Lloyds: Back to Traditional Values - John Salter
In the current economic climate, effective trade financing places an emphasi on supporting a customer's needs, argues John Salter, head of trade, payments and card products at Lloyds TSB Corporate Markets. Here, he outlines the three tactical benefits of the emphatic 'back to basics' move he sees in trade and supply chain financing.
There's no doubt about the massive shift back to traditional trade values we've witnessed in the last 12 months. Because risk is now so firmly on everyone's agenda again, we're seeing a marked 'back to basics' renaissance – a return to established understandings of counterparty risks using conventional trade instruments such as letters of credit, collections, and guarantees.
We at Lloyds Banking Group have certainly seen an increase in export letter of credit and guarantee business as companies seek to manage their risk portfolio in a secure and more cost-effective way. More specifically we have noted a rise in advance payment guarantees and standby letters of credit as companies look to ensure the physical transfer of funds is supported by bank assurance of payment. Lloyds TSB have a strong reputation in the Guarantees market and in the current economic climate we have ensured our suite of traditional and online services support our customer needs, through efficient delivery mechanisms and providing trusted advice to our customers.
This dramatically reverses the trend we were experiencing before the onset of the global recession. Much attention by banks and their corporate customers had been focused on the evolution of open account transactions to facilitate supply chain liquidity.
However, for buyers and suppliers operating in aggressive growth conditions, relationships in open account transactions implied huge elements of trust. Trade became the proverbial emperor without 'documentary clothes': the supplier's assurance of payment upon receipt of his goods had little guarantee except the buyer's reputation.
This relaxed supply chain approach could scarcely be expected to thrive in the tough business conditions that have dominated in the last 12-18 months. And it hasn't. Greater consciousness of risk – country risk most broadly and counterparty risk more specifically – has seen to that.
And this shift in corporate risk appetite has had particular consequences. The first short-term benefit is the growing recognition by large businesses of their obligation to support and protect their own supply chain. At a time of tight access to credit by smaller suppliers, it can be counter-productive to squeeze terms of trade.
As a consequence, corporates are more proactively working with their suppliers; banks in turn ensure their own products and financing propositions support these market needs.
Secondly, in support of our exporters, banks in the UK are actively supporting measures by the government's Export Credit Guarantee Department (ECGD) to add their confirmation (guarantee of payment) to letters of credit, to enable UK exporters to trade globally with an increased assurance of payment.
Lloyds TSB are taking this responsibility further, through discussions with ECGD to explore ways in which capacity for bonding lines can be created to support contract tendering and contract performance.
Thirdly, the need for robust electronic services now extends to the wider reaches of trade products to comprise delivery, visibility and settlement in order to bring the financial supply chain closer to the physical supply chain. This includes document imaging, e-invoicing and the move towards 'just in time' information.
In developing products and services the core principles remain as true today as ever: banks consult with their customers so that developments are not taking place in isolation. At Lloyds TSB we are committed to this level of consultation, as we continue to identify what it is that our customers need most, and deliver the services in conjunction with sound advice, supporting our core principles of Trusted Advisor.