Trade finance is a vital discipline for many companies; it allows them to mitigate risk and is a key enabler of business continuity. Without trade finance instruments, certain projects would come to a halt because the risk of doing business would simply be too high. Today, many factors affect how trade finance works, and it's important for companies to keep up-to-date with the latest trends and developments to optimize the related processes.
We recently sat down with trade finance experts Gizem Akkaya, Elvis Buitenhuis, and Alexander Fleischmann, and discussed the most noteworthy trends and developments during an insightful panel discussion organized in collaboration with TreasuryXL. Based on that discussion, we will cover some of the key trade finance trends that treasury and finance professionals should be aware of today. You can also watch the recording of the expert discussion below.
Supply chain disturbances impact businesses
If you have followed the news recently, you probably noticed that inflation has caused costs to rise, not just for households but also for companies. On top of that, supply chains have been affected by increased shipping times and shortages of certain materials. Consequentially, the risk of doing business rises as costs increase and the supply of goods is delayed or canceled. In some companies, this can affect certain production lines and revenue generation, so the need for trade finance has become all the more important.
Since there is so much that can potentially go wrong along the supply chain, processes must be monitored as closely as possible, but preferably without increasing the workload for finance and treasury teams. Every stage in the supply chain requires logistical and financial planning, and risk varies based on each. Trade finance needs to be able to tackle supply chain risk from the early stages and throughout the rest of the supply chain by working in close collaboration with other departments while keeping the workload at a healthy level.
Understaffed departments and the lack of expertise
Part of the current challenges around trade finance can be attributed to the war for talent. Many companies can’t find enough skilled people in treasury or trade finance departments and are hence understaffed and overwhelmed with managing all trade finance operations. However, we’ve also seen that it differs per company; some companies’ nature requires them to have a heavy focus on trade finance, and they allocate lots of resources to it accordingly, while other companies have no appointed person in charge of it, and it’s seen as the job of the treasury or finance team. In most cases, trade finance processes are highly manual and time-consuming, with much room for improvement. As a result, trade finance specialists typically start considering adapting dedicated solutions to tackle the combination of understaffed teams and room for process improvement.
The role of the trade finance function in companies is changing
Companies are realizing the importance of addressing financial risk in trade finance. Trade finance professionals must now communicate effectively with other departments to determine where trade finance is needed and how it affects the organization. Recruitment experts have noted a change in the role of trade finance professionals, who now require excellent communication skills to engage with multiple stakeholders.
Gizem Akkaya, a trade finance expert from our recent webinar, also stressed that trade finance requires good teamwork; “You need to work with all stakeholders and analyze the instrument needs and where they derive from. Ask colleagues the questions, such as what is best for the company? Where is the risk high? And what are the goals that need to be achieved? This will also imply aligning with treasury, procurement, and other departments.”
Can we solely rely on treasury to tackle trade finance?
Many companies don’t necessarily realize how much work trade finance is; managing hundreds of instruments with all related stakeholders and communication is extremely time-consuming. Especially when digitalization, automation, and streamlined processes are lacking. Relying on treasurers to do this can be like adding another full-time job to an already demanding job. Modern tools or software can help ease the workload, but companies with a larger number of instruments need to dedicate specialized people to the job.
The companies that do understand the importance of trade finance are usually the ones who know their operational continuity depends on it and are heavily exposed to supply chain disruptions and counterparty reliance. You’ll find that such businesses can have entire teams dedicated to trade finance alone.
Though we cannot only rely on treasury to manage trade finance, it does remain very interconnected with treasury management. Trade finance affects cash operations, allows quicker collection of receivables, helps optimize working capital, increases cash conversion cycles, and can help optimize company liquidity. So, trade finance will always remain an integral part of treasury.
The role of banks
Banks have always been an integral part of trade finance as they are big issuers of guarantees and loans and offer solutions for corporates to tackle instruments more structurally. Even though banks are developing trade finance solutions, they are often bank-specific and don’t help trade finance specialists manage various instruments from other banks in the same system. Banks haven't created any breakthrough trade finance solutions, but they continue working with third-party vendors to provide improved services to companies.
Over the past years, banks have become increasingly strict in assessing guarantee requests. Whereas it previously took one or two days for banks to issue guarantees, it can now take two weeks or more. This has huge consequences for trade finance teams because they need to plan the required guarantees further in advance carefully.
A few reasons for the longer waiting times are compliance requirements, KYC, sustainability and ESG developments, and impact banking, for example. These topics have also increased back-and-forth communication between the requesting party and the bank. Today, banks are required to look into the nature of guarantee-related projects and their impact on the environment or society, for instance. If projects don’t meet certain standards, or even suppliers don’t, they can decline to issue guarantees. On a more positive note, banks can also incentivize sustainable practices by giving companies special discounts on loans or guarantees.
The role of technology and automation possibilities
Technology providers are becoming more important in trade finance because they can help centralize and automate burdensome processes. There are a few areas in particular that can typically benefit from a trade finance management solution:
- Housekeeping: refers to the administrative task of keeping track of all instruments in a single place, which is usually done in spreadsheets. By having a specialized solution in place, you can collect and view company-wide instruments centrally, view which status they are in, and which require attention. Digitalization further allows online modifications of instrument requests and identical request forms regardless of the issuing party. This way, all housekeeping is streamlined, centralized, and done digitally.
- Workflows: throughout the different instrument lifecycles there are varying stakeholders involved. Before instruments are sent to the issuer, it passes several internal stakeholders, typically via email. Instead, workflows can enable automation. After each stakeholder has done their job in the process, instruments can be marked, and the next stakeholder will automatically receive a notification with a task — everything within one system.
- Bank communication: how you communicate with banks and send back-and-forth documents can also be streamlined by technology. Some solutions use APIs or third-party connections like SWIFT to facilitate better communication with banks from the same system internal stakeholders would use.
- Reporting: besides having reports on your guarantees, technologies can also provide reports on the utilization of facilities and how much room there is left to issue more.
- Fees: trade finance instruments come with fees, but companies often have little transparency in fee structures. On top of that, the fees related to each instrument also need to be posted to the ERP system or invoiced to a company's entities. With hundreds of instruments, this becomes a big nightmare. You can automate these processes entirely and achieve transparency in fee structures with the right technology.
Sustainability and ESG goals to become integral parts of the discipline
More than ever, banks are scrutinizing their clients’ operations to determine how they adhere to better sustainability and societal practices. ESG reporting plays an important role in that, but banks can additionally examine bank guarantee requests case by case and see what the guarantee is for and how the associated project impacts sustainability and ESG realms. Even the other stakeholders involved in the guarantee-related project can be scrutinized by the bank, as far as examining the entire supply chain of the project. If banks find something to dislike, they can decline to issue the guarantee or ask for more clarification. As a result, trade finance teams need to be prepared to enclose all relevant information and can expect a good amount of back-and-forth communication with the bank about sustainability when guarantees are requested.
Compliance and regulatory requirements stay vital
You need to accommodate to the issuer’s requirements depending on the industry, countries, or other jurisdictions your company is active in. Each can have an impact on how long it takes to process instrument requests and the requirements that need to be met by your company. Political developments can also cause changes in trade finance; some countries or parties can be sanctioned, which needs to be considered from a business continuity perspective as you don’t want to lose momentum throughout your supply chain. Hence, it’s critical for your business to acquaint yourself with the relevant compliance and regulatory topics to speed up trade finance processes as much as possible.
The road ahead
The future of trade finance will rely on many factors and key stakeholders such as banks, corporates, financial institutions, and technology providers. Initiatives to streamline trade finance processes come from several parties - however, they often lack central functionalities and communication methods that can encompass all the relevant stakeholders and instruments. Technology vendors can often provide more holistic solutions to improve trade finance processes.
Trade finance will be an evolution rather than a revolution. For example, if one in seven banks has a good solution, it doesn’t help if the others don't follow. So, if you want to start improving trade finance processes, don't wait for your bank, but start with what you can do today.