Accenture Trade Finance

8/18/2019 Accenture Trade Finance

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Trade finance: The landscape is changing—are you?

Capital Markets | Rethinking Investment Banking



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Doing business means taking

risks. Doing business cross-

border increases those risks:

Will my buyer pay me, andpay me on time? Will the

goods I ordered be delivered

as agreed? What are the

chances of future limitations

on foreign currency

conversion or transfer

limitations? Is there a risk of

political instability disruptingthe trade relations? How will

I finance these transactions

and avoid liquidity risks and

cash flow shortages?

Bank-intermediated trade

finance has been the preferred

instrument to offset theserisks for years, hence making

trade finance an important

catalyst of cross-border

trade and a solid source of

revenues for banks. However,

technological innovation,

switches in corporate behavior,

regulatory changes and

increasing market competition

are fundamentally changing

the rules of the game.

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Emerging economies

Global trade of goods has been growing at double-digit rates since theearly 2000s, outpacing the growth in nominal world Gross DomesticProduct. The only time when trade volumes declined was in 2008 at thebeginning of the financial crisis.1

This growth is even stronger in emerging

markets, particularly in Asia. In 2013,Emerging Asia represented around one-fourth of the value of global exports.2 Andaccording to the Asian Development Bank,this area’s role in global trade will continueto grow with a 40 percent share of totalexports forecasted by 2030.3

Banks play a fundamental role in theenablement of these cross-border tradeflows through the payment execution, riskmitigation and financing.

They discovered long ago the

attractiveness of trade finance as arecurrent and interest rate independentsource of revenues, with the added benefitof default rates which have proven to beup to 10 times lower than for traditionalcorporate lending.

More recent evidence highlights theextensive cross-selling potential of tradefinance by providing corporates witha complete and integrated transactionbanking offering: $1 in trade finance fees

can bring additional $1.70 in FX and cross

border payment fees, and another $2.25 inother transactional banking revenue.4

The importance of trade finance forbanks in building lasting and profitablerelationships with their corporate clients isundeniable.

200

180

160

140

120

100

80

05 06 07 08 09 10 11 12 13 14

200

180

160

140

120

100

80

05 06 07 08 09 10 11 12 13 14

Global imports growth by region Global exports growth by region

Source: CPB, Accenture

Trade finance – an attractive business

World imports Advanced economiesEmerging Asia

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Forecast growth in trade flows between ASEAN and its major trading partners

Sub-Saharan Africa

$66B

8%

$39B

Europe

$472B

6.5%

$304B MENA

$292B

8.8%

$162BIndia

$145B

11.5%$68B

China

$746B

11.4%

$351B Korea

$270B

10.4%

$135B

North America

$349B

6.8%

$220B

Latin and

Central America

$121B

2020 Total TradeForecasted

2013-20207y CAGR

2013 TotalTrade Actual

7.6%

$73B

Legend:Country/Region

Oceania

$110B

5%

$78B

9.0%

$609B

Global Trade with ASEAN2020: ~US$4.4T(F)2013: ~US$2.5T(A)

Intra-ASEAN

$1,12B

Extra-ASEANExports 2013:

$941B

Extra-ASEAN

Imports 2013:

$962B

Source: Trade data from ASEAN stats as of December 2014; Accenture Estimates

Trade finance transaction default rates by product

Export L/C 0.016%

Import L/C 0.020%

Performance Guarantees 0.034%

Loans for Import/Export 0.021%

All Corporate productsb 1.380%

Trade Finance Productsa

Source: ICC “Rethinking Trade & Finance 2014”aDefault rates in the Trade Register (2013 report)bDefault rates for all corporate products in 2012 from Moody’s

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The world is changing rapidly

Technological innovation in the form of digitization of channels andproducts, switches in corporate behavior and expectations, regulatorychanges and increasing market competition are today fundamentallychanging the trade finance market space.

Switches in corporate

behavior and expectationsWith corporates gaining maturity incross-border trade and getting morefamiliar with their trading partners and thecountries they are located in, the need forrisk hedging is decreasing. Corporates aregetting more selective in the use of tradefinance instruments due to the relativelyhigh fees of trade finance instruments andthe complexity and time delays connectedto their reliance on paper documents.

This switch in corporate buying behavioris reflected in the growing importanceof open account transactions, where theexporter delivers goods and the importerpays on reception or under agreedpayment conditions. It is estimatedthat open account currently representsaround 80 percent of trade transactionsby volume and 35-45 percent of thevalue of all traded goods,5 percentageswhich are expected to grow further inthe coming years.

This move away from bank intermediatedtrade finance instruments is posing a realthreat to the trade finance revenues ofbanks, while at the same time leavingcorporates with reduced access tofinancing options.

The growing maturity of cross-border tradeis not only luring corporates away frombank intermediated trade finance products,it is also leading to a further globalization

and hence lengthening of the trade cycles,raising the need for working capital ofthe different players in the supply chain.The financial crisis has demonstratedthe vulnerability of global supply chainsto smaller corporates who often face

difficulties in accessing bank financing,with supply chain failures as ultimateconsequence.

Large corporates are therefore shiftingtheir focus from meeting their ownfinancing needs to ensuring the healthof the entire supply chain. As a result,corporates are in search of new financialproducts that address their supply chainfinance and payment needs in an openaccount set-up, and span across thecompany, its suppliers and its buyers,creating a clear challenge and opportunity

for banks who want to continue to play arole in the trade finance space.

DigitizationCorporates increasingly rely on electronicchannels to interact with their banks.This is also the case for trade finance.Those corporates are expecting electronicchannels to become more and moresophisticated, not only providing basictransaction services, but also providing

them with access to advanced reporting,forecasting and simulation services fortrade finance, even more so integratedwith different transaction bankingproducts like payments, foreign exchange,liquidity and cash management.

Meeting the increased expectations ofonline channel sophistication is still doneby a lot of banks through proprietarysolutions. However bank independentplatforms – portals and many-to-manyhost-to-host connections – offered bysoftware vendors are gaining importance.These solutions are increasing the ease ofuse and transparency for corporate clientswhile fueling competition between banks.

An even more fundamental changeis coming with the emergence ofmarket standards for the electronicexchange of open account transactiondata between banks and betweencorporates and their banks.

SWIFT, as one of the driving forces behindthese data protocols, has launched theTrade Services Utility (TSU), a centralizedmatching and workflow engine whichprovides the timely and accuratecomparison of data taken from underlyingcorporate purchase agreements and related

documents, such as commercial invoices,transport and insurance documents.6

By replacing paper document flows withdigital data flows, this trend providesbanks with the fundamentals to radicallyreduce the cost and time needed to handletraditional trade finance products. Digitaldata flows also allow banks to develop newvalue added services like purchase orderand invoice matching, liquidity analysisand forecasting.

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Increasing competitionGiven the cross-border nature of tradefinance, the need for solid contentexpertise and the required balance sheetstrength, large global banks continueto play an important role, accountingfor a quarter to a third of global bank-intermediated trade finance.

There is evidence that European banks,which lost ground in 2011 and 2012because of stricter regulations and dryglobal funding markets, are making a

comeback. Together with American banks,they are looking at emerging markets forgrowth by following the global expansionof their clients.

However, local and regional banks inthose emerging markets continue to standstrong. They are defending their historicalmajority market shares by leveragingtheir deep local relationships and theirunderstanding of local markets, whileinvesting in getting their offerings up toglobal standards.

While non-bank players only take amodest part of the total market, recentyears have shown the emergenceand success of logistics companies,supplier networks and specialized niche

trade finance companies focusing oncommodity trade finance or SME tradefinance. Alibaba is already picking up onthis trend, entering into a partnershipwith two UK start-ups to providefinancing to small British businesseslooking to buy from Chinese suppliers.7

It is likely that the nimble start-ups will bethe first to leverage blockchain technologyfor trade finance, further adding to thethreat for traditional banks.

RegulationOne of the most important regulatoryresponses to the financial crisis was BaselIII, which triggered the deleveraging ofbanking balance sheets and constrainedthe availability of credit. Since thenthe apparent adverse economic effectsof the new regulations have led to therelaxation of capital requirements fortrade finance assets. This is paving the wayfor a renewed interest in trade finance,especially in those regions with high Basel

III compliance.

Possible key benefits of supplychain products:

For the anchor or principal:

increased supply chain stability, betterpredictability of financial flows, greatervisibility and control across the financialsupply chain and payment process.

For the up and downstreamparticipants:

improved payment terms, easier accessto credit at better conditions, reducedcomplexity of following up payments.

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What to do to stay in the game?

Extending the traditional trade finance products with sophisticated, onlineaccess and with supply chain offerings will be key for banks to safeguardtheir position and continue to drive growth.

Source: International Chamber of Commerce “Bank Payment Obligation.”

Benefits for the importer

• Better payment terms and conditions

• Mitigation of goods delivery risk

• Increased convenience and

reduced cost

Benefits for the exporter

• Assurance of payment

• Access to flexible pre- and post-shipment finance

• FX risk elimination by BPO in homecountry currency

Benefits for the bank

• Automated, low cost, high accuracysolution

• Upfront definition of matching ruleseliminates subjectivity

• New value-added servicesopportunities

Building a supply chainofferingInnovating trade finance products andchannels by enabling sophisticated, onlineaccess, replacing paper document flowsby data flows and building a supply chainoffering will be key for banks to safeguardtheir position and continue to drive growth.

The supply chain offering spans a vastrange of financing, payment and liquiditymanagement services, and is still in fulldevelopment with product characteristicsvarying between banks and geographies.

However, a number of generic trends in thedevelopment of product characteristics canbe highlighted:

Anchor centered

Programs are typically set up with a large,often multi-national anchor or principal,building on its credit rating to financeplayers up and down stream in the supplychain; often SMEs with little access totraditional bank financing.

Multiple participants

Deals cover a set of transactions or acluster of supply chain participants, withnumbers ranging from a couple of hundredto a hundred thousand.

Web-enabled

The cross-border character and sheersize of some of the programs in termsof participants make online channels anindispensable part of the offering.

Customization

Given the recent emergence of these

products, standardization is still low, withlarge corporate anchors expecting the bankto be flexible to tailor to their needs.

Syndication and securitization

Deals are often too large for one single bankand banks are hence turning more and moreto syndications and securitization.

Digitizing traditionaltrade finance productsBank Payment Obligation (BPO) is theother new kid on the block. It represents anirrevocable undertaking on the part of animporter’s bank to pay (or incur a deferredpayment obligation) at maturity a specifiedamount to an exporter’s bank. Althoughthe BPO product is not different fromtraditional trade finance products in itsintent to mitigate the risks of international

trade, it does so in a fully digital way, thusoffering significant advantages in speed,flexibility and reduced complexity.

100%

80%

60%

40%

20%

0%2014 2020

15%

19%

33%45%

Traditional TF Payments SCF

52%36%

Trade-related revenues for banks

Source: CEB TowerGroup analysis,Accenture estimates

Bank Payment Obligation

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The race for efficiencyand scale in traditional

productsWhile new products and channels areemerging, traditional trade finance isbecoming more and more commoditized,leading to growing pressure on theneed for efficiency in delivery. Banksare therefore modernizing their tradefinance platforms, opting for field testedtechnology solutions and maximumsimplification and automation ofprocesses. Outsourcing and offshoring

strategies are imminent as the next step inthe pursuit of cost savings.

A broad range of mature trade financesoftware solutions is available on themarket. These solutions differ in product

and functional scope as well as regionalfocus because of remaining local marketspecificities:

• Trade finance-focused packages: in mostcases combining front- and back-endsolutions with deep functional coverage

• Transaction banking packages withtrade finance functionality: covering alltransaction banking products, includingtrade finance, enabling a full andintegrated transaction banking offering

• Universal banking packages with tradefinance functionality: universal bankingsolutions with often somewhat morebasic trade finance functionalities

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Conclusion

Trade finance is an attractive business for banks. Global trade continues tobe on the rise and banks play an important role in facilitating the financing,payment execution and risk mitigation through the sales of trade financeinstruments. The significant cross-sell potential, ability to build lasting andsticky client relations and the low loss ratios of the instruments make for anattractive business for banks.

However, the trade finance market ischanging drastically. Digitization is oneof the key drivers: interaction betweencorporates and their banks happens moreand more through online channels, andtechnical solutions to fundamentallyreplace paper document flows byelectronic data flows are becomingreadily available.

At the same time, large corporates arechanging their expectations on the tradefinance solutions provided by their banks.

They are looking for the means to play anactive role in the stabilization of the supplychains to which they belong, while at thesame time being able to benefit from theadvantages of open account transactionswhere possible.

Banks need to step up their game. Theyneed to innovate their trade finance clientofferings to include supply chain solutions,

apparent adverse economic Bank PaymentObligation products and sophisticatedonline channels to access traditional and

new products. At the same time, they needto invest in the efficiency of their processand technology capabilities to ensure anoffering that is competitive both in termsof price and quality.

And they need to do it fast, sincecompetition from global and local player isgetting fierce.

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References

1

ICC “2014 ICC Trade Register Report”

2 “International Trade Statistics 2014”World Trade Organisation, 2014

3 Anderson, Kym; Strutt, Anna. 2011.Asia’s Changing Role in World Trade:Prospects for South-South Trade Growthto 2030. © Asian Development Bank;Accenture Analysis.

4 East & Partners Trade Finance ProgramJanuary 2014

5 CEB TowerGroup “Trade FinanceApplications”

6 “Trade Services Utility” SWIFT

7 http://www.reuters.com/article/2015/03/11/us-alibaba-group-britain-idUSKBN0M70HW20150311

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http://www.reuters.com/article/2015/03/11/us-alibaba-group-britain-idUSKBN0M70HW20150311








About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company, with more than336,000 people serving clients in morethan 120 countries. Combining unparalleledexperience, comprehensive capabilitiesacross all industries and business functions,and extensive research on the world’smost successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses andgovernments. The company generated netrevenues of US$30.0 billion for the fiscalyear ended Aug. 31, 2014. Its home page iswww.accenture.com.

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ContactsEdle EveraertManaging Director,Accenture Banking

Edle is a managing director in Accenture’sBanking practice, and is the global lead fortransaction banking and trade finance. Shehas 15 years of experience in management

consulting in different domains, includinggrowth strategy, online and mobile strategy,product innovation, cost reduction, processand organization redesign, with a strongfocus on corporate banking.

[email protected]

Diane NolanManaging Director,Accenture Capital Markets

Diane is a managing director in Accenture’sCapital Markets practice. She leadsAccenture Management Consulting Capital

Markets globally, driving a number ofbusiness transformation offerings, includingTrade Finance, Post-Trade Services andWealth & Asset Management. With 20years experience in capital markets, Dianeis also responsible regionally for AccentureTrading Services in Belgium, France,Luxembourg and the Netherlands (Gallia).

[email protected]

Tomasz WalkowiczResearch Manager,Accenture Capital Markets

Tomasz is a member of the AccentureFinancial Services research team,specializing in the capital markets industry.Prior to joining Accenture, Tomasz spentfive years as Equity Research analyst atUBS where he covered banks, insurers anddiversified financials.

[email protected]

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