Trade finance is going open account

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.”

Today only 5% of B2B trading is credit insured. That means 95% of global transactions are at risk.

Raphaël Caruso, Head of Innovation Lab UK-NEUR, Euler Hermes Digital Agency

Can banks keep up with corporate demands?

This changing landscape has created a shift in customer needs. Today’s corporate businesses operate in a high-risk and trade-intensive environment built up of relatively small transactions—creating a greater demand for trade insurance. And a lot of these transactions are one-off deals instead of repeated or ongoing purchases.

As this trade intensity increases, so does the importance of cost efficiency in risk mitigation. Every extra hour spent on administration is amplified when you’re dealing with thousands of small transactions. This means cost and admin efficiency is key for corporates when they seek out a trade solution. “They want to drive down unit costs and streamline their finance solutions as much as possible,” Zekkar says.

But many banks are struggling to give their customers the efficiency and protection they need. “Banks can struggle with the changing mindset, legacy infrastructure and a lack of knowledge,” explains Zekkar. “Some are lacking knowledge about new financing options, while others lack traditional skills. We’re in the middle of a generational shift—we need to adapt to the new world.”

The barriers of regulation compliance

Companies are also becoming frustrated by the barriers of regulation compliance. Updates to the Basel III framework have put more pressure on banks to implement strict capital requirements—meaning some companies no longer have access to traditional finance solutions.

When companies do receive financing, they must accept the administrative costs associated with compliance. Banks act as gatekeepers, helping the customer make sure they aren’t doing things they shouldn’t be. But as regulations grow tighter this can be time consuming. “Compliance with regulations can be admin-heavy, old fashioned and costly. Especially in today’s new environment where speed is of the essence,” says Zekkar.

The fact that many banks have different interpretations of Basel III has only exacerbated the problem. “I think there were a lot of different interpretations of the rules, which caused an imbalance in the market,” says Zekkar. “Customers understand that the regulations have a capital effect on the services banks can offer, but they don’t understand why the amount varies between banks.”

All of these problems combined are adding costs and complexity to trade finance, which many companies can’t afford. Banks are struggling to overcome these barriers and meet their customers’ needs.

Compliance with regulations can be admin-heavy, old fashioned and costly. Especially in today’s new environment where speed is of the essence.

Patrik Zekkar, Head of Trade and Working Capital Management Sales at Nordea

The answer lies in an unlikely partnership

The answer to many of these challenges may come in the form of a once-unlikely partnership. Banks are considering co-operating with credit insurers to develop solutions that meet the needs of today’s corporate customers—especially as more of them shift towards open account trading.

“Global trade is increasing, while traditional methods of trade finance—such as letters of credit—are decreasing. But trade still needs to be financed. So how can we make that possible in the banking system? Credit insurers are part of the answer,” says Urban Ljungblom, Trade & WCM Sales Development and Digitalisation, Nordea.

There’s already been substantial growth in this area. “I started working with credit insurers around 2002. Back then, the market was still immature—and we were somewhat sceptical of each other,” remembers Zekkar. “This relationship has developed enormously over the years.

“We now partner with a lot of PRIs. All the big ones. The products we offer for operational financing, trade financing, receivables, factoring, capex and export finance—all of these solutions involve credit insurance. So our utilisation of credit insurance has progressed a lot.”

Developing future all-in-one solutions

By working together, banks and credit insurers could potentially develop all-in-one finance solutions for customers. Banks add value to the customer by handling the trade documents, providing finance and facilitating transactions. The credit insurer provides the customer with international risk mitigation and protection in the case of non-payment.

“I think we complement each other,” says Zekkar. “Together we can jointly manage the company’s overall needs—documents and compliance, the whole supply chain, risk mitigation. It really makes life easier for the customer.”

“Trade parties are working together more tightly than they did a decade ago. This is enabling us to offer jointly developed products,” agrees Ljungblom. “From a corporate’s point of view, it means risk is no longer the primary concern—finance is. By bringing credit insurers to the table we can make our customers’ transactions bankable.”

A very tangible benefit for corporates would be reduced capital requirements. Because the largest private credit insurers are highly-rated worldwide, their reputation can lower the capital barriers to obtaining finance. “When you have a reputable company like Euler Hermes acting as a guarantor—instead of another bank in a developing country—that’s a completely different ball game,” says Ljungblom.

Banks can also play a role in reducing credit insurance costs for customers, especially for SMEs which conduct a large amount of low-value transactions. “We can aggregate all their transactions and bundle them for the insurance company, helping the SME get an attractive price,” says Zekkar. “It’s a win-win-win situation.”

Yet another benefit for corporates would be access to enforceability. The largest credit insurers have global reach and experience with chasing debts—something that banks alone aren’t in a position to offer. With dual solutions from banks and credit insurers, customers could benefit from this reach—meaning less payments go into default.

I think we complement each other. Together we can jointly manage the company’s overall needs—documents and compliance, the whole supply chain, risk mitigation. It really makes life easier for the customer.

Patrik Zekkar, Head of Trade and Working Capital Management Sales at Nordea

The future of integration and platformisation

So, what’s next for banks and credit insurers? “I think the next step is consolidation,” says Zekkar. “The customer wants to buy trade financing, payment services and risk coverage in the most convenient way possible. So I think the future will involve integrated channels—whether this is in the form of a multi-bank ecosystem or community, or something else.”

Caruso agrees that integration and platformisation should be key priorities. “A growing amount of today’s trade is done on platforms and marketplaces,” says Caruso. “Fundamentally, technology is changing us, our partners and our customers. Today’s customers won’t accept that it takes five meetings to get a credit insurance policy, when it takes only ten minutes to create a company with an online tool like Stripe Atlas. That’s why our new generation of products is API-based. It means we can make credit insurance available at the click of a button.”

API-based software allows other programs to interact with it, enabling a wide range of plug-and-play solutions. “Having an API strategy is crucial for financial institutions today because it can help us to make products more accessible. It creates a frictionless customer experience. We believe that platforms are the ideal channel for distributing both credit insurance and trade finance.”

Caruso also thinks that platforms will help banks and credit insurers to liberate underlying data, which has mutual benefits for everyone. “Banks and credit insurance do not have the same kinds of data, so we can gain a lot from sharing it with each other,” says Caruso. “The insights we gain can lead to really interesting possibilities—developing new underwriting models, for example, or new value propositions which are more customer-centric. Sharing our data sets can help us to meet and exceed the expectations of our customers.”

As big data, AI, and sophisticated analytics tools become more available to SMEs, they’ll be able to predict and manage credit risks more effectively than ever. Caruso says we’ll definitely see more of this: “I think we’re already seeing that companies are ready to share their accounting and banking data in order to get access to superior trade finance services.”

Technology is changing us, our partners and our customers. Today’s customers won’t accept that it takes five meetings to get a credit insurance policy, when it takes only ten minutes to create a company with an online tool.

Raphaël Caruso, Head of Innovation Lab UK-NEUR, Euler Hermes Digital Agency

The impact of distributed ledger technology

Trade finance is more than ready for innovation and disruption. And the experts agree that the potential of blockchain or distributed ledger technology (DLT) on future markets is significant.

“Blockchain has the potential to add trust and integrity to trade, and remove the need for third-party intermediaries,” says Caruso. “It could help to simplify the ecosystem, with all the transactions being added to a single public or private ledger—reducing the clutter and complexity of multiple ledgers, while ensuring high-quality data. It could also facilitate faster transactions at a lower cost.”

“Credit insurers, banks and trade parties could all work with the same ledger—helping to ensure transparency and paving the way for more integrated financial services,” agrees Ljungblom. But while there’s consensus about DLT’s potential, the experts agree that the technology is still in its early stages of life.

For now, Caruso believes that credit insurers, banks and their customers should focus on the benefits that readily available technology already offers. “We live in very exciting times, where international trade is increasingly facilitated by the emergence of technology. However, with digitalisation the risk is also higher. My advice to corporates is to make the most of your data. By sharing your information with credit insurers, you can access real-time market insights, and gain visibility of the changing risks you are facing.”

A special thanks to

Raphaël Caruso, Head of Innovation Lab UK-NEUR, Euler Hermes Digital Agency

Patrik Zekkar, Head of Trade and Working Capital Management Sales at Nordea

Urban Ljungblom, Trade & WCM Sales Development and Digitalization, Nordea

Learn about Nordea’s trade finance solutions

To learn more about our trade finance solutions, contact your Trade Finance advisor or visit: Nordea.com/tradefinance

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