Market Demand for Online Letters of Credit

B2B Exchanges: The Marketplace of the New Economy

The rapid growth rate of business-to-business (B2B) e-commerce is being driven in large part by the exponential expansion of B2B exchanges and the new environment they offer for relationship-building, access to goods and opportunties to participate in ways - both large and small - that were inconceivable a few years ago. These new models for international trade are linking buyers and sellers to a virtually endless number of products and distribution channels all over the world. The prospects for the future are evident:

• Currently, there are about 600 B2B exchanges throughout the world. (AMR Research)
• e-commerce will account for 8.6 percent of worldwide sales of goods and services in 2004. (Forrester Research)
• The United States will continue to be the global e-commerce leader with online sales reaching $3.2 trillion in 2004 followed by Asia Pacific, $1.6 trillion, and Western Europe, $1.5 trillion. (Forrester Research)
• A recent Forrester Research survey of B2B exchanges showed that currently only 52 percent of these B2B exchanges arrange credit and offer alternative payments options, but 98 percent plan to offer these options by 2001.

International Trade: Reborn on the Net

By the end of this year, the world economy is expected to achieve its best growth in more than a decade with conditions remaining strong in 2001, according to the International Monetary Fund (September 2000). A projection of 4.7 percent growth in world output this year would be the world’s strongest economic growth since 1988. A growth rate nearly as strong -- 4.2 percent -- is projected for 2001. The world economy and international trade are being reinvented on the Internet, which is strongly supporting their dramatic growth.

Online Letters of Credit: The Final Piece of the Puzzle

Numerous factors have made financing international trade extremely difficult. Each country has different rules and regulations and, in spite of the business arena’s migration toward electronic funds transfer, a limited number of electronic financing vehicles are available to importers and exporters due to the large amounts of funding required and - initially - the “faceless” nature of the transaction.

Letters of Credit (LCs) - in their traditional form - are used in 45 percent of all import/export order fulfillment transactions. In the United States, 1,700 banks issue commercial LCs, with a total value of about $108 billion annually, based on quarterly figures provided by the Federal Deposit Insurance Corporation (FDIC). Eighty percent of corporate customers surveyed by the Association for Financial Professionals (AFP) said the Internet will become a venue for letters of credit, but only about 5 percent currently use the Internet to initiate and execute them.

Despite the pervasiveness of LCs, their design and application has not been standardized, with each financial institution maintaining different ways of handling and processing LCs. The technology of the LC process has not matched demand for online management of the financing process. Understandably, the international import/export environment has little tolerance for current inefficiencies and fragmentation in the design and tracking of LC delivery - and is looking for financing options suited to the wired world.

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