Case Study : New Modes of Trade Finance DL based onFITT

Trade finance in the twenty-first century: plug andpay?

Palate-Able Delights (PAD) is a Canadian niche retailer ofhigh-end food products imported from various parts of the world.Iranian saffron and caviar, French champagnes, Italian truffles andolive oils, vintage balsamic vinegars, fine cheeses, reserve winesfrom the leading vintners, even limited-availability springwaters…if a culinary delight exists, Palate-Able Delights has amission to discover it, then share it with appreciative clients whoquite happily pay premium for the pleasure.

PAD has been very successful as an importer, but has packagedsuch unique and intriguing combinations of items into ‘themeservices’, that there is now significant demand for the PADproducts to be exported to several regions of the world.

The product line – adapted for local preferences and delicacies– has potential in many parts of the world, and PAD believes itwill eventually shift from a purveyor of fine foods to own andmanage a global gastronomic brand worthy of, as the CEO puts it,‘The most discerning palates on the planet’.

PAD is planning its shift to a (re-) exporting mode, assessingtarget markets and considering options related to the financials ofthe business. While the finance team at PAD have a generalawareness of letters of credit and collections products andprocesses, these are generally not very popular instruments –expensive, complex, prone to error, and not generally suited tofood and highly perishable products.

The company CFO is intrigued by online settlement options – herhusband is constantly on eBay bidding on various items and payingfor them through online settlement mechanisms – and she perceivesan opportunity to leverage these services for PAD.

Virtual payments – real money?

PAD recognizes that its business is niche and specialty-based:this is not a mass-market business that will compete for retailshelf space at Wal-Mart – unless the giant retailer one dayestablishes a gourmet line of products! For now, the company isfine with payment and settlement solutions that will handle smallvolumes and have maximums on transaction value.

The company CFO has directed a project team in finance to reviewsome non-traditional settlement options, contrast them with moreestablished options and report findings and recommendations.

You have been appointed to lead the assessment team, todetermine whether such solutions are viable for PAD. You start theassessment by considering target markets for export are USA and oneanother country (of your choice).

Major Considerations

Security

Internet-enabled business, including online financialtransactions, has evolved significantly over the past decade, fromblue-sky vision to practical tool and enabler. Despite therecognized progress, security remains a legitimate concern inconsidering online payments – as much in terms of the transactionand the flow of payment, as in terms of the overall risk profile ofa transaction. While PAD is generally focused on retail sales, thecompany is looking at larger shipments to certain markets, and mayface exposures as high as $150,000 in a single deal.

Open account

Banks across the globe are recognizing that importers andexporters are shifting significant business volumes – in fact, themajority of trade – to open account terms. Some of the financialinstitutions have interesting offerings in this space, andPalate-Able Delights could benefit from doing business on openaccount terms.

Non-bank providers

PAD has learned, to its surprise that UPS, whom they routinelyuse to ship parcels all over the world, and with who PAD has justconcluded an exclusive logistics contract, offers trade financesolutions to small business customers, together with its supplychain solutions suite. The CFO has explicitly directed that thisoption be assessed. Additionally, you have been instructed toreview the viability of models such as PayPal, and other morecomprehensive trade finance/management solutions, several of whichare demonstrating potential.

The Decision Factors

In addition to considering issues such as security and themechanics of a payment solution, and its suitability to the PADbusiness model, you must assess the relative efficiency and cost ofthe options under consideration. Given the perishable nature ofsome of PAD’s products, speed of settlement is important.Similarly, cash flow issues and financing may be important to PADand/or its buyers – especially where the somewhat larger shipmentsare involved.

Questions

1. PAD runs a fairly high-margin business given that it ispositioned at the ‘luxury’ end of the market and commands asignificant premium for its items and for the Palate-Able Delights‘experience’. Should PAD absorb some incremental costs in exchangefor added security, and opt to stay with traditional trade paymentand financing systems? Is a confirmed documentary letter of creditstill the best option for PAD?

2. How well-suited is PayPal, or some variation of onlinepayment solution, to the PAD business and model?

3. What are the pros and cons related to traditionalbank-provided trade finance, and open account solutions? Donon-bank providers offer a credible alternative?

4. What is your recommendation to Palate-Able Delights?