The open account challenge

When the president of the United States and the UK chancellor, Alistair Darling, start mentioning trade finance you know that a subject most transaction banks took for granted has suddenly been elevated to a new level of importance.

"Everybody is talking about trade finance," says Kah Chye Tan, global head of trade finance, Standard Chartered Bank. Thanks to the financial crisis, trade finance, which has oiled the wheels of global trade for hundreds of years, is sexy again.

But despite what some banks are saying about traditional trade finance instruments such as Letters of Credit being on the uptick again, Tan says that is not the true picture.

Although the risk mitigation benefits of LCs were appreciated more during the crisis, in 2008 overall LC volumes declined by 13%, said Tan. "If you look at 2008 the dollar value of LCs shot through the roof as commodity prices increased. Because the dollar value went up people thought LCs were back in favour."

While LCs will always be a part of the trade finance business, open account trading is here to stay (Tan says it makes up approximately 95% of the $14 trillion a year in world trade). After all why would a company want to pay $1 million to mitigate risk against non-payment using an LC when an open account trade may only cost $30?

The challenge now for the banking industry, says Chan, is to  bring the same risk mitigant benefits the LC provides to open account trading. So far, however, he says banks have done a pretty poor job of that. "It will be another five to 10 years before banks come up with a solution that the market needs," says Tan.

The problem is that open account does not just mean one product. For example, it can encompass receivables discounting, supply chain financing and accounts payable financing. "Open account means different things to different banks," says Tan.

In the run up to the global financial crisis (now referred to as GFC, which is the three letter acronymn doing the rounds at Sibos this year), most of the transaction banks were eager to talk about supply chain financing. And two Siboses ago it was a fairly universal theme on exhibition stands.

Although supply chain is still topical at Sibos this year, Tan says some banks were talking the talk but not walking the walk because the provision of supply chain financing on a cross-border basis is problematic for them as they do not own the local relationship with SMEs or suppliers and feel more comfortable financing domestic transactions. "Banks may say they are a global network bank, but in reality there are a lot of silos in banks," said Tan. "A lot of banks are shying away from cross-border [supply chain financing] transactions."