International trade is increasingly conducted on an Open Account basis. But BofA Merrill’s Bruce Proctor believes there is still a lot that banks can do to facilitate trade transactions for their clients – even if they are not using a Letter of Credit (LC).
Head of Global Trade
and Supply Chain Finance
Published: 1st May 2014
Bruce Proctor is the Global Trade and Supply Chain Executive at Bank of America Merrill Lynch, based in New York City. Proctor joined BofAML in October 2009 and has global responsibility for the firm’s Trade Finance and Trade Services business.
Prior to his current position, Proctor was the Global Trade Services Head at J.P. Morgan Chase and, before that, was the Trade Services Product Head at Citibank. He began his banking career with Continental Illinois, where he held a variety of relationship, credit and unit management positions, including ten years’ of experience in various Asian markets.
Proctor was awarded a BA degree in History from the University of the Pacific and an MIM in Finance from the American Graduate School of International Management.
How are banks developing their solution sets to support Open Account trade? What is the scope of the opportunity here?
For many of our multinational and larger corporate clients, regardless of geographical footprint, the move away from Letter of Credit (LC) to Open Account has been pretty consistent over the past few decades. I think that, to some extent, this has been driven by convenience. If, for example, you are a large U.S.-based importer and have a ten-year, unproblematic buying relationship with a supplier in China, you may decide that you know them well enough to form a more direct relationship. Many corporates have made that decision in recent years. While estimates vary considerably, the consensus view is that around 80% of global trade is now being executed on an Open Account basis.
Nevertheless, banks still have a role to play in this space. Although the actual transaction activity is taking place directly between buyers and sellers, there are still financing requirements on both sides. Exporters, for instance, might require funds on a pre-shipment basis and importers might want post-import financing to support those transactions. Also, corporates often find themselves struggling with the administrative burden when they move to Open Account. After all, the tasks that were previously undertaken by their banks – comparing documents and so on – are now suddenly falling on the shoulders of the importer. For that reason, banks play a very active role in providing their clients with administrative support, even if they are not using a product such as a LC.
How are regulations such as Basel III impacting the trade finance activities of banks?
Obviously, we’ve seen the regulatory landscape in finance change dramatically in recent years and there has been a lot of debate around the impact of some of these regulations – in particular Basel III –on trade finance. Before the recent revisions, it seemed as if Basel III was going to have a rather negative impact on trade banking.
But commercial trade financing is, generally, very short-term and provided it is structured properly, the activity is usually self-liquidating. That being the case, it seemed counterintuitive for regulators to interpret these types of transactions the same way they would a series of five-year term loans, and bringing items such as LCs onto bank balance sheets with a 100% risk weighting.
Our main concern was that this would create a view among corporate clients that the banking sector would be less able to provide trade credit support. Fortunately, we have seen some relief granted by the Bank for International Settlements (BIS) recently because there was a strong possibility that we would have seen some unintended economic consequences had trade credit availability been curtailed as a result of the regulation.
What other trends are you seeing in trade finance at the moment?
One thing I’m spending a lot of time on at the moment is the risk distribution side of the business. Trade finance, traditionally, has been a ‘book-and-hold’ type of activity. Since it was generally high-quality transactions – and an activity with a good payment history across the industry – risk distribution was never that significant a consideration in the past, relative to the longer-term structured lending that banks do.
Now, with the advent of tougher capital and liquidity rules, as set out by Basel III, there will, unavoidably, be some impact on banks’ ability to book and hold assets. Our response has been to look at ways to sell risks to other financial institutions. For example, these could be banks with a smaller origination capacity, but that would still like to be involved in markets where they don’t have a particularly strong presence. They could also be pension or sovereign wealth funds that have plenty of available liquidity, yet lack exposure to trade finance as an asset class.
How is the growth in trade receivables finance changing the ways corporates manage their working capital?
We are seeing an increasing number of clients taking a more active approach to management of their balance sheets. On the receivables side, fewer companies are prepared to wait long periods to receive payment on an invoice. Often, it is not that they have questions over the creditworthiness of a particular counterparty, they just want to improve cash flow and DSO so they are looking more actively to sell those receivables, usually on a discount basis.
I think it is important to distinguish this from factoring – where you sell your entire receivables portfolio – that, has been around for many years. The receivables finance that we are engaging in with our corporate clients is much more selective, and offers them greater flexibility. And clients are also finding that the process is becoming much more convenient and user friendly. At BofA Merrill, we have a technology platform that allows companies to electronically load and sell their trade receivables, see funds flow into their account and then, perhaps, into an investment account we are managing on their behalf – all through the same portal.
What issues need to be addressed to further the adoption of trade receivables finance solutions?
Different companies often have different views of the market – and what is acceptable or common practice. Some of our clients may be reluctant to have customers aware that they are selling receivables, for instance. So there are other considerations that come into play, regardless of how attractive may make these financing programs. In an instance such as that, we might offer to finance those receivables for the client instead. Ultimately though, we want to use our analytical capabilities to work with our clients and show them that the management of corporate borrowing power is really critical and that companies can, if they choose, shorten receivables or lengthen their payables, or perhaps do both, as a means to manage inventory. Of course, these are not new concepts, but the fact that these conversations are coming in the context of cross-border trade finance rather than in general corporate balance sheet management is certainly a newer development, and one which is becoming a very important tool for corporate treasurers.