An increasing number of Australian companies are negotiating international trade finance for themselves.
Following the increase in volume of trade going through Australias shores, the banks are seeing consolidations of both buyers and sellers in the trading space.
Often Australian companies that sell or use many imported goods pay for them in Australian dollars and rely on large wholesale companies to handle the importing for them. These wholesale companies often import directly from their parent company so they can eliminate many of the importexport risks. However, an increasing number of Australian companies are negotiating international trade finance for themselves.
Research company East & Partners estimates the trade finance market is worth more than $1 billion in fees and charges to the banks each year. International trade transactions have a number of complications and risks that are not usually present in the domestic market. These may include geographic separation, different legal and banking systems, difficulties in recovering and returning goods, the introduction of foreign currencies, the international remittance of payments, and the economic deterioration of some countries.
While smaller players seem happy to trade on open account, larger corporates are becoming more concerned with risk management, liquidity management and balance sheet management.
Andrew Webb is head of product solutions, international trade finance for the ANZ Banking Group. The demand for trade finance crosses over many client sectors, from SMEs through to large multinational corporates, as well as importers and exporters, he explains. Generally, large corporates needs are more specific and sophisticated and therefore they seek specialised trade solutions that facilitate or address a specific client need, such as liquidity, risk management or balance sheet treatment. Our SME client needs are more general and often packaged into simplified bundled pro-positions.
Webb says trade finance products can be generalised into three broad categories.
Working capital solutions provide financing to enhance or provide liquidity support during the supply chain management or natural cashflow cycle of the client. This demand is growing as industries move to just-in-time delivery (placing greater pressure on financing structures supporting these inventories further down the supply chain). Risk management solutions provide protection against a series of non-payment (default and/or performance) type risks. Within this space receivable discounting is particularly popular at present.
Transactional solutions provide electronic channels to facilitate payment and trade products that improve operational efficiency and/or management reporting capabilities.
The major products used in international trade finance are: sight and term documentary credits; trade advances in a range of currencies supporting pre and post-shipment finance of trade transactions; collections (import and export); without recourse export finance (post-shipment financing of documentary credit transactions on an open or silent basis); and open account export finance (invoice financing on a post-shipment basis covering both goods and ser-vices).
Michael Reidy, executive manager of trade services for the Commonwealth Bank, says trade holds a number of key risks to businesses, including payment risks. [There are] issues in collecting payments from business at large distances and foreign currency risks, Reidy explains. Trade solutions are designed to improve the capability of business to grow in highly competitive markets.
Reidy says the bank uses these products as tools to design a solution for customers that supports short-term working capital finance and reduce the risks associated with international or domestic trade, he says.
Trade finance usually starts with letters of credit and then moves on to collections. When a pattern of trading and trust develops, the parties move to open account financing. Open account is when two parties have had a long and close relationship. Payment arrangements are similar to domestic arrangements, with goods being shipped to an importer and payment made by the importer after the arrival of the goods.
Open account can be a lot cheaper but it is not for everybody, Reidy says. It is usually for a long-term relationship. In some areas trade finance has not changed in decades, and letters of credit are still in demand from both importers and exporters.
Manuco Electronics is an importer and distributor of electronic components and integrated circuits sourced from overseas manufacturers, predominately the Sharp brand from Japan. In the past we used L/C (letters of credit) to pay our major supplier, Sharp Corporation, explains Manuco Electronics general manager Susan Molony. In order to save on fees, we renewed the same L/C on a monthly basis. The disadvantages of the L/C were mainly those of negotiation fees, its time-consuming renewal pro-cess and lack of flexibility.
Reidy suggests the nature of an organisation, its activities and market segment will affect the type of solution that is sought. Larger corporates in general terms have benefited more strongly from the cumulative impact of 15-plus years of economic growth, he says. Their balance sheets and profit and loss/cashflow have driven a capacity to reduce overall indebtedness on the import side while allowing more aggressive positioning of export business on a non-recourse basis.
This is particularly the case with commodity exporters in the minerals and agricultural segments says Reidy. Larger corporates will tend to be multi-banked and seek specific solutions around technology/cost and capability to support receivables and payables financing domestic or international. This will likely be integrated as part of an electronic platform and linked to the banks online system.
SMEs on the other hand are more likely to seek a total banking solution that will incorporate all aspects of their banking needs set, including branch support, he says.
At the micro-business end, companies can send out payment details and start trading on the net. The banks see businesses selling goods from $700 to $1000 as able to trade using this method. Obviously eBay has made international trading via the internet much more acceptable, says small business owner Edward Howard. As a regular importer and exporter of overseas luxury goods, I have no problem buying internationally over the net and paying direct using eBays Paypal secure system using my credit card. I trust eBay to authenticate the counter-party for me.
Paypal has recently reported it has almost 2 million users in Australia, though how many of them are active is another matter.
Larger import companies are using telex transfers via online banking systems that provide an exchange rate on the spot and arrange third-party payments. One ex-banker warns this is an area in which companies may be losing money. Companies may be getting online rates. These are the carded rates the rates used for travellers cheques, which have worse spreads than the rates direct from a banks treasury. So as a business and volume of trading grows, its worth negotiating the rates and fees available from banks for foreign exchange and letters of credit. There may be room for improvement.
We now use T/Ts (telex transfers) for the majority of our overseas payments, Manucos Molony says. We have an online system from NAB, which means that we maintain the database, and can access our foreign currency account balances and the like. The cost is more reasonable a fee per transaction as there is less work done by the NAB. The change was implemented to reduce overall bank charges, which become significant in L/Cs.
One major top ASX-listed company uses letters of credit, even for small amounts with joint venture partners. The treasurer was told the reason for this is because suppliers need it so they can discount their documents in the market to raise funds.
There is some movement in the industry as corporates and institutions are wanting simpler tools such as overdraft and credit card. However, the new accounting standards and Basel II (the international framework for capital allocation that measures how banks allocate their capital) are refocussing banks on how to deliver the products. The ANZs Webb says: The only consistent is change and within trade finance this is true in relation to recent changes to accounting standards and the adoption of the new Basel II framework accords.
Like our clients weve had to review and modify some of our solutions to ensure the recording treatment/classification remains appropriate under the new accounting standards. However, of all the changes facing the banks today, this has been relatively minor.
Whereas changes under Basel II (from an industry perspective) have had far greater implications as banks navigate their way through the regulatory implications of the new capital allocation frameworks. Banks, like all companies need to optimise their use of capital.
Mark Hedges, treasurer and risk manager of OneSteel, says his company has been increasing exports over the past year, particularly into China. All this business is on a letter of credit basis. Previously OneSteel used an Australian bank for all its letters of credit, but found this was not providing the specialisation needed for the China market and now uses a foreign bank that has a local office and staff on the ground in China. Once the documents are presented to the bank in China and accepted, which may take time, it usually takes another seven days to pay after acceptance.
We use letters of credit as it provides the best insurance and moving to open account would increase the risk profile and we are not comfortable with the process as yet, Hedge says. Even with L/Cs lack of clarity makes life difficult. One, the document has to be 100 per cent right and two, you have to physically get them to the bank. Using a local bank does help with those issues.
Webb says that trade finance over the next few years will evolve. There will be growth in Asia and the increasing connectivity with trade flows to and from Australia. Businesses will also increasingly move to transacting open accounts. And there will be increased demand to bundle working capital, cash management and hedging solutions to best meet overall client needs.
Critical to the success of banks in this area will be investment in core trade platforms to reduce processing costs, enhance capability and remain globally competitive.
Banks will also need to achieve advance Basel II accreditation to optimise capital, and offer innovative products to customers.
So while the form or method of trade finance may change, Webb says, the underlying principles and relevance of trade finance will remain for many years to come.
Reidy sees a continuation of the trend to open account financing. He also predicts an integration of trade/transaction services and cash management as part of the development of true working capital finance solutions, and increased use of technology to drive out cost and improve the customers access to transaction data.
He says there will be regional expansion of domestic banks as they look to follow their customers. The level of competition in the Australian banking market has pushed margin compression on the import side and cut country risk margins, says Reidy.
