Nobody can accuse J.P. Morgan of being a Johnny-come-lately in the area of trade finance in Japan. The company underwrote $150 million in disaster relief bonds in Japan in 1924, the year following the Great Kanto earthquake, with the first dollar-denominated bond issued by the Japanese government. It opened a branch in Tokyo in 1947 and now has about 1,400 people in Japan.
With a dedicated in-country trade solutions team offering Japanese clients end-to-end trade finance and logistics solutions, J.P. Morgan can also call on Japanese expertise in Europe, the US and key Asian hubs.
Trade finance covers a wide range of services and activities where providers support export and import flows. It is separate from cash management, but companies wrap the trade functions into units that also conduct cash management business.
“If cash management in its simplest format is about how payments are collected and made, how funds are wired and how to manage account balances, then trade finance is two-fold,” said Hans Janssens, head of treasury and securities services in Japan for J.P. Morgan. “How do you finance trade flows, and how do you build the infrastructure and provide the documentation support that goes with it?”
For example, in Asia, most invoices are received in paper format, and to reconcile, manual data entry and checking is required.
“One of the innovative solutions we offer to clients in the supply chain is freight payment and audit services, Janssens said. “Using automated processes results in increased efficiency and cost savings, as well as on-time payment of freight and transportation invoices.”
Exporters prefer to see importers prepay for products, while the importer wants proof that the products he is paying for are actually on their way. The core expertise of trade finance includes supporting the opening of letters of credit that guarantee the exporter payment if they can present documentation, such as a bill of lading proving the goods have been shipped.
“Let’s say Company A wants to export goods to the Middle East or Africa, but is not sure of the credit risk of the counterparties, well in some cases Citi has a relationship with the importers,” explained Hiroyuki Soejima, treasury and trade solutions head for global transaction services at Citi in Japan. “In that case we can take on the credit risk of the importers and the Japanese exporter can export goods without the need to take on that risk.”
Only international banks can offer that type of credit offering to their clients, and it is based on a large global footprint built up through years of involvement in a range of countries and regions.
Other instances of international banks creating a win-win situation for clients would be to intervene between an exporter who wants to be paid for his goods immediately, and an importer who wants to delay payment so he can use the cash for another purpose in the meantime.
In Citi’s case this would involve Citi buying the account receivables from the exporter and offering to pay a large part of the agreed upon cash figure up front. That way the exporter receives payment in a timely manner, and maintains his relationship with the buyer. By collecting the agreed upon amount of payment from the buyer on their preferred payment date, Citi not only makes a profit on the margin, but also keeps both importer and exporter happy. This is a core expertise of financing trading and is known as the discounting of receivables.
Citi’s expertise comes in making all this possible via computer, rather than in a face-to-face format.
“The payment file can be uploaded to a website provided by Citi, known as CitiConnect,” said Citi’s Soejima. “The exporter can also instruct the bank to discount the receivable and pay at once.”
“All this can be conducted on the internet,” he added.
This story was first published in the Japan Report 2010 supplement to the December 2010/January 2011 issue of FinanceAsia magazine.