Trade Finance Operations A Solutions View on Traditional Trade - - PowerPoint PPT Presentation

Trade Finance Operations

Beirut, Lebanon, March 2010

A Solutions View on Traditional Trade Products

Alexander R. Malaket, CITP, President OPUS Advisory Services International Inc.

Summary

• Trade finance is often “lost” in a bank, and trade operations is undervalued

in the trade finance value proposition

• Innovations in trade finance, coupled with the profile gained since

September 2008, have highlighted the importance to global business

• Traditional products still add value: Even more so, as part of a business

solution!

• A holistic view of the trade finance business, within banks, together with a

solutions view of client needs, will set a constructive way forward

Trade Ops Staff: Look Beyond the Documents to the Business Solution!

“Short-term credit/trade finance has been associated with the expansion of international trade in the past century, and has in general been considered as a routine operation, providing fluidity and security to the movement of goods and services. Short-term finance is the true life-line of international trade.”

Improving the Availability of Trade Finance During Financial Crises WTO Publications, 2003

The current crisis has generated unprecedented profile for Trade Finance

We could say this today, too…!

“We have excellent profile in the Bank: our division head reports directly to the vice-chair, and often helps us make the case for trade finance” “…support from the Bank’s executive? Well, the Board will leave us alone as long as we are making money…” “Our chairman recently briefed the CEO of a major global client on what we believe is a key trend in trade finance. That kind of senior-level communication is invaluable..”

Yet, Trade Finance is often “Lost” in a Bank…

…and Trade Finance Operations even more so!

• Mature business, established product offerings and shared practices

across the globe. Some innovation

• Credit-driven, with four main pillars: payments, financing, risk

mitigation and information

• Highly commoditized despite complexity and expertise
• High fixed-cost business, increasing margin and profitability

compression

• Value & profitability to banks – P&L – is very poorly understood
• Increasing demands related to compliance, globally
• Internally fragmented: Sales & Operations rarely in optimal

alignment

Trade Finance as a Business

“I don’t care if you have a bunch of hamsters in the back-office processing the transactions, as long as the client-facing system looks good and we bring in the business”

Trade Operations: Undervalued Asset

• Senior Trade Executive, New York, circa 1998

“Whenever I ask a bit deeper question about the operational side of the issue, people are stuck…from the operational side, their know-how is very poor. Reporting & booking is very, very important. You might end up with a very bad working capital structure, or a worsening of return on invested capital. This is a point which blocks the deal, where we end up with no transaction at all.”

• AGM Finance, Istanbul, 2010

Low Medium High Relationship Expertise New Proven Evolving

L/C Collections Open Account

OBSOLETE?

New relationship, low expertise in trade, represents highest risk, all else being equal Low Medium High Relationship Expertise New Proven Evolving

L/C Collections Open Account

OBSOLETE?

New relationship, low expertise in trade, represents highest risk, all else being equal

Trade Operations: Linking Product & Relationship

This model looked obsolete, but traditional products/features are back

…Provides some combination of:

• Payment Facilitation
• Financing
• Risk Mitigation
• Information

Every Trade Finance Product…

Including the emerging Supply Chain Finance & Working Capital Solutions

Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Sales Contract and Delivery of Goods Verification & Transmission of Documents, Remittance of Funds Importer Payment, Exchange for Documents Exporter Documents, Exchange for Payment

To Illustrate: Documentary Credits

• Documentary Credits are typically used between trading partners wishing to

ensure mutual security in a transaction

• They may also be required as the basis for financing; Banks will often

discount or advance funds due under a Letter of Credit. The need to use L/C’s may arise out of financial arrangements independent of the buyer/seller relationship (to access FX, for example)

• Banks have extensive and well-established roles and obligations to ensure

that the terms and conditions of these instruments are met

• The Issuing Bank structures and issues the Letter of Credit on behalf of the

Applicant, but the Credit, once issued, represents a "promise to pay" by the Issuing Bank

Documentary Credits

• The Advising Bank receives, authenticates and verifies the L/C, then

“Advises" it to the exporter

• Documentary Credits may include a separate payment undertaking by a

Confirming Bank, which may be sought by the exporter

• Discrepancies in the Shipping Documents against the L/C terms can cause

the transaction to fail, or they may be waived to permit conclusion of the

• transaction. 60-70% of documents tendered by exporters under L/C's have

some type of discrepancy

• Governed by the Uniform Customs and Practice for Documentary Credits

(UCP 600), International Chamber of Commerce, Paris, and periodic revisions thereto

Documentary Credits

Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Sales Contract and Delivery of Goods Verification & Transmission of Documents, Remittance of Funds Importer Payment, Exchange for Documents Exporter Documents, Exchange for Payment Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Sales Contract and Delivery of Goods Verification & Transmission of Documents, Remittance of Funds Importer Payment, Exchange for Documents Exporter Documents, Exchange for Payment

Master L/C Master L/C Back- to Back L/C Back- to Back L/C

Exporter (Seller/Beneficiary)

Becomes Importer/Applicant

Master = Collateral

Documentary Credits: Back-to-Back

…which also offer some uniquely useful & flexible features

• Trade financiers – including Operations Specialists – need to look beyond

the flow of documents and the processing of transactions

• This is a business solution for trade clients
• Once such a view is adopted, it is much easier to take an integrated

approach to trade finance – where sales/relationship specialists AND

• perations specialists work together
• Look to the future: if you process documents, you shuffle paper. If you

provide a client solution, you create value

Trade Products & Operations: A Solution View

The L/C as a Risk Mitigation Solution

Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Political/Country Risk Commercial Risk Bank Risk Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Political/Country Risk Commercial Risk Bank Risk

The L/C as a Risk Mitigation Solution

Importer (Buyer/Applicant) Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Country 1 Exporter (Seller/Beneficiary) Issuing Bank Country 2 Advising Bank (Confirming Bank) Payment type/timing Confirmed L/C L/C Confirmed L/C Payment Terms Confirmed L/C Incoterm ECA Cover Guarantee/IFI Programs ECA Cover Importer (Buyer/Applicant) Importer (Buyer/Applicant) Exporter (Seller/Beneficiary) Advising Bank (Confirming Bank) Issuing Bank Country 1 Exporter (Seller/Beneficiary) Issuing Bank Country 2 Advising Bank (Confirming Bank) Payment type/timing Confirmed L/C L/C Confirmed L/C Payment Terms Confirmed L/C Incoterm ECA Cover Guarantee/IFI Programs ECA Cover

The L/C as a Financing Solution

Negotiations Contracting L/C Issuance Document Preparation Shipment Settlement TF as a competitive advantage Payment Terms Bank Re-Finance Invoice Financing/ Factoring Pre-shipment Finance Buyer Credit ECA Cover ECA Cover UCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties Negotiations Contracting L/C Issuance Document Preparation Shipment Settlement TF as a competitive advantage Payment Terms Bank Re-Finance Invoice Financing/ Factoring Pre-shipment Finance Buyer Credit ECA Cover ECA Cover UCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties

• Warehouse receipt financing: Pre-shipment collateralized loan, using goods stored

in independent warehouse

• Trust Receipt Financing: Financing of the importer after the release of the Bill of

Lading and the goods, on the basis of a trusted relationship and the expectation of repayment after sale

• Financing based on a Banker’s Acceptance: tenor, discount rate – can finance the

beneficiary/exporter, or either Bank

• Financing of foreign receivables – transactionally or on a ‘pooled’ basis: advance a

percentage of the receivables, with full recourse

• Factoring: purchase of invoices on a non-recourse basis; factors must conduct

effective credit assessments, therefore often become very involved in the Exporter’s credit analysis and bookkeeping

• Aval: The act of having a third party (usually a bank) guarantee the obligations of a

buyer to a seller per the terms of a contract such as a promissory note or purchase agreement.

The L/C as a Financing Solution

‘We take a ten-year view of our trade banking relationships, assess the direction of the Bank and the compatibility of our value systems…’ ‘Open Account is increasingly important to us, but the products and services available simply do not meet our needs…. ‘We are in a highly competitive and volatile commodity business. If I have to operate 24/7 to meet the needs of my clients across the globe, my trade bank has to keep up’ ‘We are not interested in technology for its own sake. If the tool adds value, we will look at it, however, our processes in L/C transactions are optimized to the point where we prefer to use letters of credit than to shift to Open Account, or some other option’

The Client View: Solution, not Product!

The last speaker claims to process 20,000 transactions/year with 2 FTEs

Traffic Dept., P.O. Processing Finance, Treasury

Functions Supporting International Trade

Trade Bank Client Organization Sales and/or Structured Trade Trade Services Operations

O B J E C T I V E S

Client Supply Chain

Integrated Trade Finance Model Channels for client information, Internal communications and staffing Service delivery based on client objectives And business solutions Holistic approach with broad access to Client Organization Business Objectives/Solutions Channels Traffic Dept., P.O. Processing Finance, Treasury

Functions Supporting International Trade

Trade Bank Client Organization Sales and/or Structured Trade Trade Services Operations

O B J E C T I V E S

Client Supply Chain

Integrated Trade Finance Model Channels for client information, Internal communications and staffing Service delivery based on client objectives And business solutions Holistic approach with broad access to Client Organization Business Objectives/Solutions Channels

The Solution View Links to TF Ops

OPUS Advisory, 2004

• Trade operations capabilities are expensive to maintain
• IT implementations can cost up to US $30 Million
• Technology solutions from TradeCard to TSU are still working to

“virtualize” some or all of the trade transaction flow

• Staff shortages have been an issue, though the crisis & resulting

exit of banks from trade finance has mitigated this issue

• Staff development is critical: timelines vary from 5-7 YEARS to 6

MONTHS (Consider the CDCS Program)

• Productivity among trade banks can vary by 700%
• Compliance is a complex and increasingly critical issue in trade

finance

Operations & the Client/Solution Connection

Response to these issues determines success in client solutioning

• Senior European Trade Banker, 2006

Foreign Regs

The Boarder

Advising Bank (Confirming Bank) Exporter (Seller/Beneficiary) Issuing Bank Importer (Buyer/Applicant) Bank Regulations KYC OFAC Commercial Regs BIS Environmental Regs Insourcing Bank Foreign Regs

The Boarder

Advising Bank (Confirming Bank) Exporter (Seller/Beneficiary) Issuing Bank Importer (Buyer/Applicant) Bank Regulations KYC OFAC Commercial Regs BIS Environmental Regs Insourcing Bank

The Boarder

Advising Bank (Confirming Bank) Exporter (Seller/Beneficiary) Issuing Bank Importer (Buyer/Applicant) Bank Regulations KYC OFAC Commercial Regs BIS Environmental Regs Insourcing Bank

Client Solutions & Compliance

 Limited understanding of trade among auditors & compliance specialists  Lack of clarity about the nature of transactions & their associated risk  Limited communication & MIS specific compliance issues

“The only way we can be fully compliant today, is to turn off the lights, close the door and go home”

Bottom Line?

P & L: Is the Business Profitable? RM’s & Sales: Does Trade Have the Necessary Profile? Trade Operations: Is the Model Effective & Leveraged? Client Value: Do Clients See a Business Solution? P & L: Is the Business Profitable? RM’s & Sales: Does Trade Have the Necessary Profile? Trade Operations: Is the Model Effective & Leveraged? Client Value: Do Clients See a Business Solution? Trade Operations is an important piece of the puzzle: Leverage an Undervalued Asset!

Thank You.