Finance and Insurance

Another set of services-based industries that have historically played a key role in international trade are finance and insurance. These industries correspond with the need to pay for the international movement of goods and take proper measures to cover any losses. The barter system originally served as a form of payment before money was created. Bartering involves the exchange of services and goods for other services and goods in return.

Eventually, goods were originally financed through the bill of exchange— a private written order addressed by the seller to the buyer. The buyer, then, was required to pay on demand or a fixed amount by a specific time through a beneficiary. The bill of exchange system that is used today goes as far back as the 13th century The bill of exchange became the system for financing international trade transactions. The Bank of England established the formal regulation of the bill of exchange system.

International trade finance experienced a downward trend as countries around the globe moved away from outward, open-market practices toward inward-looking protectionist strategies. In other words, trade barriers were used by numerous countries as a way of protecting local producers from foreign competition. The rise of protectionism meant the decline of the export of goods and, thus, a reduction in the need for international trade financing. Financial services rebounded during the latter half of the 20th century due to the resurgence of exports and credit requests. Various institutions, such as commercial banks and government agencies, offered export financing, credit insurance, and loan guarantees. Today, export financing is a key service that helps to boost trade now that sellers can get the required capital to produce, supply the needs of an overseas buyer, and reduce the risk of non-payment.

The insurance industry grew in significance to address the risks associated with the shipment of goods such as loss, damage, or theft. Insurance services go as far back as ancient civilization. Merchants in Babylon, Greece, and Rome relied on bottomry contracts, which were loans given to traders that did not have to be repaid should a shipment get lost at sea. The interest on the loan covered the insurance risk.

During the Medieval Period or Middle Ages (500 ad-1500 ad), sea loans were offered to merchants. These same merchants only repaid the sea loans upon safe arrival of a shipment. Additionally, merchants aimed to reduce their risk by spreading their cargo across several vessels. Placing goods on multiple ships presented its own set of challenges: 1) having to find more than one shipper going to the same destination, 2) having to negotiate multiple contracts, and 3) entrusting goods to more than one shipper (Kingston 2014, 2). Commenda contracts were another form of insurance during the medieval period, which emerged after Pope Gregory IX condemned the practice associated with sea loans. Under the sea loan arrangement, an individual would provide a traveling merchant with the capital necessary to ship goods with the agreement that both parties would share the profits. However, the financier bore the sea and commercial risk. The use of sea loans saw a decline beginning in 1236.

The contemporary insurance contract can be traced back to Italy during the mid-l4th century. The risk associated with shipping goods internationally on a vessel shifted from the merchant to an underwriter upon the latter receiving a premium payment (Holdsworth 1917; Kingston 2014). Italian trade began to drop off, which created opportunities for cross-border underwriting services to other European countries. Nevertheless, the system established in Italy continued to influence the insurance industry.

By the l6th and 17th centuries, Britain, France, Holland, and Spain began to see the rise of their own local insurance industries. The first known insurance provider in England was Lloyd’s of London. Edward Lloyd offered merchants with shipping information, which became known as Lloyd’s List. In 1769, the list service evolved into a group of underwriters who provided marine insurance to merchants throughout Europe and America (Britannica). Marine insurance was mostly underwritten by one or more individuals. Eventually, individual providers began to specialize in the insurance business. Finally, formal companies emerged as providers of marine insurance (Clark 1978).

In the American colonies, individual persons began to get involved in the insurance trade (Murrey and Fensternaker 1990). Marine insurance became an important industry as America’s exports increased more than fivefold from $20.2 million in 1790 to $108.3 million in 1807 (Murrey and Fensternaker 1990, 262). As a result, the number of firms increased dramatically. The Insurance Company of North America in Philadelphia became the first corporate insurance firm that formed in 1794.

Because of the transport of human beings destined for the system of slavery during the Transatlantic Slave Trade, these people were classified as commodities. Therefore, the cargo composed of human beings could be insured during a voyage, as argued in the 1783 court case of Gregson v. Gilbert. In this specific case, more than 130 enslaved Africans on the Zong, a British slave ship that was owned by the Gregson slave-trading syndicate, were murdered upon being thrown overboard. The ship’s owners filed a claim for the loss of enslaved Africans, but the insurers refused to pay, because the loss was not due to accident or natural disaster. In the end, the court ruled the intentional killing of enslaved persons legal and ordered the insurers to cover the loss (Lobban 2007). Eventually, slave ships were no longer insured, and the slave trade was completely abolished in 1807.

As in Europe, the insurance industry saw a shift from individual to corporate underwriters. The latter could offer insurance services more efficiently and facilitate an easier payment and claim adjustment process to merchants (Clark 1978). The industry experienced significant loss in terms of payment of claims and reduced business during the 19th century. As several wars broke out during this period, such as the War of 1812 and the American Civil War, vessels were seized by the British and/or there was a significant decline in shipping. Insurance companies had to pay claims for such losses while having fewer clients (Murrey and Fensternaker 1990). The loss of vessels became less common resulting in the decrease in insurance rates (Clark 1978).

Innovative technologies in the 20th and 21st centuries have altered the way in which the services highlighted in this chapter are provided to allow for more efficiency and effectiveness, as well as enhanced security.

For instance, with the introduction and growing use of online purchasing through e-commerce platforms as an additional option for brick and mortar retailers and online retailers, such as Amazon, shipping services have had to adapt to remain important and relevant. In 2018, about 1.8 billion people purchased goods online globally (Clement 2019). In 2019, e-retail sales reached $3-5 trillion dollars, up from $2.9 trillion dollars a year earlier. Online purchases represented 14.1% of retail sales around the world during the same year and are expected to increase to 22% by 2023 (eMarketer 2019). E-commerce allows companies to meet the demands of consumers who seek to purchase goods internationally and with quick delivery times. That can only be done with sophisticated delivery processes and systems to allow for faster delivery times, lower shipping costs, and flexibility in an ever-changing global business environment. As a result, the shipping industry has also had to evolve to meet the needs of the present-day consumer through the use of automation and artificial intelligence. Many logistics and transportation companies have also used outsourcing to third-party service providers for distribution, warehousing, and fulfillment. This model has become known as third-party logistics or 3PL. A 4PL company incorporates 3PL services plus manages the resources, technology, and infrastructure.

According to a representative from the ocean, truck, and rail freight forwarding 3PL company, BGI Worldwide Logistics:

The logistics industry is continuously evolving to meet the demands of the changing marketplace. Companies are investing in advanced technology platforms and systems to handle the online retail boom with speed-to-market and the customer service experience becoming a major factor in company success. Organizations have had to quickly adapt by upgrading or implementing warehouse management systems to improve operations efficiency and flexibility, and by hiring employees with the technological training, education, and soft skills to meet the new demands. Logistics companies must continue to innovate and adapt to changes in the market in order to remain relevant.

(Jackson 2018)

Automation has also played a significant role in the financial and insurance services industries. The ability to handle transactions online and respond to the needs of customers through online platforms allow for these service providers to move much more quickly to meet the needs of both local and international customers.

Digital technology continues to force industry-level changes, as in the case of the financial services industry, to meet the needs of a wider spectrum of customers. In 2018, 36% of consumers worldwide relied on e-wallet, which allows for payment for goods and services online through a computer or smartphone (Worldpay 2019). The Asia-Pacific region represented the area with the highest percentage of consumers using e-wallet at 52% and Latin America the smallest with 15% (Worldpay 2019). The digital wallet provides options for the percentage of the population that may find it difficult to open a bank account or get a loan. With the disruption to the system, the financial services are no longer just provided by traditional banks and credit unions but other providers such as tech giants Apple via Apple Pay and Google, Google Pay.

Blockchain technology is playing a role in revolutionizing the shipping and logistics industries. Blockchain technology benefited the maritime shipping industry by saving time in the process. For instance, shipping entails a document-intensive process. The documents include, but are not limited to, the following:

  • 1. Bill of lading, a receipt listing all goods being shipped and indicates the owner of those goods;
  • 2. Commercial invoice, which includes the value and information about goods being shipped for use during customs clearance and to determine duty rates for those goods;
  • 3. Certificate of origin, which identifies the original place(s) of manufacture; and
  • 4. Packing list, which describes weight and dimensions of the contents of a shipment.

The process varies in terms of time to complete all documents and the costs associated with exporting. For instance, according to the World Bank

Doing Business Survey, the documentary compliance process takes two hours to complete and costs US$60 to export from New York City (USA) to Canada. In the case of exporting from Mexico City to the United States, the documentary compliance process may take a bit longer—eight hours. Additionally, the cost is higher—US$100. Blockchain technology reduces the amount of time and lowers costs by utilizing a single blockchain with a ledger of information that can only be accessed by authorized parties to read, edit, and sign the blockchain ledger (“Can Blockchain Technology Bring Smooth Seas to Global Shipping?” 2018). Blockchain technology also reduces transit times, errors, and corruption. At the same time, blockchain technology increases transparency and improves regulatory compliance (“Can Blockchain Technology Bring Smooth Seas to Global Shipping?” 2018; Ogee and Furuya 2019; Pederson et al. 2019). The efficiencies and barrier removals created by blockchain technology have the potential to boost the volume of trade by 30% to US$1.1 trillion, according to World Economic Forum estimates in a 2018 white paper titled “Trade Tech - A New Age for Trade and Supply Chain Finance.”

Blockchain is currently being used within the maritime shipping industry. For example, in 2018, Maersk, the largest container ship and vessel operator globally, and IBM, a multinational technology firm, formed a blockchain- enabled digital shipping platform—TradeLens. Other large companies—such as Hyundai Merchant Marine, a shipping company, and Samsung SDS, a subsidiary of the Samsung Group that provides information technology services—have also invested in blockchain technology. TradeLens has demonstrated the ability to cut administrative costs by up to 15% of the value of shipped goods, which translates to US$1.5 trillion worldwide (Comben and Rivet 2019). Even with this and other blockchain platforms, only 19-2% of logistics service providers have invested in blockchain technology (Ogee and Furuya 2019).

Notably, blockchain technology in maritime shipping carries several risks of its own. Having too many platforms without a common standard across the board may actually offset the benefit of efficiency (“Can Blockchain Technology” 2018). Whereas blockchain technology has been touted as increasing security, the real world has presented a different reality. Fraud and cybersecurity attacks through the use of blockchain technology have also plagued the maritime industry. For instance, the NotPetya cyberattack cost Maersk up to US$300 million and stalled its operations in 2017, a year prior to its development of TradeLens with IBM. Keep in mind that Maersk controls 76 ports all around the world and 800 vessels that include container ships responsible for carrying tons of cargo amounting to about one-fifth of global shipping capacity (Greenberg 2018). The company’s whole computer system was shut down. Furthermore, employees received a message on their machines requesting payment in Bitcoin, a digital currency that also relies on blockchain technology, to release computer files. Bitcoin payment allows users to engage in transactions anonymously.

According to the World Economic Forum findings:

Securing blockchain starts with traditional information security ...

The distributed approach makes it much harder for attackers to tamper with information undetected. Given the number of intermediaries in global supply chains and the potential for theft and fraud, it is no surprise the industry is turning to blockchain.

But when it comes to confidentiality and availability, blockchain can lag behind other technologies. It is absolutely not recommended to store sensitive information on blockchain for instance.

Data availability and real-timeliness will also depend on the block- chain type: an in-theatre supply chain system for the military may not use the same blockchain type as a postal mail service.

(Ogee and Furuya 2019)

Most blockchain technology has been implemented in the financial services industry, specifically financial technology (fintech) (Budman et al. 2019, 3). The digital currency, Bitcoin, which relies on blockchain technology, emerged in 2009 as a response to the global financial crisis resulting from a decentralized banking system, in which some large banks engaged in unethical lending practices.

Beyond digital currency, blockchain technology has been used to create a more efficient and secure financial services system. At the moment, the small- and medium-sized enterprises (SMEs) and emerging market economies bear the costs of a financial services system that still relies on traditional paper-based, manual processes, according to a World Economic Forum study (“Trade Tech” 2018). The same study argues that the digitization of the financial services industry helps to reduce processing times, waste, fraud, delays, and thus, costs. Simultaneously, transparency and security increases. Banks around the world have already started to implement block- chain technology as trade itself, as described above, becomes digitized. “Trade finance is an obvious area for blockchain technology. It is so old, it’s done with fax machines, and you need a physical stamp on a piece of paper,” says Charley Cooper, managing director of R3, in a 2017 interview with the Financial Times newspaper (Arnold 2017). R3 is a New York-based blockchain technology company

Global managers in the services sector now have to adjust to the demands of consumers and embrace the shifts in technology. Global managers need to be forward thinking when it comes to the new technology and the lessons from these new technologies. The key lesson from the historical view is the long-term significance of the services sector going as far back as ancient times.

As we have seen, innovation gives rise to new industries in countries around the globe. As an interconnected globalized world, business services are now outsourced in a business-to-business (B2B) fashion, as exemplified with the rise of the call center industry in the 21st century thus, making other types of services tradable across borders.

A global manager’s understanding of these changes is important as global customers seek faster, reliable, less costly services and a higher quality of life. In addition, the historical influences on the current trade in services should be an important part of international business training offered by the educational community and government agencies. Such an understanding by all stakeholders contributes to the global competitiveness of local firms and national economies.

Following that private meeting with professional service providers about blockchain technology, the technology itself continued to see growth in recent years. Time will tell what other innovations will emerge that may further revolutionize the services sector within the global economy. For now, global managers interested in the trade in services and policymakers seeking to develop policies that contribute to local competitive advantage should understand the trends in the import and export of services. Educators at business schools should also incorporate international trade, including in services, into their curriculum to truly begin preparing students to function in the current and ever-evolving global economy.

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