RegionsEEATradition and Innovation in Trade Services

Tradition and Innovation in Trade Services

In the world of supply chain finance, Spain is arguably at the cutting edge. It is a relatively little-known fact about the new generation of supply chain finance structures that these payables-backed financing models have been widely used by leading banks in Spain for 20 years. Spanish banks have therefore gained an expertise in this field and have exported this solution to other countries where they have strong market positions, such as Portugal and Latin America.

Are there markets where traditional trade finance instruments will continue to dominate or is the move to open account trading inevitable?

Although we are mindful that open account now accounts for over 80% of global trade flows, let us also remember that US$1 trillion of trade per year is settled through letters of credit (L/Cs) and documentary collections and that global trade continues to grow at impressive rates. These traditional trade finance instruments remain highly valuable in many of the geographies where we operate, in particular emerging markets and regulated countries where exchange controls are in force.

Even in more advanced economies and indeed at the beginning of new trade relationships, especially between distant counterparties, L/Cs continue to provide added comfort for both exporter and importer.

Furthermore, the potential downturn in the credit and commodity cycle could create increasing demand for traditional trade finance solutions and structured financing. Thus, while we do see a general trend towards open account, we nevertheless believe that traditional trade finance instruments will continue to be an important – indeed essential – part of our holistic trade services offering for many years to come.

Importantly, it is the way of delivering these trade solutions to customers that is evolving and this is where we see the importance of technology and rise of web-based solutions to streamline processes, minimise turnaround times and cut costs, hence adding value to customer relationships.

The recent publication of the ICC’s Uniform Customs and Practice for Documentary Credits (UCP 600), which revises and updates the internationally accepted rules on using L/Cs, should also help to create greater clarity in L/C processing by reducing the level of misunderstandings and different interpretations under the previous editions. It is therefore unlikely that the L/C will become redundant in the near future.

Are there areas of supplier finance that are ripe for industry-wide collaboration or will competition take care of any gaps in service?

One topical area where there appears to be a good opportunity for collaboration is SWIFT’s Trade Services Utility (TSU). Its value proposition is well positioned, focusing on an area where many banks and their corporate customers can benefit from a shared data-matching and workflow engine. This enables participants to use a common infrastructure to minimise cost and extend their reach to work with other banks across the globe. We are participating in the TSU initiative and would expect to see growing momentum in take-up.

Another related area of opportunity for collaboration is e-invoicing, both domestically and internationally. Over the last couple of years, the European Commission has been promoting the benefits of e-invoicing as a way of driving down processing costs and working groups have been formed. Similarly, the Euro Banking Association is now researching how to deliver value to its member banks by offering e-invoicing services as a logical follow-on from the single euro payments area (SEPA). These initiatives at industry level show promise but they appear to have medium- to long-term timeframes.

In the interim, some of the private initiatives being launched are likely to fill the gap and build market position. We are already working on a number of developments in this field, partnering with solution providers. For example, through Abbey, our UK subsidiary, we have recently formed a co-operation deal with OB10, the global e-invoicing network, to deliver a combined working capital finance and e-invoicing solution to UK corporates. E-invoicing is complementary to our supply chain financing solutions, since the accelerated receipt and approval of invoices is a valuable way of maximising the volume of invoices available for discounting, which in turn accelerates supplier cash flows.

What circumstances led to the rapid growth of reverse factoring in Spain?

The original drivers for the development of reverse factoring in Spain over 20 years ago were similar to today’s drivers, namely the conflicting needs of buyers and suppliers. The former seek longer payment terms while the latter want faster cash flow. Alternatively, to use today’s terminology, buyers want to extend their days payables outstanding (DPO), while suppliers want to reduce their days sales outstanding (DSO).

Another driver behind this early growth of reverse factoring in Spain was a local practice whereby bills of exchange are subject to stamp duty. This encouraged large businesses and banks to develop alternative financing structures that did not require bills of exchange, but that nevertheless allowed risk-enhanced working capital finance in a country with traditionally long trade credit terms.

With the rapid international expansion of Spanish banks over the last 15 years, this financing solution has been migrated onto web-based delivery and exported to countries where we have strong representation, such as Southern Europe and Latin America. Furthermore, we now support clients’ supply chains beyond these geographies by making discounted payments to suppliers in other parts of the world, such as the US, UK and western Europe.

How close is the industry to creating a standardised open account debt instrument? Is there a recognised need to do so?

In the digital world of e-invoices and electronic payments, the banking industry is still some way off in creating a standardised open account debt instrument. Ironically, it could be argued that the paper world already has a tried and tested solution to this challenge: the bill of exchange. This is an internationally recognised debt instrument and international standards have been agreed in the Uniform Rules for Collections and local Bill of Exchange Laws, which are often reasonably homogeneous, though with some notable exceptions.

Some day in the future we may see the development of an electronic bill of exchange or promissory note that would be as acceptable internationally as its paper equivalents. This would have the added advantage of being electronic, hence quicker and easier to transmit and process. However, these electronic instruments would ideally be exempt from stamp duty, unlike the treatment of their paper equivalents in certain jurisdictions today.

There are one or two private initiatives to develop electronic bills of exchange, which we are monitoring. It may, however, be some time before any of these achieve critical mass. In 2008, SWIFT’s TSU Release II will include a Bank Payment Obligation instrument, which is an undertaking to pay a bank an amount on a future date under a predetermined condition; for example, a match or mismatch acceptance of data presented through TSU. This opens up an interesting range of financing solutions.

How far can alternative trade finance products and services go without some global consistency in the assignment of receivables? To what extent does supply chain finance come up against obstacles arising from differences across legal jurisdictions?

Any bank with experience of reverse factoring/receivables financing will be mindful of the importance of perfecting a supplier’s assignment of receivables to the bank. The problem is that requirements vary from one country to another. In the short term, we do not expect any dramatic change or harmonisation in the local rules concerning the assignment of receivables, and local expertise will continue to be highly valuable.

Does old-fashioned correspondent banking still have a meaningful role to play in global trade services?

Correspondent banking remains a highly relevant activity to a bank like Santander. Despite being present in over 40 countries, there are situations where the best way for us to deliver a service to our corporate customers is by partnering with a local bank in a country. For example, to win export contracts, it is often a requirement to issue bank guarantees in favour of the importer. Where we have a full banking operation on the ground, such as in Latin America, we use our own local subsidiary to issue the performance bond or advance payment guarantee. However, in some geographies, such as the Middle East, we work with local correspondent banks to issue such guarantees, with a tight service level agreement, to ensure competitive and streamlined delivery of the requirement.

In this way, correspondent banking helps us to extend our global reach and add value to customer relationships. Similarly, we act as a gateway into local clearing and banking services in our core markets for correspondent banks that are less well represented there. In addition to SEPA-compliant euro payment and collection services, another topical example would be our ability to provide Mexican peso clearing services to major banks once this currency joins CLS.

We anticipate that SWIFT’s TSU will create another interesting opportunity for banks to work together to streamline the supply chains of mutual customers. TSU enables a bank to extend the reach of its capabilities beyond its own customer base, so that two banks can meet the needs of their mutual customers. This environment may encourage the development of a new market for revenue and risk sharing agreements between partner banks.

Has the growing interest of corporate treasurers in working capital management changed the nature of your relationships with your corporate clients?

Our client relationships are going through an important evolution that we think is extremely positive, extending the ways we can add value to these relationships. With increasing corporate focus on working capital management, our role is taking on an advisory nature. We are typically working more closely with customers nowadays to structure new solutions spanning a wider range of their supply chain processes. We are trying to ensure awareness of what technology can do to improve efficiency and security. For example, a growing number of our large corporate clients are using SWIFTNet FIN and FileAct to send us payment instructions and receive balance and transaction information, hence improving visibility and liquidity management.

The next logical step in efficient working capital management, already taken by one major client, is to use FileAct to send us files of approved invoices so that we can provide discounted payments to their suppliers using our supply chain finance solution. This accelerates supplier cash flow and enables the buyer to extend its trade credit terms – a ‘win-win’ for the supply chain. This secure and automated approach is now being adopted by other clients as they embrace the benefits of SWIFTNet.

In five years, which products and services do you expect will provide the bulk of global transaction bank revenues?

We see an acceleration of the migration from manual processing of paper towards the increasing use of web-based technologies and electronic documents to achieve greater levels of efficiency and straight-through processing. In five years’ time, our core business will still be cash and liquidity management as well as trade and supply chain finance, although the traditional lines between these areas are likely to have disappeared.

Much of our revenues will be achieved in these areas, with products increasingly being delivered via the web. Furthermore, as some mature products undoubtedly become commoditised, we are already developing a new generation of cash and financial supply chain solutions to continue adding value to our customers’ international trade and domestic businesses. Examples would include e-invoicing and automated document reconciliation services as well as greater automation in cross-currency liquidity management. These will complement the bank’s expertise in supply chain finance and will help customers to drive down processing costs, improve visibility and optimise working capital management, both on the payables and receivables sides of their operations.

What types of business relationships will you need to support these value-added solutions?

With the convergence of the physical and financial supply chains, we can see benefits in partnering with logistics companies to enhance overall visibility of the movement of goods internationally. This alliance enables all parties to reduce risks and costs, linking more closely the flow of funds and the cost of finance with the physical state, ownership and location of goods. In this way, data feeds from freight forwarders, shippers and independent inspectors can be used to enhance transactional control and mitigate risk.

Thanks to this enhanced visibility, in addition to post shipment finance, pre-shipment finance can also be made available to deliver up-front financing and staged payments. In some cases, a percentage of the contract value can be advanced on completion of the various stages of the trade cycle, so that part of the funds is advanced at each step.

Examples of these trigger points for finance can be summarised as follows: when the purchase order is issued; once raw materials have been processed or manufactured; when goods are in transit; and finally on receipt and approval of invoice. This valuable financial structuring enables the supplier to fund both the sourcing and manufacturing of goods. This approach benefits from the combination of logistics information and innovative financing, facilitated by web-based technologies.

Of course, we can see challenges ahead and we must always be prepared for the unexpected, but we are excited by the prospect of drawing on our experience and professionalism to meet these challenges and add value to our transaction banking customers.

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