Driving the Trade Finance Agenda in Europe
An Executive Interview with Thomas Dusch, Managing Director, Head of Trade Finance International Sales Germany, UniCredit
In this month’s Executive Interview, Thomas Dusch of UniCredit talks to Helen Sanders, Editor, about some of the trends he is seeing in the way that trade finance and working capital financing solutions are being used by European corporates.
What trends are you seeing in the use of traditional trade finance instruments in Germany and other parts of Europe?
As an exporting nation, the guarantee business has always been important in Germany, whether classic bonds, performance bonds or other variations, reflecting the industrial diversity across the country. While trade continues to be strong, we are seeing a shift in trading counterparties. For example some export business has declined, while some has become more complex. At the same time, new markets are developing, however, such as in Africa and Middle East, and more recently emerging markets in Asia, such as Pakistan, Bangladesh and Myanmar. As new markets open up, letter of credits are more important than ever before, as corporations are often doing business with less familiar counterparties.
Amongst large multinational corporations, import letters of credit (LCs) are less important, as they often buy on open account. In contrast, export LCs remain essential, and their use continues to grow, for similar reasons to the increase in guarantee volumes.
To what extent has the trade finance market become more competitive in recent years?
The trade finance market, including guarantees and LCs is a highly competitive market, and this has increased since the global financial crisis as many banks have rebalanced their activities away from investment banking in favour of corporate and commercial banking. Many banks are keen to establish a presence in Germany, and trade finance is typically seen as a low-risk activity with low barriers to entry. Furthermore, banks are far less reluctant to lend to other banks than they were during the crisis, so correspondent banking and inter-bank lending is increasing, and banks want to use their credit lines.
Although growing competition is putting pressure on pricing, trade finance has not become a commoditised product offering. Corporate treasurers, finance and purchasing managers recognise the importance of high-quality trade finance solutions that are structured specifically according to their needs, provided by a bank with proven experience and expertise, and typically consider these issues a higher priority than price when selecting their trade finance banking partner.
With working capital optimisation becoming a higher priority, what impact has this had on corporate demand for trade finance and working capital solutions?
Just as cash management has seen an enormous expansion in the range and value of services that banks offer to their corporate customers, there has also been renaissance in the breadth and diversity of trade finance and working capital solutions that are available. As corporate customers of all sizes and industries focus on working capital and unlocking value from the supply chain, solutions such as receivables finance and inventory management are becoming increasingly prevalent. While US corporations were amongst the first to adopt these solutions, particularly as trading receivables was more common than in other regions, corporations in Europe are now becoming more proactive in working capital optimisation.
You mention that the US is more advanced in the use of working capital financing programmes: what other regional variations in the use and demand for these solutions would you highlight?
Regulatory, cultural and market conditions all play a part, so programmes that have been successful in one region can often not simply be replicated in another. For example, as working capital financing is currently more advanced in the US than in Europe at this stage, financing levels are typically higher, resulting in more syndicated programmes, while at this stage, working capital financing programmes in Europe are typically bilateral. With the EU late payment directive now implemented in most EU countries, supply chain financing might gain even more momentum. However, the value proposition of supplier financing, together with other working capital programmes, will vary according to the commercial model, industry and priorities of each enterprise.