Global trade finance banks have been evolving for years to meet changing client requirements, writes Jon Richman, Managing Director, Head of US Trade and Working Capital at Santander.
In the early days of trade finance, most banks were simply managing letter of credit departments, sometimes without even realising these were important revenue-generating activities. Over time, the banks that have chosen to remain competitive in this business have been building their global capabilities to facilitate a wider range of cross-border activity, automating end-to-end processing, and enhancing their credit models and risk distribution capabilities. Over the last two decades these banks have been developing trade finance solutions for open-account based trade, including receivables purchase and supply chain finance, which can significantly benefit the working capital management of their corporate clients.
During this period, the leading trade finance banks, like Santander, have migrated from being letter of credit processing shops serving the mass-market to becoming the new strategic advisors for senior treasury and C-level executives of the most sophisticated corporates in the world. We now help corporate clients to identify best methods for enhancing cash flow/working capital (for select large cap corporates this can deliver real value in excess of US$1bn) while also improving supply chain competitiveness.In the early days of trade finance, most banks were simply managing letter of credit departments, sometimes without even realising these were important revenue-generating activities. Over time, the banks that have chosen to remain competitive in this business have been building their global capabilities to facilitate a wider range of cross-border activity, automating end-to-end processing, and enhancing their credit models and risk distribution capabilities. Over the last two decades these banks have been developing trade finance solutions for open-account based trade, including receivables purchase and supply chain finance, which can significantly benefit the working capital management of their corporate clients.
Not surprisingly, the types of substantial investment in technology, products, capital and people expertise to deliver in this new environment has limited the number of truly global leaders in this new trade finance space, while some banks and technology providers have carved out niche geographic or product positions. For Santander, offering the full range of trade finance advisory and related capabilities globally, including in the US where major corporates are driving global supply chain activity, is an imperative.
Working capital advisory
Armed with new tools for helping clients manage working capital, Santander has developed techniques for analysing and quantifying the working capital-related opportunities for using these new receivables purchase, supply chain finance and related product capabilities. Through analysis of our clients’ accounts and internal/external data sources we can find areas for improvement, for example, where our clients could reasonably shorten their customer sales terms (Days Sales Outstanding) or extend supplier payment terms (Days Payables Outstanding) to be on par with industry averages or best-in-class peers. By working with our clients to better manage working capital, in a manner that is also beneficial to their supply chain trading partners, substantial value can be created for all parties.
We have seen clients use these tools to free up substantial cash flow that can materially improve liquidity and leverage ratios, increase sales or reduce risk – all with the goal of increasing their enterprise value. Working capital management is now widely seen by our clients and by the market as a critically important measure of the health and efficiency of a company’s operations.
Antoine Arts, Head of Global Transaction Banking in the US for Santander, says: “The value we can provide to our clients today in a working capital advisory capacity is many multiples of what we historically considered for our clients just through the provision of traditional trade finance and cash management products.”
Factoring, where a bank or finance company purchases the receivables/invoices of its clients, has been one of the most simple and traditional products offered, usually to smaller and mid-sized corporates as a source of additional liquidity. Large corporates wanting to improve working capital often used securitisation tools to sell their receivables through highly structured programmes requiring special purpose vehicles, external ratings and firmly established eligibility and reporting requirements.
More recently, Santander has combined the best of these techniques, enabling its clients to access more flexible and comprehensive solutions. Through its own innovative risk models that make internal use of securitisation methodologies for capital calculation purposes, Santander is able to evaluate the risk of a receivables portfolio based on the performance of the pool of a clients’ obligors rather than relying primarily on the quality of each individual obligor. This approach means that we can offer clients more comprehensive global risk coverage of obligors at 95-100% of invoice value, off-balance sheet treatment involving limited or non-recourse solutions, and favourable pricing to each client that reflects the diversified benefits of Santander’s deep global pool of receivables. This can be achieved for clients with an easy set-up that does not require a client to change the way it manages its receivables today.
Santander’s large corporate clients in the US and in other major centres can now use these tools, either independently or in conjunction with securitizations, to reduce payment risk and Days Sales Outstanding, or to extend terms to customers in order to grow sales.
Supply chain finance
With the relative decline in letter of credit usage, supply chain finance has become one of the most widely used tools for managing working capital. Essentially these programmes involve large corporate buyers accepting invoices that their suppliers can immediately discount via the supply chain finance bank for early payment. As the large buyer is usually more creditworthy, the supplier is able to access this liquidity at a relatively advantageous price compared to its own cost of capital. The large buyer will generally look to extract some value from suppliers for offering these programmes via a supply chain finance bank, usually in the form of extended payment terms (Days Payable Outstanding) or at a reduced unit price for the underlying goods or services.
These programmes are now very prevalent in the market and clients are looking to reach their suppliers all over the world with ever-increasing automation and functionality, including embedded foreign exchange conversion and pre-shipment finance. Santander has been at the forefront of developments in this space, offering its clients a truly global platform that has rich functionality and ease of use even for the smallest suppliers. As these programmes have grown in size, the leading trade banks also offer funding participations to other banks and institutional investors to optimise capacity and economics for all parties.
The business of trade finance has re-invented itself over the last two decades. Through new working capital advisory tools and related product capabilities, the trade finance business is now seen as strategically important to our clients.
Rogier Schulpen, Global Head of Trade and Working Capital for Santander, says: “We back-up what we claim for our clients in the advisory process with the most advanced set of receivables and supply chain finance solutions available in the market.”
For Santander, as a global leader in the industry, we expect the rapid evolution of trade finance to continue in full force – bringing ever increasing value to our corporate clients and their trading partners.