“Those people at ANZ are just ruining it for everyone else,” the head of trade finance services at a global bank told me in Singapore last year, referring to the Australia and New Zealand Banking Group, the fourth-largest bank in Australia by market capitalization.
He was dismayed at how ANZ, which was then in the midst of its “enter Asia at almost any cost” strategy, was undercutting other banks in terms of transaction and other fees, and using its trade finance offering almost as a “Trojan Horse” to create its Asian business. The long-standing rules of the club had been disturbed.
That is good news to CFOs and treasurers in Asia. They are seeing more banks that provide low-cost financing to distributors, suppliers and other parts of the supply chain, purchase receivables to unlock working capital across the chain, and offer other supply chain financing services.
Foreign banks from America’s Wells Fargo through to Australia’s NAB, CBA and ANZ have much smaller Asian businesses and rely therefore on playing the niches and following their existing customers into Asia and taking it from there
Focus on Supply Chain
With intra-Asian trade on the rise along with cross-border procurement, the supply chain financing component of trade finance has been a particular area of focus for banks in Asia.
For the banks, supply chain financing is attractive for a number of reasons. With margins down, fee income from related trade products has presented as a good way to buttress the trade finance business, which itself has been a focus for many banks suffering from declines in other products.
Also, the more the bank can ingratiate itself into a supply chain of a corporate, the more important it will become for the company as one of its main banking partners.
These trends coincide with the push by foreign banks to expand in Asia. Given the competition in Asia’s banking markets, 2015 and now so far in 2016 have seen some fairly rabid competition from a slew of foreign banks all desperate to build their Asian business.
ANZ is not the only bank doing this, although it has been one of the most visibly aggressive. Other foreign banks, from America’s Wells Fargo through to Australia’s NAB and CBA, have much smaller Asian businesses and rely therefore on playing the niches and following their existing customers into Asia and taking it from there. Their ultimate goal is the conversion of their client’s suppliers and customers into fresh clients.
Supply chain finance, however, has been somewhat overhyped. The reality is that most corporates in Asia are still doing their trade finance using old fashioned Letters of Credit, a product several centuries old which is nothing if not durable, but which most corporates don’t really like.
Open Account is also popular, but that relies on shipping goods before payment is due, and puts risk back onto the exporter, unless the bank comes through with some mitigating risk products.
Some banks are prepared to extend balance sheets to clients in the form of supply chain financing. Some are not. While that has depended on issues such as the maturity of relationships and the aggressiveness of the bank, the reality is that we are in an environment where volatility and regulation are not encouraging a liberal approach to the balance sheet.
This does not stop banks from talking up their “innovative supply chain solutions,” even though only a fraction of customers have been offered them, and they are rarely tailored for individual corporate use.
The other issue is that many banks offer only part of the supply chain, and leave big gaps elsewhere. What is a CFO to do in plugging these gaps but to go to another bank, which totally invalidates any claim from banks on delivering “end to end supply chain solutions.”
“It’s like plumbing,” explains the head of trade finance at a major Asian bank. “We think we have all the pipes connected and flowing, and that is our main focus, to build the plumbing.”
“But we see competitors coming in and they only have a pipe going from point A to B and then from E to F. It just leaves huge gaps.” The prediction from this banker is that, eventually, corporates would see the problems in these incomplete solutions and go back to the tried and tested.
Get close to your suppliers and your customers. Don’t trust your banks to do that piece for you
What CFOs Can Do
So, on a practical note, what should CFOs and treasurers look out for? Here is a quick checklist:
- If a bank says it offers “end to end” supply chain solutions, make sure you do the proper due diligence. There’s a lot of hype out there, and the chain might have some missing links.
- See if you can move away from Letters of Credit to other forms of financing, and try to get the bank to take some of the risk.
- Check the rate and fee structure. Some banks might be giving with one hand and taking with another. Add it up.
- If a bank doesn’t have a wide regional network in itself, check out its correspondent bank relationships. Are they strong enough to ensure everything functions efficiently? The worst case scenario is some vital parts sitting on the dock of a foreign port, frozen until payment comes through.
- Get close to your suppliers and your customers. Don’t trust your banks to do that piece for you. If you build up a network of trust, it can be as valuable and grease your wheels as efficiently as any bank can.
- Make sure your supply chain is operating as well at an operational level as you think it should be. There is often a big difference between strategy and execution in this area, and the CFO needs to get his or her hands a little dirty.
About the Author
Lachlan Colquhoun is Research Editor at CFO Innovation.
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