Moving to Open Account Payments

August 15, 2009

I was talking to a banker colleague who informed me that over the past two years the move from documentary credit to open account payments has been dramatic.  Certainly, companies I have spoken to all have plans to move to open account payments as fast and as completely as possible. Most of the motivation to move to open account payments is driven by the desire to reduce ongoing operating expense for its own benefits and that of its more financially sound suppliers, improve working capital through an extension in payment terms accompanying a move to open account payments and a reducing in credit expense.

So, how does a company move from payment on documentary credit terms to open account? Typically, there are three factors the company considers: (1) does the company have the technology and operating process in place to move payment processing from the bank to the company, (2) are their suppliers willing to move from documentary credit to open account payment terms, and (3) does the move to open account payment term have an inadvertent impact on the company by financial market.


Welcome to Supply Chain Finance

June 22, 2009

This year marks the twentieth anniversary of the publication of six documentary credit message standards by the then-named UN/EDIFACT organization.  These messages provide the framework for electronic exchange of documentary credit[1] messages between the importer and importer bank, and exporter and exporter bank.  They were designed by a small group of trade specialists from banks and corporations who met for the first time three years earlier in San Francisco.  Departing from current standards for documentary credits, this group developed the new standards to integrate documentary credit instruments into the order management operations of importers and exporters.  Thus began the journey to integrate, electronically and seamlessly, the financial and physical supply chains.

Since this seminal work, various industry initiatives, banks and companies—startup and established–have endeavored to take the electronic documentary credit from concept to profit.  Most of these efforts met with limited success or outright failure.  Instead of embracing the electronic documentary credit, the market has moved to another form of payment—the open account payment—to automate payments in the global supply chain.

The documentary credit—the traditional paper instrument—not only facilitates a guaranteed payment between importer and exporter—but also the transfer of credit and liquidity from importer, through banks, to the exporter.  This credit transfer mechanism has evolved over decades to provide exporters access to funds from their banks before shipping goods and to accelerate collection of funds after shipment and bank payment approved.  As payments move to open account payments, providers of trade financing services are developing solutions for pre- and post-shipment financing that work for open account payments as well as financing supported through documentary credits.  This new open account supply chain financing is still evolving.

The journey that began twenty years ago to integrate electronic documentary credits into the supply chain has taken many turns in the road, some into dead ends.  The glimmer on the horizon is a process revolving around the payment on open account terms wrapped in new supply chain financing programs that continue to get credit to the exporter.  But we are still on the journey to get to this new trade paradigm.

Welcome to “Supply Chain Finance: Perspective on Physical and Financial Global Supply Chain Convergence,” a new blog chronicling the journey to the new financial supply chain.  In the coming weeks we will cover past, present and, with some verve, the future of the global financial supply chain. 

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[1] Documentary credit is also known as a commercial letter of credit.