An international trade group, a technology vendor, and a bank are planning a test of a new credit card-based payment system that bypasses letters of credit.
The payment system, called TradeCard, will use the credit card infrastructure and will target smaller companies for which letters of credit are too costly and burdensome.
"It's a one-stop shop as far as being able to do importing and exporting, and it's simpler to use," said Kurt Cavano, vice president at American Management Systems, a Fairfax, Va., bank technology vendor.
The effort is headed by World Trade Centers Association, a New York nonprofit organization comprising 317 members in 97 countries. Its membership includes port authorities, regional chambers of commerce, and other entities interested in shipping goods across borders.
Other players in the effort include Full Service Trade System, a Bermuda-based for-profit subsidiary of World Trade Centers; Royal Bank of Canada, Toronto; and American Management Systems.
Guy Tozzoli, president of the trade centers association, said the TradeCard pilot is set for October. He also said he expects a patent in about three months on the TradeCard idea, which he hatched in 1993.
"It's a very simple idea," he said. "Banks kept working on improvements to letters of credit, and I hurdled them."
Officials said five New York-area banks, which they refused to name, are also involved.
Officials said the system's simplicity and low cost would be an attractive alternative and that larger importers and exporters could also become a target market but that the trade groups would like to prove the system first.
TradeCard's infrastructure, developed by American Management Systems, would use electronic data interchange software and network communications to link the parties involved in a trade.
The service's participants would engage in a series of bilateral arrangements between buyers and sellers. Freight forwarders would supply third-party confirmations that the trade has been executed as stipulated in the agreement.
Players in the trade finance area say that the Bermuda unit will run the service, which will be resold by banks to their business customers. Royal Bank of Canada's Naznine Lakha, director of sales, said the bank would be a "funder," or provider of liquidity to the buyer.
Letters of credit are sold to traders, who substitute a bank's credit for theirs to guarantee payments after goods are delivered.
TradeCard, which would finance trade deals typically in the $100,000 range, is seen as a threat to the banking industry's $1 billion of fee revenues from trade, according to observers.
"It is intended to be a corporate to corporate kind of business, which I guess potentially could take business away from the banks," said Dan Taylor, president of the U.S. Council on International Banking, New York.
"To suggest that this portends the imminent demise of letters of credit as we know (them) is not realistic at all," said Anthony Brown, senior vice president at MTB Bank, a merchant trade bank based in New York.
Still, he admitted that the procedures for international trade are ripe for an overhaul, especially considering the low-cost technological alternatives.
It is well-known that the dozens of documents required to ship goods across borders must be available to numerous parties involved in a trade. The parties include banks, importers, exporters, freight forwarders, insurers, and customs officials.
But the Bolero Association, a London-based trade group, is trying to build an electronic registry that gets rid of much of this paper.
Bolero, which is sponsored by the European Commission, has estimated that paper processing alone costs as much as 7%, or $210 billion, of the more than $3 trillion of annual trade transactions.
"Certainly letters of credit are cumbersome, but L/Cs are trying to save themselves from extinction through efforts such as Bolero," said Mr. Brown of MTB Bank.
Herbert Ouida, executive vice president of the trade centers group, maintained that TradeCard "is not a threat. It's an enhancement to the services that banks offer."
Bolero has forged closer ties to the Society for Worldwide Interbank Financial Telecommunication, a Brussels-based financial messaging network for banks.
Still, it remains to be seen how the proposed registry will be developed. Mr. Taylor of the international banking council said he believes that John McKessy, Bolero's North American representative, has joined TradeCard.
Allen Gahn, senior principal at American Management Systems, said, "Since the financing is sort of a hybrid, I'm not sure if there is any specific regulation that covers it."
"All the legal protection required is whatever the terms are between the parties themselves," he said.