Partnerships in trade finance – a key to future success?

1. Dominic Broom, Head of Market Development, Treasury Services EMEA, The Bank of New York Mellon 16th June 2009 Partnerships in trade finance – a key to future success?

2. Agenda Trade services – where were we? Trade services – what is the current situation? Going forward – critical success factors Going forward – partnerships for success 2

3. Section I. Trade services -where were we?

4. Trade services - past issues • Silos within organisations • ―Conflicting interests within organisations adversely affected supply • chain efficiency • Fragmentation of the financial and physical supply chains • ― Local strength cannot make up for a company’s lack of global outlook • The belief that letters of credit (LCs) and documentary collections were troublesome and too time-consuming • ―In fact, this is a technology issue, not a problem with the LC itself • The rise of open account (OA) trade • ―In open account trades, the buyer and seller have flexibility to set their own documentary requirements • ―Over 80% of global trade is now transacted on an Open Account basis, although letter of credit (LC) use has never stopped and is now growing

5. Trade finance – resolution of past issues • How were these past issues resolved? • Integration of the physical and financial supply chains • ―Increased efficiency mostly on the physical side of the supply chain: availability of cheap credit made financial focus unnecessary • Enhanced technological development • ―Enhanced transaction processing flow and sharing of data and information • Collaboration • ―Banks, logistics companies and third-party financial organisations working together to increase efficiency • ― However, this collaboration has not been liquidity focused. The issue of true funding efficiency for the supply chain remains • Partnership • ―Local and regional banks working with global players to enhance global trade at a local level

6. Section 2. Trade services – the current issues

7. Trade services – the current situation • What are today’s problems? • Liquidity concerns • —Concerns about the availability of working capital and liquidity management • —Corporates are concerned about the credit risks of suppliers and buyers • —Throughout the supply chain, suppliers are reducing credit terms • —Advance payment is becoming increasingly sought • —Customers requesting to extend payment terms and delay payment due dates • —Increasing risk of customer payment default • —Decrease in the availability of credit lines • The struggle to secure credit facilities • —Despite efforts from central banks to pump liquidity into the banking system, many corporates remain cut-off from funding • —Changes in banks’ loan-eligibility models, coupled with changes in the economic climate have created a disconnect between those responsible for making lending decisions and businesses requiring credit

8. Trade services – the current situation: buyer-seller conflict Conflict between buyers and sellers —Seller – wanting payment as early as possible —Buyer – looking to pay as late as possible Both want to optimise working capital at lowest cost —Account payables (buyer), account receivables (seller) —Reducing inventory —Maximising cash —Seeking out and leveraging the strongest credit in the supply chain Seller wants financing & financial risk mitigation —Pre-shipment (working capital loan) —Post-shipment (invoice discounting, factoring) —Currency hedging Buyer wants purchase risk mitigation —Streamlined documentation handling processes and deferred payment solutions 8

9. Trade Services – the current situation: globalisation and its pitfalls Globalisation and its pitfalls —Because of the increasingly global nature of trade, regional banks – at an individual level – have lost the required skills to perform deep evaluations of prospective borrowers —The ability to undertake a full credit analysis has been superseded by head office models that favoured the provision of lending on a more industrialised basis —As a result, local town-centre bank managers have lost touch with the needs of local businesses, which means they may no longer offer what their clients want and need —Yet many local banks do not have the necessary technology to gain the required understanding of the workings of clients’ businesses —The costs of developing the necessary infrastructure to monitor, collate and report on a business’s every activity are prohibitive for most local and regional banks —Because of this, local banks are being pushed out of global trade – which is worrying as global trade begins at local level and their input is vital for effective risk mitigation 9

10. Section 3. Going forward – critical success factors

11. Trade services – critical success factors: regional bank model • The role of regional banks • A return to localisation • —A return to localisation is imperative for risk management • —Risk management is not scalable • —This means that local and regional banks must resume their past role as risk-assessors of potential borrowers • —As a result, local banks will re-establish the strong relationships they once enjoyed with local companies, and will regain awareness of clients’ needs • —Regional banks have a key role to play in facilitating global trade • —Moving forward, it is vital that they perform this role • Lending on an industrialised basis • —This head-office model superseded the localised model as trade became more global • —This system no longer works

12. Trade services – critical success factors: technology • Trade service providers • —Many regional and local banks simply do not have the required • technology to gain the necessary understanding of the workings of a client’s business • —Other players in the supply chain such as logistics companies and freight forwarders have developed technology solutions that need to be integrated into the bank environment • —But the costs of developing such an infrastructure are prohibitive for many • Sophisticated technology • —We need to combine the sophisticated technology developed for trade services with the dependency of the LC • —We need technology to allow end-user clients to enhance cash-flow, route payment requests more efficiently and track payments • —Technology is the enabler • —This technology needs to be made available to regional banks whose local expertise is imperative to the supply chain

13. Trade services – critical success factors: trade instruments • Risk instruments • The letter of credit (LC) • —As a result of today’s economic turbulence, the LC is making a strong comeback as • a tool of risk mitigation • —Although the risk-mitigating features of the LC are very much in demand, the process remains a problem. This may be solved by the use of sophisticated trade finance technology • Flexibility and Visibility • —What is needed now is a way to bring the best of the LC into a post-credit crunch context • —We now need a focus on the credit structures of the LC combined with flexibility and visibility – in the context of the application of efficient cash management structures • —The goal is a fully integrated and seamless risk and cash management process • —A combination of specialist technology and a change in the risk-assessment model can make this possible

14. Section 4. Going forward – partnerships for success

15. Trade services – partnerships for success: options • What are the options? • Do nothing • —This may result in disintermediation • One-size-fits-all solutions • —There are specialist software and technology providers who have developed programmes to provide information management and collation functions • —However, these tend to be off-the-shelf products without a holistic service to ensure successful integration and usage across the bank’s client base • Global & multi-national banks • —There are some with the necessary and costly systems to provide to their own clients that provide outsourcing services to regional banks • —However, beware Greeks bearing gifts! There is the danger that a bank providing its larger peer with insight into its local business will ultimately lose that business • Non-compete approaches • —Some global banks with the required infrastructure offer non-compete outsourcing relationships. This eliminates the risk of the global player establishing a regional foothold and taking business from the local bank

16. Trade services – partnerships for success: going forward • To move forward, we need to build effective partnerships • What are effective partnerships? • —Effective partnerships build on the strengths of local/regional banks and global players and bring them together. A good bank partnership is greater than the sum of its parts • —Credit understanding and management • —Technological offering • —Non-compete approach • —Accessibility of both knowledge and technology • What does this mean for regional banks? • —Local and global knowledge made accessible • —Efficiency and flexibility • —Fulfilling clients’ needs without shoe-horning them into a one-size-fits-all model • —Therefore, local banks must not allow themselves to be pushed out by the global players

17. Trade services – partnerships for success: conclusion • How can partnerships help regional banks stay in the game? • Local banks add value through the relationships they hold with their clients • ―Their local knowledge is vital for accurately assessing risk • In order to do this, local banks need the necessary technology to meet client needs • ―Successful implementation is vital but difficult • One solution is the formation of non-compete outsourcing relationships with global banks that have the required infrastructure • ―A non-compete relationship eliminates the risk of the global player establishing a regional foothold and taking business from the local bank • Thanks to the experience and transaction data shared in trade finance networks, local banks can ensure they are better informed when it comes to making lending decisions • ―In addition, local banks will glean greater insight into clients’ changing needs and may allow them to provide consultative services to suggest creative solutions that may reduce their dependency on debt