The role of e-finance in supporting international trade
Electronic finance, or e-finance is changing the way financial services are used in international trade. E-finance refers to financial services offered electronically, for example, via Internet. It includes Internet banking and payments, e-brokerage, e-insurance, e-trade, and other related services (Purcell 2003, pg 1). As more financial services are becoming available in electronic format, they are becoming popular for international trade, even among developing countries. Trade-related financial and insurance products are being adapted to customers’ needs. Loan requests, credit insurance, letter of credit confirmations, and other documents can be transferred electronically. E-finance is forcing standardization, adding speed, and reducing costs. These advantages can help countries stay competitive in the international trade sector (Cattani 2000, pg 13).
Banking and insurance services are not new forms of services offered electronically. A large segment of the financial sector has gone digital years ago and private electronic networks have been used for years to transfer funds. Service providers such as VisaNet, SWIFT, and FedWire have been used for years before the Internet. However, the Internet has proved to be both a facilitator and a barrier for e-finance adoption (Cattani 2000, pg 13).
E-payment is vital to the e-trade cycle because it is the purpose of any transaction. However, e-payment as well as other financial services requires the latest and finest security and encryption. The Internet is an open highway for information sharing which currently serves as a barrier for e-finance adoption. Security technology allows e-payments to present quick, cost effective, and secure completion of transactions (Cattani 2000, pg 13).
In most developing countries, there is a lack of credit reporting systems and the countries still need to improve these in order to improve the quality of financial information on enterprises and rate them as credit risks (UNCTAD 2005, pg 117). E-credit information and e-credit insurance are ways to improve irregular information on enterprises as credit risks. If they can improve this, then their access to suppliers’ credit or trade-related finance and e-finance provided by financial intermediaries can be improved (UNCTAD 2005, pg 132). Trade finance providers are moving online not only to overcome this irregular information on enterprises at lower costs, but to also provide finance at lower cost through the more extensive use of e-payments, e-banking, and e-trade finance techniques (UNCTAD 2005, pg 133).
One way countries can use the Internet to finance international trade is through e-factoring. Factoring involves interactions and exchanges between three types of firms: the client firm (or supplier), the customer firm (or buyer), and the factor (Soufani (2002), pg 21). The factoring company provides the client firm working capital by exchanging the account receivable for cash. The factoring firm takes on the credit risk for the accepted accounts receivable, sales ledger administration, and collection for the accepted accounts and maintains all essential records in order to collect debts purchased (Soufani (2002), pg 240). Factoring is mainly a financial process where a particular firm (the factor) purchases from its clients (or the suppliers) their creditworthy accounts receivable at a discount, or for a service fee plus interest, so the client is able to obtain an advance on cash as a form of financing. The largest international association of factors is Factors Chain International (FCI), with nearly 200 factors (including banks offering this service) members in 59 countries (UNCTAD 2005, pg 138). The association has developed a centralized Internet-based system of electronic communications. The servers have central processing, reporting, message validation, and delivery that are available to members...
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