Trade Finance Operations
Beirut, Lebanon, March 2010
A Solutions View on Traditional Trade Products
Alexander R. Malaket, CITP, PresidentOPUS Advisory Services International Inc.
Summary
Trade finance is often “lost” in a bank, and trade operations is undervaluedin the trade finance value proposition
Innovations in trade finance, coupled with the profile gained sinceSeptember 2008, have highlighted the importance to global business
Traditional products still add value: Even more so, as part of a businesssolution!
A holistic view of the trade finance business, within banks, together with asolutions 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 FinanceDuring Financial CrisesWTO 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 reportsdirectly to the vice-chair, and often helps us make the case for tradefinance”
“…support from the Bank’s executive? Well, the Board will leave usalone as long as we are making money…”
“Our chairman recently briefed the CEO of a major global client onwhat we believe is a key trend in trade finance. That kind of senior-levelcommunication 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 practicesacross the globe. Some innovation
Credit-driven, with four main pillars: payments, financing, riskmitigation and information
Highly commoditized despite complexity and expertise
High fixed-cost business, increasing margin and profitabilitycompression
Value & profitability to banks – P&L – is very poorly understood
Increasing demands related to compliance, globally
Internally fragmented: Sales & Operations rarely in optimalalignment
Trade Finance as a Business
“I don’t care if you have a bunch of hamsters in the back-office processing thetransactions, as long as the client-facing system looks good and we bring in thebusiness”
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 badworking capital structure, or a worsening of return on invested capital. Thisis 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 andDelivery of Goods
Verification & Transmission ofDocuments, Remittance of Funds
ImporterPayment,
Exchange forDocuments
ExporterDocuments,
Exchange forPayment
To Illustrate: Documentary Credits
Documentary Credits are typically used between trading partners wishing toensure mutual security in a transaction
They may also be required as the basis for financing; Banks will oftendiscount or advance funds due under a Letter of Credit. The need to useL/C’s may arise out of financial arrangements independent of thebuyer/seller relationship (to access FX, for example)
Banks have extensive and well-established roles and obligations to ensurethat the terms and conditions of these instruments are met
The Issuing Bank structures and issues the Letter of Credit on behalf of theApplicant, but the Credit, once issued, represents a "promise to pay" by theIssuing 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 aConfirming Bank, which may be sought by the exporter
Discrepancies in the Shipping Documents against the L/C terms can causethe transaction to fail, or they may be waived to permit conclusion of thetransaction. 60-70% of documents tendered by exporters under L/C's havesome type of discrepancy
Governed by the Uniform Customs and Practice for Documentary Credits(UCP 600), International Chamber of Commerce, Paris, and periodicrevisions thereto
Documentary Credits
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank(Confirming Bank)
Issuing Bank
Sales Contract andDelivery of Goods
Verification & Transmission ofDocuments, Remittance of Funds
ImporterPayment,
Exchange forDocuments
ExporterDocuments,
Exchange forPayment
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank(Confirming Bank)
Issuing Bank
Sales Contract andDelivery of Goods
Verification & Transmission ofDocuments, Remittance of Funds
ImporterPayment,
Exchange forDocuments
ExporterDocuments,
Exchange forPayment
MasterL/C
MasterL/C
Back-to
BackL/C
Back-to
BackL/C
Exporter(Seller/Beneficiary)
BecomesImporter/Applicant
Master = Collateral
Documentary Credits: Back-to-Back
…which also offer some uniquely useful & flexible features
Trade financiers – including Operations Specialists – need to look beyondthe 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 integratedapproach to trade finance – where sales/relationship specialists ANDoperations specialists work together
Look to the future: if you process documents, you shuffle paper. If youprovide 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/CountryRisk
Commercial Risk
Bank Risk
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank(Confirming Bank)
Issuing Bank
Political/CountryRisk
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 DocumentPreparation
Shipment Settlement
TF as a competitiveadvantage
Payment Terms Bank Re-Finance
Invoice Financing/Factoring
Pre-shipmentFinance Buyer Credit
ECA Cover
ECA CoverUCP
Importer/Buyer Exporter/Seller
Financing shifts the timing of Financial Flows & Risks between parties
Negotiations Contracting L/C Issuance DocumentPreparation
Shipment Settlement
TF as a competitiveadvantage
Payment Terms Bank Re-Finance
Invoice Financing/Factoring
Pre-shipmentFinance Buyer Credit
ECA Cover
ECA CoverUCP
Importer/Buyer Exporter/Seller
Financing shifts the timing of Financial Flows & Risks between parties
Warehouse receipt financing: Pre-shipment collateralized loan, using goods storedin independent warehouse
Trust Receipt Financing: Financing of the importer after the release of the Bill ofLading and the goods, on the basis of a trusted relationship and the expectation ofrepayment after sale
Financing based on a Banker’s Acceptance: tenor, discount rate – can finance thebeneficiary/exporter, or either Bank
Financing of foreign receivables – transactionally or on a ‘pooled’ basis: advance apercentage of the receivables, with full recourse
Factoring: purchase of invoices on a non-recourse basis; factors must conducteffective credit assessments, therefore often become very involved in the Exporter’scredit analysis and bookkeeping
Aval: The act of having a third party (usually a bank) guarantee the obligations of abuyer to a seller per the terms of a contract such as a promissory note or purchaseagreement.
The L/C as a Financing Solution
‘We take a ten-year view of our trade banking relationships, assess thedirection of the Bank and the compatibility of our value systems…’
‘Open Account is increasingly important to us, but the products andservices available simply do not meet our needs….
‘We are in a highly competitive and volatile commodity business. If I have to operate 24/7to 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, wewill look at it, however, our processes in L/C transactions are optimized to thepoint where we prefer to use letters of credit than to shift to Open Account, orsome 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
FunctionsSupporting
InternationalTrade
Trade Bank Client Organization
Sales and/orStructured Trade
Trade ServicesOperations
OBJECTIVES
Client Supply Chain
Integrated Trade Finance Model
Channels for client information,Internal communications and staffing
Service delivery based on client objectivesAnd business solutions
Holistic approach with broad accessto Client Organization
Business Objectives/Solutions
Channels
Traffic Dept.,P.O. Processing
Finance, Treasury
FunctionsSupporting
InternationalTrade
Trade Bank Client Organization
Sales and/orStructured Trade
Trade ServicesOperations
OBJECTIVES
Client Supply Chain
Integrated Trade Finance Model
Channels for client information,Internal communications and staffing
Service delivery based on client objectivesAnd business solutions
Holistic approach with broad accessto 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 & resultingexit of banks from trade finance has mitigated this issue
Staff development is critical: timelines vary from 5-7 YEARS to 6MONTHS (Consider the CDCS Program)
Productivity among trade banks can vary by 700%
Compliance is a complex and increasingly critical issue in tradefinance
Operations & the Client/Solution Connection
Response to these issues determines success in client solutioning
- Senior European Trade Banker, 2006
Foreign Regs
Th
eB
oard
er
Advising Bank(Confirming Bank)
Exporter(Seller/Beneficiary)
Issuing BankImporter
(Buyer/Applicant)
Bank Regulations KYC OFACCommercial Regs BIS Environmental Regs
Insourcing Bank
Foreign Regs
Th
eB
oard
er
Advising Bank(Confirming Bank)
Exporter(Seller/Beneficiary)
Issuing BankImporter
(Buyer/Applicant)
Bank Regulations KYC OFACCommercial Regs BIS Environmental Regs
Insourcing Bank
Th
eB
oard
er
Advising Bank(Confirming Bank)
Exporter(Seller/Beneficiary)
Issuing BankImporter
(Buyer/Applicant)
Bank Regulations KYC OFACCommercial Regs BIS Environmental Regs
Insourcing Bank
Client Solutions & Compliance
Limited understanding of tradeamong auditors & compliance specialists
Lack of clarity about the nature oftransactions & their associated risk
Limited communication & MISspecific 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 BusinessProfitable?
RM’s & Sales: Does TradeHave the Necessary Profile?
Trade Operations:Is the Model Effective &
Leveraged?
Client Value:Do Clients See aBusiness Solution?
P & L: Is the BusinessProfitable?
RM’s & Sales: Does TradeHave the Necessary Profile?
Trade Operations:Is the Model Effective &
Leveraged?
Client Value:Do Clients See aBusiness Solution?
Trade Operations is an important piece of the puzzle: Leverage an Undervalued Asset!
Thank You.