Case Study : New Modes of Trade Finance DL based on FITT

Trade finance in the twenty-first century: plug and pay?

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

PAD has been very successful as an importer, but has packaged such unique and intriguing combinations of items into 'theme services', that there is now significant demand for the PAD products 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 it will eventually shift from a purveyor of fine foods to own and manage 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, assessing target markets and considering options related to the financials of the business. While the finance team at PAD have a general awareness of letters of credit and collections products and processes, these are generally not very popular instruments - expensive, complex, prone to error, and not generally suited to food and highly perishable products.

The company CFO is intrigued by online settlement options - her husband is constantly on eBay bidding on various items and paying for them through online settlement mechanisms - and she perceives an 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 retail shelf space at Wal-Mart - unless the giant retailer one day establishes a gourmet line of products! For now, the company is fine with payment and settlement solutions that will handle small volumes and have maximums on transaction value.

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

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

Major Considerations

Security

Internet-enabled business, including online financial transactions, has evolved significantly over the past decade, from blue-sky vision to practical tool and enabler. Despite the recognized progress, security remains a legitimate concern in considering online payments - as much in terms of the transaction and the flow of payment, as in terms of the overall risk profile of a transaction. While PAD is generally focused on retail sales, the company is looking at larger shipments to certain markets, and may face exposures as high as $150,000 in a single deal.

Open account

Banks across the globe are recognizing that importers and exporters are shifting significant business volumes - in fact, the majority of trade - to open account terms. Some of the financial institutions have interesting offerings in this space, and Palate-Able Delights could benefit from doing business on open account terms.

Non-bank providers

PAD has learned, to its surprise that UPS, whom they routinely use to ship parcels all over the world, and with who PAD has just concluded an exclusive logistics contract, offers trade finance solutions to small business customers, together with its supply chain solutions suite. The CFO has explicitly directed that this option be assessed. Additionally, you have been instructed to review the viability of models such as PayPal, and other more comprehensive trade finance/management solutions, several of which are demonstrating potential.

The Decision Factors

In addition to considering issues such as security and the mechanics of a payment solution, and its suitability to the PAD business model, you must assess the relative efficiency and cost of the options under consideration. Given the perishable nature of some of PAD's products, speed of settlement is important. Similarly, cash flow issues and financing may be important to PAD and/or its buyers - especially where the somewhat larger shipments are involved.

Questions

1. PAD runs a fairly high-margin business given that it is positioned at the 'luxury' end of the market and commands a significant premium for its items and for the Palate-Able Delights 'experience'. Should PAD absorb some incremental costs in exchange for added security, and opt to stay with traditional trade payment and financing systems? Is a confirmed documentary letter of credit still the best option for PAD?

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

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

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