ABN AMRO and Coface, an export credit insurer, have signed a memorandum of understanding to provide an assured settlement model for e-commerce trading in Asia-Pacific. Targeted at companies trading in e-marketplaces, the collaboration promises faster, and more cost-efficient financial settlement over and above the use of traditional trade finance instruments such as letters of credit and documentary collection.
Under the collaboration, Coface's @rating system will be incorporated with ABN AMRO's trade settlement products to enable companies to trade within a more secure environment. @rating is a internet based business-to-business (B2B) merchant rating system that assesses a company's ability to meet its commercial obligations. Coface will also guarantee the rating under a separate insurance policy.
"[T]he new economy requires speed and global reach. This collaboration will bring an alternative settlement model to the traditional settlement model that we are comfortable with. It would be an alternative to documentary credits and documentary collection," says Walter Tan, senior vice-president of trade services at ABN AMRO Asia Pacific.
"There is much perceived risk in the world of virtual commerce today because companies may have no idea of the reliability of a potential partner," says Francois David, CEO of the Coface Group.
Is this the future I see before me?
According to Tan, ABN AMRO has some 30 mandates from companies and internet markets in relation to e-commerce strategies. These companies and e-markets were increasingly looking for a cost efficient, and faster settlement process that offered a way of mitigating the risk of non-payment. Tan estimates that the cost of settlement can be reduced by up to one quarter by this new method. In addition, Tan says that it "may be an incentive for us to provide the financing on a selective basis because they are credit insured."
But in the search for such an alternative settlement model, will export credit insurance replace traditional trade finance instruments in the new economy? Yes, to an extent, says Tan. "It's called creative destruction. When you move into a new economy, you create new value propositions and in that process, some of your traditional value propositions will be destroyed". But Tan admits that, "there will always be high risk countries, and high risk transactions that will still require traditional instruments."
Coface and ABN AMRO still have a number of issues to work out with their new model, for example the extend of insurance coverage; how feasible is it for all transactions to be covered; and whether it will be covered on a portfolio basis or on an individual transaction basis. Such issues will need to be discussed with the e-marketplaces and e-merchants for a customized solution, says Tan.
ABN AMRO and Coface will launch a joint marketing initiative to e-marketplaces and portals within the next week.