How We’re Reinforcing the ‘Open Account’
by Dave Phillips, Global Head for Trade Services and Supply Chain Finance, Lloyds Banking Group
What’s exciting, argues Dave Phillips, is how rapidly banking technology is developing to facilitate trade by meeting two supply chain funding challenges in today’s increasingly testing global environment.
In today’s uniquely risk-laden global conditions, how can we strengthen the essentially trust-based advantages of Open Account trading? It’s an intriguing, and to me, an increasingly pertinent question as UK corporates seek to streamline their financial supply chain in their drive into new and often unfamiliar international markets.
Right now, let’s remember, some 85% of all global trade transactions are estimated to be managed on an Open Account basis. For more than two decades, it’s grown to become what is now the world’s optimal trade model, far outstripping the settlements still made with traditional trade products such as letters of credit. But as the dynamics of global trade have shifted towards new growth arenas of Asia and South America, international corporate clients are increasingly confronting their banks with two specific challenges: first, how to extend the benefits of Supplier Finance/Approved Payables programmes to suppliers in the world’s key growth geographies; and second, how to deepen funding access across a greater sweep of supplier cash flow needs in those territories.
It’s worth recalling how we have evolved to this point in Open Account trading. It began with the need of larger corporates to complement the drive for greater efficiency in the management of their physical supply chain, with a similar focus on the financial supply chain. Technology and improved communications gave companies greater confidence about trading without having to rely so exclusively on some of the traditional and administratively more burdensome protections like letters of credit. Open Accounting created much quicker, simpler, smarter routes to manage agreed trade terms and payment conventions.
New pressure to conserve cash
For larger corporates, there’s now new pressure to conserve cash by stretching their trade terms. They have increasingly deployed the Supplier Finance/Approved Payables model to ease their suppliers’ cash flow pressures by accelerating payments on privileged terms – and, in return, seeking lower pricing from their suppliers.
And now, as economic environments have deteriorated, larger companies have become even more concerned about the intensifying vulnerability of their key strategic suppliers. That’s generated a heightened interest in using the Supplier Finance/Approved Payables programmes effectively to wrap protective arms around their key suppliers with both faster invoice settlements and with much cheaper rates than they would get on conventional loans or overdrafts.
It is out of these evolving approaches to the financial supply chain that today’s distinctive new challenges emerge for bankers. How we confront them will determine how effective we are in remaining fully intermediated with the dynamic funding demands of the corporate players whose international trading we’re in business to facilitate.
What corporates want
We are all well acquainted with these Supplier Finance/Approved Payables programmes in familiar economies like the UK and US. The first challenge now is for banks to extend that expertise by mining into the supply chain of their corporate clients so that the on-boarding, explanation and recruitment of key suppliers to these same Open Account programmes works every bit as smoothly in the emerging growth markets of Asia and South America. Beyond that, what major corporate clients want is for banks to develop techniques which will effectively ‘reverse-extend’ the scope of their Open Account facilities so that they cover more than is now possible of the pre-shipment costs being incurred by corporates’ key strategic suppliers.