NEW YORK — International open account trade was once riddled with challenges for companies looking to do business on a global scale. A lack of transparency and concern about "cross-border exposure" made the financial end of doing business difficult.
But a new breed of supply chain trade finance solutions has developed recently that leverages technology and increased visibility. This makes global business not only manageable, but profitable.
David Conroy, global head of supply chain services and trade sales at Citi's global transaction services business, discussed these financial solutions with WWD.
WWD: What are the benefits of open account trade financing?
David Conroy: As the number of companies participating in cross-border trade continues to increase, so does the need for risk mitigation, efficient document processing and financing. In addition to the extraordinary expansion of global trade — volume has doubled in the past 10 years and quadrupled in the last 20 — the trade marketplace has undergone a dynamic shift in transaction formats from both ends of the supply chain, affecting importers and vendors alike. Specifically, there is a noticeable transition from traditional letter of credit [LC] to open account trade, allowing savings and enhanced efficiency throughout the purchasing cycle.
Today, for example, more than 40 percent of companies worldwide trade with eight or more geographies, many with hundreds of individual suppliers. This characteristic of the marketplace, with its subsequent expansion of trade volumes, reinforces the popularity of open account trade because it is most advantageous to industries with a one-to-many relationship between buyer and sellers.
Until recently, major barriers such as a lack of transparency and apprehension about cross-border exposure have limited international open account trade. However, significant improvements in technology and increased visibility into the financial supply chain have diminished these concerns considerably, as both buyers and sellers recognize the benefits available through open account trade. In addition, competitive pressures are forcing participants throughout the supply chain to improve their efficiency and drive down costs.
WWD: How does open account financing differ from traditional letters of credit?
D.C.: By streamlining processes for both importers and suppliers, simplifying and automating documentation review and reducing the cost of working capital across the global supply chain, open account trade can result in greatly improved efficiency and considerable savings in time and costs.Within domestic markets, open account trade has always been the norm. Until recently, however, major barriers such as a lack of transparency, access to liquidity and apprehension about cross-border exposure have limited international open account trade. Significant advances in technology and increased financial knowledge across the supply chain are diminishing these concerns considerably. The transition is most apparent in the U.S. and Europe where intense competitive pressures are forcing participants throughout the supply chain to improve their efficiency and drive down costs.
WWD: Are LCs becoming antiquated?
D.C.: Yes. The LC, a document-laden, error-prone payment process, still experiences over 80 percent discrepancy rates, and bogs down the financial supply chain. The transition from LC to open account trade allows savings and enhanced efficiency throughout the purchasing cycle. Open account trade enables the financial supply chain to work more in sync with the physical supply chain and helps ensure necessary liquidity for all stakeholders in the purchasing cycle by providing greatly improved visibility and transparency.
The trend toward open account trade is also influencing the buyer-supplier relationship. To capitalize on the efficiencies of open account trade — and eliminate the time- and labor-intensive tasks like reconciliation — a strong, trusting relationship must exist between buyers and suppliers.
WWD: How does Citi differentiate itself in the trade finance market?
D.C.: With the remarkable increase in the number of companies (including buyers and suppliers) participating in cross-border trade, there is a corresponding need for risk mitigation, efficient transaction processing and financing on a global scale. As a result, companies worldwide are looking for a financial partner with the local knowledge, on-the-ground presence and global reach that can provide intellectual capital and deliver innovative financing solutions across their entire supply chain.
As the world's largest financial institution, with a market-leading network spanning 104 trade-capable branches in 72 countries — the largest footprint in global trade — Citi can streamline and enhance cross-border transactions between trading partners located virtually anywhere. We've designed our comprehensive portfolio of trade services and financial products to help our clients effectively manage risk and optimize cash flows and to provide innovative, customized, end-to-end solutions to match our clients' unique trade requirements across the global supply chain.WWD: Can you give readers an example of one of these solutions?
D.C.: Citi has launched an Enhanced Open Account Trade operating platform that facilitates processing and relieves the administrative burden for clients making the transition from LCs to open account trade. This platform not only facilitates payments for open account purchases, it also transforms and streamlines the entire reconcilement process. Clients benefit from our knowledge of local trade practices, regulations and market risks.
Citi's Enhanced Open Account Trade solution is one of the global trade marketplace's most robust platforms of integrated services that support transaction processing, communication and reporting and liquidity enhancements for open account transactions. It greatly improves the accuracy, speed, visibility and liquidity in the overall transaction process — resulting in bottom-line benefits to importers and suppliers across the global supply chain. With Citi's Enhanced Open Account Trade solution, trade participants across the global supply chain — importers and exporters alike — can complete their cross-border transactions much more efficiently and at a fraction of the cost of using a letter of credit.
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