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."

Trade finance - A "rude awakening" for banks as they seek to innovate

A show of hands for those corporates that have lost trust in their banks post-financial crisis. At this morning's conference session at Sibos in Hong Kong on the shortage of trade credit, the vote was fairly overwhelming with a show of red cards from those corporates in the audience.

The leading trade finance bankers on the panel had no choice but to acknowledge that they have some work to do to restore corporates' trust. "Corporates believe trust has been damaged," said Kah Chye Tan, global head of trade finance, Standard Chartered Bank. However, he added that banks also had a responsibility to be prudent.                             

"Trust has dissipated," said Lawrence Webb, global head of trade and supply chain, HSBC. "However, I don't think clients distrust banks at the transaction level. But we have some way to go to rebuilding trust at an industry level."

John Ahearn, managing director, supply chain managment, structured trade and asset optimisation, Citi, was more inclined to apportion the blame equally between banks and corporates, saying that corporates are largely sophisticated buyers that should have understood what they were buying. "We [still] have clients coming to us asking to borrow enormous amounts of money [based on] thin prices." When it comes to apportioning blame, Ahearn says "we (banks and corporates) all got drunk together, but now the party is over.

While it may not be the best time for new clients to approach banks asking for credit, Webb said that HSBC's trade weighted index indicated that Hong Kong companies were expecting increased access to trade finance in the months ahead. But what about those banks that now have substantial government stakeholdings? Will they be extending credit in the wake of the financial crisis? Tan of Standard Chartered seems to think that they will be forced to withdraw to their home market and therefore reduce lending.

Ahearn, representing Citi, which the US government has a more than 3o% stake in (apparently the US government has announced it wants to sell its stake) asked whether the UK government would be happy with RBS lending money in Singapore? The same could be asked of Citi, although the US government's stakeholding in Citi is much less than the UK's 70% shareholding in RBS. Tan ventured that the money governments pumped into banks to prop them up during the crisis equated to a form of protectionism or a form of subsidy.

In an effort to plug the gap in the secondary trade finance markets, The International Finance Corporation with the support of the G20 group of countries set up the Global Liquidity Program, yet it is unclear whether the millions pledged to that program have filtered through to those banks or companies that actually need it. There also appears to be an enlarged role for Export Credit Agencies to play, however, they appear to be playing catch up.

 "We need to make sure these [IFC] initiatives are in place on a long-term basis," said Webb of HSBC, "as opposed to being reactive." The challenge for the banks in the trade finance space is not only restoring credit but also being able to move with companies as their supply chains evolve.

Tan said banks needed to move with companies as they expanded their global supply chains and not just provide domestic solutions. However, Ahearn cautioned that banks should not underestimate the risks in terms of tax and financing issues in cross-border supply chain or trade finance. "They may be in for a rude awakening if the regulators look at this," he said.

SWIFT TSU passes the all-important 100 mark

SWIFT's Trade Services Utility (TSU), which is a central matching utility designed to standardise the process between banks for matching purchase order and invoice information, was first announced at Sibos in Atlanta.

It was initially designed to help banks become more relevant in the open account trading space, which makes up more than 80% of cross-border trade. While the TSU attracted some early adopters, until recently it looked set to become a non-starter as few banks signed up to the utility. But oh what a difference a financial crisis and changes in the trade finance market make. 

Today SWIFT announced that the TSU passed the all-important 100 mark in terms of bank membership with recent signings including Barclays Commercial Bank, Yapi Kredi Bankasi, Banco de Crédito del Peru, Bank of China Hong Kong, Shin Kong Bank and Taishin Bank.

Those banks that recently signed up to the TSU are hoping it will be one of the key lynchpins for developing the next generation of trade finance solutions. However, the TSU still has its sceptics, with corporates saying it offers little in terms of direct value to them.

And although trade finance is sexy again given that most banks have witnessed increased trade finance activity as buyers and suppliers look to mitigate counterparty risk, working out how they can successfully re-integrate themselves into corporates' supply chains is still challenging for most banks.