The landscape of trade finance has changed dramatically in recent years. With globalisation intensifying competition, more businesses are turning to open account trade—but this has inherent risks for sellers. We spoke to the experts from Nordea and leading global credit insurance provider, Euler Hermes, about the future of trade finance—and how companies could benefit from banks and credit insurers working together.
The rise of open account trading
Trade finance has never stood still—but in the last decade its most fundamental rules have changed. Cultural, geographic and communication barriers are dissolving, facilitating a significant increase in international trade. In this hyper-connected world, even the smallest companies can use technology to sell their products overseas. And shipments that once took weeks or months now happen in a matter of days.
“It’s not only the pace of physical movement which is changing, there’s also been a huge increase in the volume of trade,” says Patrik Zekkar, Head of Trade and Working Capital Management Sales at Nordea. “We’re seeing new trade routes. We’re also seeing new types of products—intangible goods like software—being sold internationally.”
With globalisation increasing trade volumes, bringing new players to the market and intensifying competition, there’s increasing pressure on sellers to meet buyers’ demands. This often happens in the form of flexible payment terms. There’s been a shift towards open account trading—where goods are delivered sometimes weeks or months before payment is due.
Open account trading can benefit growing companies and SMEs, making them more attractive to buyers and helping them gain a competitive edge. It also speeds up the transaction cycle and frees businesses from reliance on traditional finance instruments like letters of credit. But it’s far from a perfect solution.
International trade risks are increasing
While open account trading has benefits for buyers, it substantially increases the risk of sellers not being paid. “In the current world of B2B trade, there’s a high risk of customers becoming insolvent and not paying their invoices, or failing to pay within the agreed terms and conditions,” says Raphaël Caruso, Head of Innovation Lab UK-NEUR, Euler Hermes Digital Agency. “However, today only 5% of B2B trading is credit insured. That means 95% of global transactions are at risk.”
It’s notoriously difficult for sellers to predict which transactions will go wrong. “On average, 40% of a company’s assets are in the form of trade debts. And sometimes this figure can be much higher. So it’s very hard for most businesses to predict who will default on payments,” explains Caruso. “Almost 50% of payment defaults come from vendors with whom a stable and long-term trade relationship has already been established.”
Globalisation and new technologies are having a major impact on how the corporate treasury manages liquidity. Many treasuries are shrinking in size at the same time as their financial responsibilities continue to grow. In this article, we take a closer look at the biggest liquidity challenges facing today’s treasuries.
With the rapid increase of international trade and digitalisation, treasuries need to find new ways of working. They face common challenges, such as risks posed by instability in overseas markets, international trade regulations and language barriers. They also need to ensure robust communication between the treasury and other parts of the business—notably the supply chain, sales and procurement departments. We spoke to Nordea’s liquidity management experts to learn more.
Treasuries are doing more with less
The group treasury is responsible for its company’s liquidity management. It’s charged with ensuring that cash is readily available and developing strategies to mitigate any financial risks. But treasuries around the world are facing increasing pressure to fulfil these objectives with less human resources at their disposal.
“There’s pressure to have fewer people in the group treasury than a few years ago. Now there might only be two or three people. Meanwhile, the treasury’s responsibilities are expanding,” says Vesa Paukku, Head of Business Insight at Nordea. “There are new challenges coming from the changing world and digitalisation.”
These new challenges include managing the use of rapidly evolving technologies. As businesses enter a world of increasingly real-time technology, where payments can happen in a matter of seconds, there are greater risks of cyber fraud to contend with. Treasuries need to strategise carefully to harness the benefits of digitalisation, while working closely with IT and taking concrete steps to communicate these risks across departments.
In the past, treasuries may have looked at bespoke IT solutions that were designed to support the way they operated. But now, they’re realising the benefits of streamlining and simplifying the technology they use.
“Before it was fashionable to have tailor-made solutions for your treasury, but now we’re seeing more interest in basic setups and file formats—companies want to use common technical standards,” says Paukku. This standardisation makes it easier to upgrade technology, maintain security and meet the objectives of both the treasury and the wider business. It also means that treasuries can work more efficiently with other parties—which is important as companies deal with increasingly complex international networks of buyers and suppliers.
Volati was managing several different business and financial systems with payment flows in different currencies from its 14 subsidiaries. In collaboration with Nordea, Volati found a solution that was both cost and resource efficient.
Nordea’s MegaTrends report is an annual publication that uses various data sources to map out the hottest market trends, what they mean for our corporate customers – especially treasury and finance departments – and how you can make the most of new opportunities.
One of the most discussed and analysed pieces of European Union financial legislation will finally be transposed into national law on 13 January 2018. But will the world change with the arrival of PSD2? Or will the financial industry – banks, corporates and customers - have to wait even longer before the effects are felt?
After years without political contact between Norway and China, bilateral relations are back on track opening up for a resumption of free trade discussions and increased cooperation in many other fields. “Bilateral trade has always existed between China and Norway, but we do recognise that the relationship on a political level has normalised as of late, which will leverage to a higher degree the trade between the countries, primarily on goods and services” says Corrado Lillelund Forcellati, General Manager, Nordea Bank Singapore.
One of the trade areas that was hit hardest was the export of salmon. According to data from the Norwegian government and DNB Markets, Norway was the leading exporter of salmon to China in 2010, but exports had shrivelled so much that in 2015, even the Faroe Islands were exporting more salmon to China.
In May 2017, however, there were clear signs that Norway’s seafood exports were back on China’s radar. A recent delegation to China ratified a new seafood trade agreement, comprised of USD 1.45 billion worth of salmon exports to China by 2025, as reported by Quartz. The agreement was signed shortly after Norwegian Prime Minister Erna Solberg’s visit to e-commerce giant Alibaba in April 2017. The following month, Taobao and Juhuansuan, two of Alibaba’s ecommerce platforms, hosted promotional events for Norwegian salmon.
A spokesperson for the ministry told Quartz that as part of Prime Minister Solberg’s April visit, Norway and China agreed to conduct regular discussions on a range of topics, including human rights. According to this spokesperson, the “normalisation of relations” would “create major business opportunities for both countries,” with discussions on a free trade agreement to resume.
“Norway and China have agreed to establish a consultation mechanism at a political level between our foreign ministries, where we can discuss all matters of common interest, both bilateral and multilateral, including issues relating to the UN, human rights, and trade policy,” the spokesperson added.
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EuroFinance 2017 round-up
At the end of 2017, Nordea announced that it would join the we.trade consortium as a founding partner. The consortium is, in conjunction with IBM, developing a platform based on distributed ledger technology (DLT) that aims at making domestic and cross-border commerce easier, safer and more efficient for companies. It is the first such blockchain-based trade finance platform, marking a milestone in the practical adoption of DLT in the financial industry.
A significant step forward in Blockchain/DLT adoption
Nordea joins Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societé Generale and UniCredit as a founder of we.trade, which will simplify trade finance processes for SMEs mainly. Larger companies have documentary credit (D/C) and tailor made guarantees as tools to reduce their risks, while these are not always appropriate for the SME segment. However, large companies that favour open account solutions may also find we.trade a good solution.
Ville Sointu, head of DLT & Blockchain at Nordea, explains the significance: “In the current broad landscape of blockchain technology based initiatives in trade finance we see we.trade as a standout in its focus and realistic execution strategy. We’re looking forward to providing a Nordic perspective to the future of trade finance.”