• How Were Reinforcing the Open Account

     

    What’s exciting, argues Dave Philips, is how rapidly banking technology is developing to facilitate trade by meeting two supply chain funding challenges in today’s increasingly testing global environment. 

     

    In today’s unique risk laden global conditions, how can we strengthen the essentially trust- based advantages of open account trading? It is an intriguing, and to me, an increasingly pertinent, question as UK corporates seek to streamline their financial supply chain in their drive into new and often unfamiliar international markets.

     

    Right now, let’s remember, some 85% of all global trade transactions are estimated to be managed on an Open Account basis. For more than two decades, it’s grown to become what is now the world’s optimal trade model, far outstripping the settlements still made with traditional trade products such as letters of credit.

     

    But as the dynamics of global trade have shifted towards new growth arenas of Asia and South America, international corporate clients are increasingly confronting their banks with two specific challenges: first, how to extend the benefits of Supplier Finance/Approved Payables programmes to suppliers in the world’s key growth geographies; and second, how to deepen funding access across a greater sweep of supplier cash flow needs in those territories.

     

    It’s worth recalling how we have evolved to this point in Open Account trading. It began with the need of larger corporates to complement the drive for greater efficiency in the management of their physical supply chain, with a similar focus on the financial supply chain.

     

    Technology and improved communications gave companies greater confidence about trading without having to rely so exclusively on some of the traditional and administratively more burdensome protections like letters of credit. Open Accounting created much quicker, simpler, smarter routes to manage agreed trade terms and payment conventions.

     

    New pressure to conserve cash

    For larger corporates, there’s now new pressure to conserve cash by stretching their trade terms. They have increasingly deployed the Supplier Finance/Approved Payables model to ease their suppliers’ cash flow pressures by accelerating payments on privileged terms – and, in return, seeking lower pricing from their suppliers. And now, as economic environments have deteriorated, larger companies have become even more concerned about the intensifying vulnerability of their key strategic suppliers.

     

    That’s generated a heightened interest in using the Supplier Finance/Approved Payables programmes effectively to wrap protective arms around their key suppliers with both faster invoice settlements and with much cheaper rates than they would get on conventional loans or overdrafts.

     

    It is out of these evolving approaches to the financial supply chain that today’s distinctive new challenges emerge for bankers. How we confront them will determine how effective we are in remaining fully intermediated with the dynamic funding demands of the corporate players whose international trading we’re in business to facilitate.

     

    What corporates want

    We are all well acquainted with these Supplier Finance/Approved Payables programmes in familiar economies like the UK and US. The first challenge now is for banks to extend that expertise by mining into the supply chain of their corporate clients so that the on-boarding, explanation and recruitment of key suppliers to these same Open Account programmes works every bit as smoothly in the emerging growth markets of Asia and South America.

     

    Beyond that, what major corporate clients want is for banks to develop techniques which will effectively ‘reverse-extend’ the scope of their Open Account facilities so that they cover more than is now possible of the pre-shipment costs being incurred by corporates’ key strategic suppliers.

     

    Right now, the widely accepted conventions of Open Account trading generally confine banks to funding authenticated supplier costs once there’s proof that the goods are, effectively, ‘on the water’. But that still leaves a significant preshipment funding gap: key strategic suppliers today increasingly also need the comfort of cash flow much earlier, to cover the cost of manufacture itself.

     

    In the past, they have used letters of credit to discount this with their own banks. In Open Account trading, however, both the ‘supplier’ and ‘buyer’ banks need improved electronic methods for authenticating the validity of purchase orders and other key reconcilables in order to fund pre-shipment costs.

     

    Developing technology

    What’s exciting is that technology is now making it much more practical for the banking sector to meet both of these critical corporate challenges. It’s one of the reasons, for example, why corporates are finding increasing value in the adoption of SWIFT connectivity.

     

    What began essentially as an efficient technological platform for banks to communicate with each other, has since found dramatic additional pulling power through its Trade Services Utility (TSU) interface for larger corporates to communicate with several banks.

     

    The facility is increasingly popular as an electronic engine with which to match the consistency of key documents in the open account space – purchase orders, invoicing, bills of lading, freight bills. On the back of this, the Uniform Customs & Practice (UCP) rules of the International Chamber of Commerce are currently being written, for expected introduction in April 2013.

     

    This will strengthen the next-stage development of SWIFT’s bank payment obligation (BPO), essentially an inter-bank instrument based on an irrevocable but conditional undertaking to both make and accept the relevant payment. This will facilitate payment guarantees by the bankers of both corporate sellers and buyers in different locations – a risk mitigation tool, in other words, which amounts to the cost-effective electronic equivalent of the conventional letter of credit.

     

    Indeed, ahead of planned implementation next spring, some corporates are already starting to deploy the new facilities on a test basis. Meanwhile, the challenge being addressed with vigour by all banks is twofold: first, to put in place the structures that provide themselves, in turn, with the funding surety they need; and second, to build their own financing propositions for client corporates around the TSU’s flexibility and simplicity.

     

    This reinforces the core aim of banks to help improve the working capital management, risk mitigation and operational efficiency of corporate treasuries supervising and monitoring international trade on Open Account terms.

     

    It means the TSU-member banks – and there are now more than 100 in almost three dozen countries – can electronically share buyer and seller data from purchase orders, invoices, bills of lading, insurance certificates and other documents.

     

    The issue of electronic BPOs via the SWIFT TSU will increasingly enable those large corporate buyers to meet any Open Account reservations which suppliers in emerging economies might still have about the transparency and strength those facilities being developed by banks to mitigate credit risk while extending their financing for preand post-shipment financing, as well as inventory receivables.

     

    None of this negates the use of traditional instruments. These will still be critical in certain sectors and geographies. The greater the financial risk – for example, with natural resources with huge monetary values – the greater I think the tendency will continue to be to use the traditional trade risk mitigation instruments. What is fascinating, however, is how rapidly banking technology is developing to facilitate trade in today’s increasingly testing global environment.

     

    Dave Phillips Global Head for Trade Services and Supply Chain Finance, Lloyds Banking Group

    Dave Phillips joined Lloyds Banking Group in 2012 as Global Head for Trade Services and Supply Chain Finance. He has over 35 years’ experience in international corporate and transactional banking services.

     

    Dave joined Lloyds from Citigroup where he was Managing Director, Global Head of Financial Institutions for Global Transactional Services with responsibility for client sales, retention and growth of the Banks, Fund Managers, Insurance, Broker Dealers and Financial Intermediaries customers for Securities Services, Trade Services and Finance and Treasury Services. Dave was a member of the Global GTS Executive Committee, was recognised as one of the top 300 executives in Citigroup and was a member of the Citigroup Business Leadership Programme.

     

    This article was published in Treasury Management International in September 2012.

9/17/2019 3:37:10 PM