Crisis Prompts Creative Solutions
Businesses are demanding more integration, efficiency and liquidity from their trade finance providers. The trade finance space will never be the same.
By Denise Bedell
The recent global financial crisis brought many changes to the world of trade finance. Treasurers became more involved than ever before in day-today financing activity, demand for traditional products swelled, and related technology budgets increased. Trade finance continues to evolve as treasurers take more of a hand in trade finance management and work toward total integration of all the moving parts in the working capital cycle. With the crisis, the focus on trade finance tools and solutions has intensified. Not only do such tools provide risk mitigation, but they also offer much-needed liquidity—both of which have been in short supply over the past 18 months.
As the crisis unfolded, trade finance took a back-to-basics turn as companies looked to letters of credit (LCs) and guarantees and focused, understandably, on the risk mitigation aspect of trade finance instruments. “With liquidity and the credit crisis, the traditional trade finance instruments were back in vogue—albeit at a much higher price,” says Sanjay Dalmia, managing director of Fundtech India. “The fact that credit could be obtained with these instruments was useful.” For banks, the more traditional trade finance instruments presented a safer opportunity to lend to corporates.
Daniel Schmand, head of trade finance for Europe, the Middle East and Africa (EMEA) at Deutsche Bank, notes: “All trade finance instruments are providing liquidity and risk mitigation at the same time. So they have had a significantly increased importance during the past 18 months.”
As the crisis deepened, LCs and other traditional instruments were in great demand. “If we look at total trade flows passing through SEB globally, we normally have an average confirmation ratio of less than 50% covered,” explains Patrik Zekkar, head of trade finance sales, Sweden, at SEB. “During the crisis we reached almost 80% covered,” meaning almost 80% of trade transactions had some form of protection—be it an LC or other form of guarantee. This was in part because of the increased perceived risk but also in part because risk mitigation options began to disappear. Credit insurers left the market, and many major banks refocused on their home markets.
John Ahearn, global head of trade at Citi Global Transaction Services, adds: “The factoring market has been disrupted— for example, with CIT. These major disruptions are all feeding positively into the trade finance business.”
But as the outlook began to improve, treasurers started to look at how they could improve trade finance management not just for risk mitigation but also to pull out liquidity through increased efficiency. As such, at a time when most IT budgets have been cut, trade finance and other processes linked tightly to working capital management are areas where corporates are in fact willing to spend.
New Solutions for a New World
Working capital management demands are driving the corporate treasurer to look beyond traditional boundaries and to study more deeply all the processes that touch working capital, including trade and the supply chain. Nancy Atkinson, a senior analyst at Aite Group, says that treasurers are now being asked to do more to look at cash and how best to apply it to ensure they meet their company’s working capital management needs.
“The economic crisis and the rather constrained amount of lending by banks is making optimal working capital especially important,” notes Atkinson. “As a result, the treasurer is more involved in their company’s overall supply chain. Increasingly, they are looking at trading partner relationships, accounts payable, accounts receivable and the procurement areas. All those areas impact working capital management, which is the purview of the corporate treasurer.”
Companies are looking to bring together processes to whatever extent they are able, Atkinson says. “There are a number of technology solutions out there aiming to help them do that,” she notes. Among them is Swift Trade Services Utility (TSU), a matching and workflow engine for banks to provide supply chain services to their corporate clients. It is geared to allowing banks to automate purchase order and invoice and receivables matching. “Swift TSU is growing slowly, but it is growing,” notes one market participant. “The thing about initiatives such as this is that it must build a critical mass in order to be effective, and it takes time to build it up.”
Another model is that of newer entrant Syncada, a joint venture of US Bank and Visa. Syncada provides a global financial supply chain network and a single platform for invoice and payments processing, with trade finance solutions embedded in that process. It is intended to be a multibank platform for trade and supply chain finance management. However, it is still in the early stages and again will need to see more uptake to be truly effective as a multibank solution.
PrimeRevenue is another multibank portal, where customers bring their trade and supply chain finance banks to the table to help support their suppliers. “Banks are looking at these as potentially a good opportunity to keep themselves in the game,” says the market participant. On the other hand, Orbian offers a bank-neutral multibank portal where companies do not have to bring their banks. Instead, banks and investors can come to Orbian to buy receivables, and suppliers can thus receive muchneeded funding.
Not everyone is convinced of the efficacy of the multibank model, however. “We don’t agree with the multibank model as it is; there has to be a lead bank that provides the finance capability,” says Ahearn. He explains Citi’s approach: “We are providing two new services to address this. First, we have put together infrastructure on the supply chain side for ourselves and our customers’ relationship banks. Second, we put together syndicated deals to act as agent on supply chain finance programs for our customers. This was fairly unheard-of before the crisis.”
Schmand: “All trade finance instruments are providing liquidity and risk mitigation at the same time”
Another issue from a corporate perspective is one of critical mass. It makes sense to invest in cash management solutions because of the sheer mass of payments made by the average corporate. “Cash instruments are mass payments—they are technology driven and efficiency driven—whereas trade payments are more driven by risk mitigation, and the scales are much smaller,” adds Schmand. Thus, trade finance technology by itself may not be worth the time and resources for the average company.
This is one reason that many firms are looking for solutions that incorporate trade finance solutions into financial supply chain management technology to bring together as many processes as possible and make the best use of technology spend on improving working capital management. Others are looking at outsourcing the entire process.
Jack Villacis, vice president of sales at Surecomp, says that corporates are looking to invest in trade and supply chain technology. “There is a longer evaluation process in place, but budgets are there,” he says. “Corporates are demanding products that integrate trade finance and cash management tools. That shows that corporates are trying to be efficient with international trade.”
Market participants have responded to this with considerable enthusiasm. Banks and service providers are putting enormous effort into devising a single solution set that brings together the physical supply chain, the financial supply chain and trade finance. This integration has become so ingrained in the provider landscape that some cash management banks have changed their organizational structure to match that focus, incorporating the once-disparate cash management, payments, supply chain finance and trade finance groups into a single unit.
Zekkar: During the crisis SEB saw a
Bruce Proctor, trade and supply chain product management executive at Bank of America Merrill Lynch, notes that trade finance providers now not only are selling products but are focused on broader solution-based selling and tying other capabilities into trade. “As a result, the list of key providers in the market is being narrowed,” he says. “Traditional trade finance has almost no barriers to entry. But going forward, whether it is a large corporate or mid-size company, regardless of geography, the expectations that customers have of providers will be very different than they have been in the past.”
This has forced an examination by providers as to whether they are willing to make the necessary investments, says Proctor. “Corporate clients want committed partners who will be consistent providers and weather storms in the financial markets,” he notes.
Proctor believes that the way corporate treasurers and finance desks are approaching trade is very different now. “They need to have assured liquidity and have alternatives at the ready if their usual providers encounter difficulties,” he says. “But also, companies themselves want to use these tools to more effectively manage their own operations. They want to link internal processes to trade and create more efficiencies.”
It is not an easy road to travel, however, even as the worst of the crisis recedes. “It is not in the middle of recession where you have the highest risk, but in recovery,” Schmand notes. “A lot of companies have reduced inventory, sold stocks and found ways to create liquidity without accessing bank balance sheets, but in recovery they need to buy, produce and deliver.” They now need sufficient liquidity to survive the recovery.