13 February 2019

Putting Innovation into Action

Next Generation Trade Finance
 
Andrew Betts
Regional Head of Global Trade and Receivables Finance, HSBC


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There’s never been a more exciting time to be in global trade. While the headlines continue to be dominated by geopolitical challenges, positive forces are setting the scene for a promising 2019 and beyond.

Over the last 12 months, the gap between growth in trade volumes and values has decreased; and for the first time in five years, trade growth is once again outstripping global growth – by a factor of 1.5x. Trade liberalisation also continues apace, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Japan Economic Partnership Agreement highlighting what can be achieved by like-minded partners. Together these agreements cover almost 40% of global GDP and provide a clear statement from confident nations that a rising tide of fair trade can benefit these economies by over USD 450bn.

Arguably the most exciting trade development, however, is the pace of technology change. For several years, we have been waiting for innovations such as blockchain to deliver on their true potential. Now, we are on the cusp of exponential change in the industry – and treasurers must be ready to adapt because centuries worth of change is taking place in less than a generation.

As part of this change, a host of cumbersome, timeconsuming, manual, paper-based processes are evolving into streamlined ‘one-stop-shop’ digital solutions.

An early example of this is we.trade – a blockchain-based platform that HSBC has developed together with IBM and a consortium of eight other banks.

The we.trade platform seamlessly connects buyers, sellers and their respective banks, by providing a single source of information, which is visible in real time and on a need-to-know basis for each participant in each transaction. The objective is to make open account trade transactions fully digitised, easier to manage and faster to execute – cutting transaction times from around 10 days to under 24 hours.

As GPS Food Group (GPS) explains in this supplement, the real-life benefits of the platform extend far beyond that. During a we.trade pilot, GPS discovered a host of additional advantages – ranging from significant security benefits to the potential for improved cash flow forecasting and more strategic buyer/supplier relationships. The power of technology innovation cannot be underestimated, it seems.

Innovation isn't always about reinventing the wheel, though. Often, it's about taking a different approach based on a specific situation or set of needs – the road less travelled. This is the view Meliá Hotels took when looking to optimise its working capital. Rather than taking the well-trodden route of using securitisation, the company instead chose to work with HSBC to implement a pan-European discounting programme – tailored to their large and diverse receivables portfolio. As outlined in the case study on page three of this supplement, the programme also leverages digital channels to embed automation and best practice end-to-end.

What these case studies demonstrate is that innovation is happening right now within the world of trade finance. Commercially-viable blockchain solutions are now enabling corporate treasurers to execute trade transactions with greater speed, transparency and security. And existing digital channels are being put to use in new ways by forward-thinking treasury functions to achieve efficiency gains in multiple areas of trade.

Furthermore, the scale and pace of technology adoption is creating regional innovation powerhouses – and separating corporate leaders from followers. Today, treasurers have a unique opportunity to help shape and create the future of trade finance.

Room for Manoeuvre: Optimising Working Capital with Receivables Finance

  • Juan Francisco Amoraga, Global Sales Manager, Global Trade and Receivables Finance, HSBC
  • Gaspar Llabrés, Credit & Insurance Senior Director, Meliá Hotels

With an eye on working capital efficiency, Meliá Hotels' treasury team was looking to access faster and more flexible liquidity as a means of speeding up the cash conversion cycle. After careful consideration, treasury decided to implement a receivables finance programme with HSBC that would respond to the company's current and future needs. Since then, the programme has gone from strength to strength, with the facility being extended to EUR 100m in 2017.

Turn the clock back to 2010: the year that a volcanic ash cloud halted European air traffic, 33 Chilean miners survived 69 days trapped underground, and Spain won the FIFA World Cup. It was also the year that Spanish-headquartered Meliá Hotels International (Meliá Hotels) decided to flip the script on its approach to working capital efficiency. Operating more than 370 hotels in 43 countries across four continents, Meliá Hotels is one of the world's largest hotel companies – and the market-leading hotel chain in Spain.

Like any multinational corporation, working capital efficiency is a high priority for Meliá Hotels’ treasury team.

Not only does treasury need to support the day-to-day running of the business, it must also help to position the company for ongoing growth – whilst responding to the growing needs of shareholders. This means demonstrating effective balance sheet management through key metrics such as Free Cash Flow (FCF), Days Sales Outstanding (DSO) and gearing.


Thinking outside the box

Up until 2010, Meliá Hotels had been addressing typical working capital challenges through various securitisation transactions carried out on commercial assets. As Gaspar Llabrés Credit & Insurance Senior Director, Meliá Hotels explains, however, "This type of operation is complex from a structural and legal perspective and incurs high administrative costs. Appropriate vehicles have to be set up and maintained and the bank has to operate with a conduit, specifically one that can operate in different currencies. We wanted a more user-friendly and cost-effective solution that would deliver greater control of commercial credits and improved monitoring of client solvency, in order to improve the average collection term."

Having worked with Meliá Hotels since 2004, HSBC understood that the company was looking for 'something different' and therefore suggested a EUR 12m Limited Recourse Receivables Discounting facility instead, which was later extended to EUR 100m.

This solution supports working capital optimisation and balance sheet efficiency by enabling Meliá Hotels to monetise their receivables. The cash released can be used for investment and paying suppliers promptly, which can be useful for negotiating discounts or more favourable terms. Of course, the solution also helps to mitigate buyer credit risk.

A pilot began in May 2010, with a few buyers testing the setup. Over the following months and years, further testing took place, the set-up went live, and more buyers were added. Then, in 2016, Meliá Hotels decided to expand the receivables finance programme, recognising the solution's capacity to grow with the business as more customers were acquired and as the company moved into new markets.


Expanding and optimising

Once again, HSBC was selected as the partner for this programme. "We had already received great service from HSBC. We were confident that extending the receivables finance solution would deliver all of the efficiencies we were looking for, without the cost or disruption of alternative solutions."

Although a handful of other banks also offered receivables financing to Meliá Hotels at this time, "What ultimately made us choose HSBC for this programme extension was the flexibility of the bank's solution, as well as the bank's ability to adapt to the type of clients in our portfolio. After all, we work with a large number of buyers, including small buyers where credit information is difficult to obtain.

"Other factors influencing our decision to award the mandate to HSBC were the bank's willingness to adapt to Meliá Hotels' administrative processes – and the fact that the financial terms of HSBC's receivables financing programme were better than those offered by competitors."

Having been awarded the mandate, HSBC structured a tailor-made, pan-European bulk discounting programme for the company, facilitating the addition of new buyers and the increase of the facility size up to EUR 100m. The programme was implemented in just 60 days from the point of signing on the dotted line, going live in early 2017. "This is impressive considering the size of the programme, and the fact that the buyers involved are completely different from those who joined in 2010," says Llabrés.

Moreover, the extended programme is specifically adapted to the company's high volume of invoices and buyers, since there is no need to report on individual invoices – it can be done in bulk. The receivables finance solution is simple to use, says Llabrés. "Each month a series of predetermined files are updated with information on new operations, new invoices and details of the collections received over the past month."

Once this information has been extracted, a monthly report is completed and sent to the bank via HSBCnet, reflecting the status of the receivables and the movement in each of them since the last report. The bank then pays any new receivables as agreed and Meliá Hotels' credit control team collects buyer payments that are due, transferring them to HSBC.


A collaborative effort

Naturally, as with any project of this scale, there were a few challenges along the way. But HSBC worked closely with the team at Meliá Hotels to iron out any creases. Juan Francisco Amoraga, Global Sales Manager, Global Trade and Receivables Finance HSBC notes: "As alluded to, given the size and diversity of Meliá Hotels' receivables portfolio, classification and credit scoring of certain buyers was difficult. To overcome this hurdle, HSBC partnered with an insurer to mitigate buyer credit risk in the whole portfolio."

The portfolio was segmented between the small number of buyers with high exposures and the large number of buyers with smaller exposures, Amoraga explains. "The large exposures are individually assessed on a rolling basis and the smaller exposures have 'discretionary limits' with specific criteria for Meliá Hotels to follow."

According to Llabrés, "HSBC's help in overcoming challenges such as the credit scoring of the buyers is testament to the strength of our relationship. They always approach any issues with flexibility, teaming up with us to find the right solution, and demonstrating dedication by truly understanding the business."

This hard work on both sides has resulted in a receivables finance programme – in EUR, USD and GBP – that has allowed the treasury team at Meliá Hotels to demonstrate their efficiency through strong FCF, low DSO and, since the solution is not a form of borrowing, reduced gearing.

"By looking beyond the obvious solution of securitisation, this programme has delivered lower costs, lower resource-burden, greater agility and an improvement in the average collection period – in addition to the strategic financing it represents."

That has been hugely beneficial in enabling treasury to support the business as it grows and we fully intend to partner with HSBC on new innovative projects in the future

GASPAR LLABRÉS, CREDIT & INSURANCE SENIOR DIRECTOR, MELIÁ HOTELS

About HSBC’s Receivables Finance offering

Receivables finance is available in most major currencies and as early as the same business day – providing the ability to access up to 90% of invoice values. Through receivables finance, treasurers can release cash previously caught in the sales cycle to cover day-to-day expenses or pay suppliers faster. With the flexibility to access the entire amount available or draw down only what is required, receivables finance is also an effective strategy for self-funding growth.

 

Beefing Up Open Account Trade with Blockchain Technology

  • Daniel Barr, Director, Global Trade and Receivables Finance, HSBC
  • Padraig McCarthy, Director, GPS Food Group

Moving and marketing in excess of 100,000 tonnes of meat products annually throughout the world, GPS Food Group was keen to find an innovative way to make its open account trade transactions faster, safer and more competitive. The company recently participated in a successful pilot of the we.trade blockchain platform, a collaboration between HSBC and eight consortium banks, to do just that.

As a specialist business that manages the procurement, production, logistics and marketing elements of the supply chain for the meat trade, GPS Food Group (GPS) has operations in every corner of the globe: from the UK and Ireland, to Norway, South Africa, China, and Brazil. Many of the geographies in which the group operates favour open account trade, introducing a variety of risks into the financial supply chain that need to be carefully managed.

Padraig McCarthy, Director, at GPS explains: "Trading internationally always carries risks – from late payment to non-payment, as well as the challenges around unknown counterparties. Another growing concern is fraud. Like any business, we have been contacted by criminals endeavouring to extract funds through fraudulent invoices. A number of our customers have also been victims of fraudulent activity, whereby emailed invoices have been intercepted and bank account details changed, so we are very conscious of the need for greater security in all trade transactions."

As such, GPS was looking for new ways to improve its international trade processes. "We were interested in the blockchain concept because of the transparency and security it offers. When HSBC approached us about joining the we.trade pilot, it was something that we were keen to get involved with. We already had a great relationship with HSBC, they knew our business well, we worked with them in a number of regions, and we were aware of the development they were doing with IBM on this project. So, for us, it was a great opportunity to try out an innovative solution with a respected and established international partner," says McCarthy.

Kickstarting the pilot

GPS had a number of in-depth meetings with the HSBC team before getting the ball rolling on the pilot.

“The first task was to identify counterparties from our customer and supplier bases who were already HSBC clients – the initial plan was for this small-scale pilot to test the technology and see if it could later be expanded to other banks,” McCarthy notes.

Box 1: A blockchain milestone

The we.trade platform is one of the first commercially-viable blockchain enabled digital platforms for open account trade transactions. Built by IBM using Hyperledger Fabric, the platform seamlessly connects buyers, sellers and their respective banks, by providing a single source of information, which is visible in real time and on a need-to-know basis for each participant of an individual transaction. The objective is to make cross-border and domestic open account trade transactions fully digitised, easier to manage and faster to execute. Users are able to complete end-to-end digital trade transactions, through to autosettlement undertaken by the buyers' banks on the due date, all via a single platform. This includes creating purchase orders, confirming shipment of goods, raising invoices and confirming that agreed settlement conditions have been met.

 

Box 2: Benefits of using we.trade

  • we.trade significantly simplifies open account trade transaction management and tracking by digitising the end-to-end process.
  • It greatly improves the visibility of trade journeys, as the participants of each trade transaction are able to track the progress of the trade transaction on a real-time basis.
  • The platform also automatically triggers the payment to be executed by the buyer's bank, once all the settlement conditions have been met subject to cleared available funds.
  • we.trade also provides access to unique digitised bank products that are platform-related, such as:
    • Bank Payment Undertaking (BPU), available from the buyer's bank – providing assurance to the seller that a payment will be executed on a due date, once all settlement conditions have been met.
    • BPU Financing, available from the seller's bank – providing financing to the seller if a BPU has been issued by the buyer's bank, for the benefit of the seller.

 

After much consideration, GPS chose to engage with a third party customer in the UK, to execute two open account transactions via the we.trade platform. Keen to try out the international dimension, however, GPS also selected an internal supplier based in Ireland to participate in the pilot. For the latter transaction, GPS chose to use a BPU (see box 2 for more information) – which is one of the unique features of the platform.

Naturally, there was some manual work required to get the pilot off the ground. "At the moment, we.trade is a standalone web portal – so we had to manually input the details of our counterparties into the platform. And, of course, we performed rigorous data checks before we populated an actual transaction," says McCarthy.

"Once the details of a relationship are set up, however, it is possible to transact on an ongoing basis – there is no need to re-key information for individual transactions with that counterparty." The longer-term plan for we.trade is to enable the platform to integrate more directly with ERP and/or TMS systems and eliminate the manual aspects.

With the information populated and the data checked, GPS then executed the pilot transactions. "We received a payment through the portal and we also made a payment. It was extremely simple and painless. Once each transaction was confirmed and the payment terms were agreed, the transaction happened automatically. Funds were transferred without having to undertake any further action – no payment needed to be initiated, since it is all automated," notes McCarthy. This 'selfexecution' is enabled through so-called smart contracts, which trigger payment when pre-agreed parameters of the contract are met.


Reaping the rewards

Although the GPS pilot was relatively small-scale, it proved that the technology works

PADRAIG MCCARTHY, DIRECTOR, GPS FOOD GROUP

The company saw numerous potential benefits, he says, including simplifying the process of open account trade, and digitising transactions from start to finish. "But one of the most impressive aspects for us was the security and certainty the platform brings. There is just one trigger point for transactions. Moreover, bank- and transaction details are confirmed within a secure environment – which means that there is less likelihood of fraud or disputes.

"Thanks to the visibility the platform brings, you also have the security of knowing that the transaction loop is complete, which can lead to opportunities for improved cash flow management. There are softer benefits too: if, as a counterparty, you can offer security of payment from customers and to suppliers, then that could potentially improve trading relationships."

Building on the success of the pilot, McCarthy is keen to see the we.trade platform become more widespread, which may well go hand-in-hand with the platform's ability to integrate with other technologies. "We are really impressed with the platform thus far and HSBC has committed significant resources to making it a success – including working with customers to get the platform up and running.

"I have no doubt that it will evolve into a more widely used solution – but it already represents a key milestone in the use of blockchain technology within the world of trade finance. And GPS is delighted to have been able to take part in this successful pilot."

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