Bruno François, deputy global head of Trade Finance and Network Management at BNP Paribas, flags the biggest trade finance challenges facing companies today.
Global Finance: How can banks help secure supply chains?
Bruno François: An imbalance between supply capacity and demand emerged from the pandemic in securing access to goods and raw materials. This is creating a lot of tensions on the supply chain, where certain sectors and industries are more impacted than others.
Banks support companies financially, and to anticipate orders and volume as well as cost increases. In order to optimize the working capital, buyers continue to put pressure to increase payment terms. It is not uncommon to see payment terms in the range of 120 days or beyond, which is increasing the overall cash cycle for suppliers. It is important to keep an equilibrium, and banks have an active role to play through supply chain financing solutions such as UPAS [Usance Payable at Sight, a deferred-payment method of documentary credit in which exporters receive payment after their shipment and presentation of complied documents, while importers can make payment on maturity].
Another visible effect of the pandemic is the emergence of alternative sources of supply, with a trend for a nearshoring of the sourcing. This is taking time and is more a medium-term to long-term challenge, as it involves a major industrial change.
GF: What sort of risks does this pose?
François: Clients are concerned about making sure they can navigate through the pandemic as well as the systemic changes that have occurred in their industries. Banks offer a series of solutions to mitigate the risks—be they counterparty, country risk or liquidity—using trade guarantees, letters of credit, etc.
The market is flooded with liquidity today, greatly supported by public money. This has been a fantastic stimulus to support the economy and growth, but the time will come when this financial support must be paid back and refinanced. Banks will have an active role to play with all short-term financing solutions, including trade financing and supply chain financing. Our approach is centered on the knowledge that the bank has of its clients’ businesses. We can use the data we have to gauge the financial health of a particular client or a whole industry. Through discussions with, and requests to, our sales teams, we can address clients’ working capital issues through a particular set of solutions and offer advice on ways in which the bank can help them to improve their KPIs [key performance indicators].
GF: What does the rise of ESG mean for trade finance?
François: Sustainability is the major topic, which is shaping the way companies must, or will have to, do business. The largest ones must adapt themselves to the taxonomy and include ESG in their reporting, which is already a reality. This will progressively cascade down to the entire ecosystem. Trade finance is at the crossroad, as it can have an impact at all levels of the supply chain—including raw materials, suppliers, production, transport, distribution, etc. Our industry is transforming progressively but it is still early days. This topic is probably the major challenge companies will have to address, and this includes banks.
GF: How is digital transformation impacting trade finance?
François: These are buzzwords we have been hearing for the past five years, but they are the reality. A lot of companies are currently busy with digital transformation at many levels, including treasury and trade. Digitalization cannot come alone, and needs to form part of a more global strategy in terms of operational setup. This requires defining priorities. The cost, time and head-count resources required for such projects cannot be underestimated. We offer advisory services to accompany our clients in the definition of the operational setup which suits their needs, but also the appropriate digital solution. In trade finance, we are starting to see the sort of centralization projects that we saw in cash management 10 years ago.