Getting Paid

1. Getting Paid The Bankers Perspective COMMERCIAL BANKING

2. Getting Paid - The Banker’s Perspective David Pearson International Relationship Director The Royal Bank of Scotland

3. Executive Summary • The Risk Ladder in pre-contract negotiations • The growth of Receivables Finance in overseas trade • Protecting against exchange rate fluctuations • How International Payments are made • Suggestions to make it easier for your customers to pay you

4. International Credentials • RBS Group are the 6th largest Banking Group in the World and 2nd in Europe • The RBS group spans banking, financial services, investment management and insurance in the UK, Europe, Asia and the US • We have a presence in 140 countries through a network of 3000 partner and correspondent banks • Team of 19 Trade Finance specialists operating across the Midlands • RBS is committed to providing UK processing of UK customers’ international services

5. Managing Risk - The Risk Ladder High Risk Open Account Exporter Documentary Coll’n Letter of Credit Cash in Advance Low Risk

6. Managing Risk - The Risk Ladder High Risk Low Risk Open Account Exporter Importer Documentary Coll’n Letter of Credit Cash in Advance Low Risk High Risk

7. Payment in Advance • Exporter receives payment and then ships goods • May be practical requirement to manufacture before payment received • May accept partial payment before shipment

8. Letter of Credit - Documentary Credit • Exporter receives guarantee from overseas buyers bank that they will pay provided the exporter produces certain documents on time • May be ‘confirmed’ by UK Bank • Normally ‘irrevocable’ and can be ‘transferable’ • Onus is on exporter to comply with terms of Credit • Subject to Uniform Customs & Practice

9. Documentary Collection • Documents are controlled via the Banking system but it is not a guarantee of payment for the Exporter • Exporter retains the Buyer and Country Risk • Governed by Uniform Rules for Collections

10. Open Account • Totally reliant on trust as is the case with most domestic sales • Cheap and hassle free • Potential language difficulties • Debtors can be insured • Invoice Finance / Factoring can mitigate the risks • Credit Insurance - may not protect against refusal to pay

11. Debtor Finance - What is it? • Provides services linked to the client’s sales ledger • Funding up to 90% against the value of the invoice as soon as it is raised, with easy access to the invoice finance facility via software. • Collections (if required), using a dedicated in-house team, including the use of multi-lingual credit controllers to help collect overseas debts • Protection through Bad Debt Protection service, available for both domestic and overseas debtors

12. Debtor Finance - Who uses it? • In excess of £10Billion funds advanced in the UK • In 10 years this has grown over 400% • Over 40,000 businesses • 88% of funding is to companies with £1m T/O or more • Export factoring has grown 23% in last year • Export Invoice Discounting has grown 38% in last year • 23% increase in number of companies funding export via invoice finance

13. Export…Factors Chain International Option • FCI is a global network of leading factoring companies, whose common aim is to facilitate international trade through factoring and related financial services. • FCI's mission is to become the worldwide standard for international factoring. • FCI helps its members achieve competitive advantage in international trade finance services through: • A global network of first-class factoring companies • Modern and effective communication systems, to enable them to conduct their businesses in a cost-efficient way • A reliable legal framework to protect exporters and importers • Standard procedures, aimed at maintaining a universal quality • A package of training programs • Worldwide promotion aimed at positioning international factoring as the preferred method of trade finance

14. FACTORS CHAIN INTERNATIONAL FCI FCI FCI FCI FCI FCI FCI FCI FCI FCI FCI FCI FCI

15. Managing Currency Risk • ‘Economic’, ‘Translation’ & ‘Transactional’ exposure • Essential to take action if you have fixed sales prices • A worked example… • Buy and manufacture in UK • Sell to US in USD - sales of say $100k • March 07 = £52,083 income (GBP/USD 1.92) • April 05 = £??,??? income

16. Managing Currency Risk • ‘Economic’, ‘Translation’ & ‘Transactional’ exposure • Essential to take action if you have fixed sales prices • A worked example… • Buy and manufacture in UK • Sell to US in USD - sales of say $100k • March 07 = £52,083 income (GBP/USD 1.92) • April 05 = £50,000 income (GBP/USD 2.00) • 8 cents drop in value of US$ = £2,083 = 4% drop in income

17. Managing Currency Risk - the options • Invoice in Sterling - competitive? • Do nothing - high risk • Sell at Spot and create an overdraft on a currency account • Fixed Forward Contracts • Option Forward Contracts • Structured deals for higher amounts and more complex transactions eg Vanilla Options • Best form is Self-Hedging

18. How do banks make International Payments? • By sending payments through Settlement Mechanisms like CHAPS or by using a global network of Agent Banks who we hold accounts with - known as Nostro Accounts • A Nostro Account is an account held with an Agent Bank abroad, generally in the indigenous currency of the country of that Agent ” Debit Customer - USD 100,000 Credit Nostro Ledger - USD 100,000 Royal Bank of Scotland Group Message MT103 JP Morgan Chase New York Debit Nostro Statement - USD 100,000 Credit Beneficiary - USD 100,000

19. A more complex example • Customer instructs RBSG to pay US$100,000 to a customer of Chang Hwa Commercial Bank, Taiwan Royal Bank of Scotland Group Debit Customer - USD 100,000 Credit Nostro Ledger - USD 100,000 Message MT202 Message MT103 Debit Nostro Statement - USD 100,000 Credit US agent Bank - USD 100,000 JP Morgan Chase New York Chang Hwa Taiwan Settle locally Debit Local Settlement A/c - USD 100,000 Credit Chang Hwa - USD 100,000 Debit US agent Statement - USD 100,000 Credit Beneficiary - USD 100,000 US agent of Chang Hwa

20. So what’s this SWIFT? “Society for Worldwide Inter-Bank Financial Telecommunications” • SWIFT is • an International network • jointly owned by member banks for the transmission of banking messages • Each member bank has a SWIFT address known as a Bank Identifier Code (BIC) to which messages are sent

21. Bank Identifier Code (BIC) • A BIC is a unique code that identifies a branch of a bank. • It is made up of: • A 4 digit abbreviation of the SWIFT bank name • A 2 digit abbreviation of the ISO country code • The 2 digit SWIFT location code • A 3 digit SWIFT branch code Country Code Location Code Branch Code Bank Name N W B K G B 2 L X X X R B O S G B 2 L X X X

22. International Bank Account Number Bank Identifier Code (BIC) • An IBAN is a standard way of identifying a bank account in an internationally agreed format, introduced under European Banking directive to improve processing • But IBAN lengths across Europe differ and they aren’t adopted in the US!! • SWIFT BICs and IBANs are mandatory for cross-border customer euro payments in Europe Country Code Check Digits Bank Sort Code Account number G B 0 2 N W B K 6 0 0 0 0 1 1 2 3 4 5 6 7 8

23. Making it easier for your customers to pay you • Quote your IBAN (International Bank Account Number) and Swift BIC (Bank Identifier Code) on all invoices (NB - NOT your usual account number and sorting code) • GB99 RBOS 1234 5612 3456 78 • RBOSGB2L789 • Sticky Labels! • Consider opening accounts overseas - access to local clearing systems