Advanced supply chain solutions are filling the open account gap

Companies are increasingly using open account transactions to facilitate mutual global trade and, while they benefit from new levels of speed and flexibility, they are also exposed to higher risk. Adeline de Metz and Raphael Barisaac, Global Co-Heads of Trade and Working Capital at UniCredit, outline how banks and corporates can mitigate against such risks.                                                                                                                                                

The rise of open account trading and the dramatic shift away from traditional trade finance instruments has been a continuous trend for over a decade now – with companies, both large and small, drawn by the appeal of increased speed, simplicity and reduced transaction costs. However, while open account trading has its advantages, it also limits exporters’ access to credit and exposes them to heightened levels of risk.  

How, then, can companies address the risks associated with trading on open account terms? How can banks help them with this while improving corporate access to credit? And can we be optimistic, that, moving forward, businesses – large and small – will be able to continue trading with confidence?

These are big questions for the world of trade finance, but the answers are starting to take form. By embracing innovative new working capital tools, investing in new technology, and increasing cross-industry collaboration, banks – and their corporate clients – can ensure success in a changing trade landscape.  

Enter supply chain finance

Based on the latest estimates, open account represents around 80% of trade transactions by volume and 35-45% of the value of all traded goods – percentages which are expected to keep growing in the years to come.[1]  This is certainly no surprise: open account settlement generally serves to reduce paperwork, simplify supply chain processes, and lower costs. Yet it also comes with its drawbacks. Chief among these is increased exposure to risk – be it from the spoilage of shipped commodities or a counterparty default.

Thankfully, there are several options that banks and corporates can explore to bolster the security of open account trade.  In its broadest sense, supply chain finance – incorporating techniques such as accounts receivable financing, forfaiting, factoring and payables finance – represents an important means for suppliers to access credit and mitigate risk when trading on open account terms.

Payables finance, in particular, has proved popular with corporate buyers in recent years. Using payables finance, a seller of goods has the option of receiving the discounted value of its receivables (represented by outstanding invoices from the buyer) before the due date, and at a more attractive rate than it could obtain on its own – since the financing cost is aligned with the higher credit rate of the buyer.

These programmes have historically been accessible to only the largest suppliers in a corporate buyer’s supply chain – with slow on-boarding processes and KYC and AML procedures both limiting banks and putting a strain on smaller business. However, new, innovative solutions on the market are now targeting a wider subset of suppliers. For example, UniCredit has co-operated with several fintechs to offer  clients innovative solutions – ranging from supply chain finance portals that auction approved supplier receivables, to those that are able to rapidly on-board thousands of suppliers from all over the world.

In addition, banks such as UniCredit now offer a variety of solutions to directly assist suppliers trading on open account terms. Single-name forfaiting, for example, enables exporters to secure financing immediately by selling their receivable contracts from a single debtor, while digital forfaiting allows exporters to sell large numbers of invoices on a revolving basis. Factoring, meanwhile, is an ideal solution for those with diverse domestic portfolios.  The most sophisticated clients with large pools of receivables also look at securitisation and structured solutions as efficient ways of obtaining off-balance sheet liquidity.

The power of blockchain

Moving forward, a blockchain-enabled system, that connects all members of a supply chain (including sellers, buyers, shippers, insurers, inspectors, banks and even investors) via the same ledger, could also prove a truly transformational technology for companies of all sizes trading on open account terms. Substituting large numbers of proprietary, centralised databases with one open-source, relatively simple, protocol would provide corporates with a more comprehensive and real-time view of supply chain flows – dramatically driving down infrastructure costs for both banks and corporates.

However, developing and implementing such technology on the required scale hinges on collaboration and dialogue between the various participants in the trade finance ecosystem. Recognising the importance of industry-wide collaboration, in January 2017, seven European banks, including UniCredit, signed a collaborative agreement to develop and commercialise the “Digital Trade Chain” solution (now known as – a new cross-border trade finance platform for SMEs, based on distributed ledger technology. now has nine founding member banks, with a new joint venture company soon to be introduced.

With a first test release live with select clients from the second quarter this year, and full deployment expected after the summer, participant members are confident that will vastly accelerate the order-to-settlement process and facilitate end-to-end transparency for trade transactions. This should be a big boost for Europe’s SMEs – helping foster trade throughout the continent and giving companies more confidence when on-boarding new trading partners.

Collaboration for now and for the future

This new culture of collaboration – bringing together banks, fintechs and regulators, to work on common objectives – may hold the key to developing a new generation of trade finance innovations in the future. Pooling the resources, expertise, and outlooks of a range of industry participants can help foster digital innovation in a way we’ve never seen before.

However, banks, corporates and third-party providers must remain wary of allowing long-term visions to cloud their view of solutions that can offer benefits to their clients in the here and now. Technological innovations, such as artificial intelligence (AI) and enhanced data intelligence, could actually have a more significant impact in the near term. Indeed, a number of providers are now exploring how AI could be used to enhance the efficiency and accuracy of KYC and risk management processes and, in turn, improve overall process speed and cost-efficiency.

In addition, there are many tools already available that can help corporates guard against counterparty risk. The BPO, for instance, sees the importer’s bank undertake an irrevocable promise to make a payment on behalf of its client upon the matching of trade data – effectively guaranteeing payment for the exporter.

Corporates therefore stand well-equipped to manage the risks associated with open account trade. And the future holds promise of even better tools – with new collaborative solutions enabling them to manage their risks effectively and run their businesses with confidence.