 

Liquidity planning process; why simplicity matters…

Liquidity planning process; why simplicity matters….

Everyone will agree that liquidity planning is an essential part of managing a company. As dedicated provider of liquidity management software, the Trinity team talks to many different companies.

One of the reasons we are invited to speak with the CFO, is because the company’s current processes are no longer considered to be efficient. In most cases we come across two different situations:

Using Excel

The liquidity planning is done in Excel and management acknowledges that this has some essential disadvantages. At a certain point, the use and maintenance of the spreadsheets become time-consuming and the error risk increases continuously. Usually the calculation sheet is managed by one person only, meaning that the knowledge is not distributed in the organization and therefore creates an additional risk.

Furthermore, most spreadsheets miss valuable functionality like e.g.:

  • drill down from consolidated plan positions to their details
  • currency differentiated planning and easy conversion
  • reflection of cash flows from financial deals in current forecast without delay
  • automated and immediate import of cash flows from ERP systems
  • easy PLAN/ACTUAL deviation analysis
  • audit trails and user access rights system to comply with corporate governance guidelines

Using the ERP

The second situation is when we encounter a liquidity planning process that is supposed to work via the existing ERP platform. Due to the complexity of operation the cash forecasting process does not work as required. Next to the above, various other difficulties in handling can appear in ERP-based solutions, e.g. missing calculation of market values, no consideration of interest rate curves, impractical change of planning structures, inadequate automated integration of cashflows from different sources.

Another issue we encounter, is that the implementation of the solution has failed as a result of too much internal resistance from local subsidiaries. This reason, of course, is agnostic to the system in use, whether it is self-made spreadsheets or ERP-based solutions. Therefore, it might be a good idea to implement an easy-to-use system which is especially designed for integrated liquidity planning automatically reflecting all cash flows from financial deals without delay and accessible for all users via internet.

To make a project a success, it is important that different stakeholders, often based in different countries, need to work together in a positive spirit. A simple demo of Trinity’s liquidity planning module can be very convincing and will help to align people.

Did you know our liquidity module can be implemented in 5 days only?

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