Strategies for Resilience and Efficiency in Trade Finance

Mitigating risk through intelligence

The landscape for international trade finance has grown increasingly complex in recent years, demanding heightened vigilance from treasurers and CFOs. Francesca Nenci, Head of Group Trade and Correspondent Banking, UniCredit, explains how strategic foresight, digital innovation, and rigorous, timely intelligence and analysis can help corporates and their treasurers to navigate these dynamics amid myriad geopolitical uncertainties.

Efficient international trade is built around a host of interdependencies, not least the nexus of trade finance, working capital, and credit risk. It’s a relationship that has become considerably more complex for treasurers and banks since the pandemic. Their vigilance remains crucial on these three intertwined fronts due to ongoing volatility, the continuing tough macroeconomic environment, and a fractured international landscape.

For trade finance leaders such as Nenci, these critical areas have presented many challenges and numerous headaches over the past few years. Along with other treasury professionals, she recalls that the pandemic was the clear initial trigger for an unprecedented disruption of trade finance and working capital globally, with the subsequent seizing up of supply chains exacerbating matters.

Nenci adds: “The initial signs of recovery across these areas post pandemic were, in fact, rather promising. However, this was deeply compromised by the dramatic upheaval of the geopolitical landscape in 2022 with the war in Ukraine swiftly followed by the Israel-Gaza conflict that flared up in October 2023. These developments have introduced further dimensions of complexity, influencing global trade flows and heightening risk perceptions among market participants.

“To complicate matters even further, we saw the emergence of a persistent high-inflation environment and concerns among market participants over the trajectory of interest rates, underscoring further the interconnected nature of economic stability, the viability of global trade, and credit availability in today’s volatile markets. Given that landscape, it has become imperative for banks and corporates to adopt a holistic approach, one that integrates these multi-faceted dynamics to effectively navigate the current economic environment and proactively mitigate potential risks.”

Mounting pressure

For Nenci, who began her career at UniCredit 20 years ago as a political analyst, the importance of having a handle on political risk factors is one of today’s most important considerations for banks and corporates when it comes to understanding the dynamics of trade finance globally.

She says: “Of course, political risk has always been a consideration with trade finance, however in this period of political shifts and macroeconomic challenges we see the need to consider geopolitical factors and credit risk scenarios much more intensely. If all we had to worry about was, for example, interest rates, as in good, relatively more stable times, then trade finance would be less impacted. Now it is a much more complex scenario overall.”

Evaluate, navigate, and monitor

The global peak in interest rates appears to be receding. However, Nenci, in line with market expectations, believes they will ease more gradually than anticipated even just a year ago, as policymakers remain concerned about inflation. “That implies that concerns over credit availability have not yet dissipated. It is therefore crucial for us to closely monitor countries where import-export trade flows are pivotal for corporate stability, ensuring we support and protect our clients in those jurisdictions,” she says.

“The ongoing geopolitical challenges further complicate our responsibilities on this front. Some countries are now perceived as riskier for our clients, impacting credit availability beyond mere interest rate considerations. We must acknowledge that we are navigating a new era where the risks for trade finance instruments and working capital are higher than they were four or five years ago. Furthermore, all these considerations can change abruptly and unexpectedly, driven by significant global events such as the upcoming US election.”

Although geopolitics has become a significant concern for banks and MNCs, its inherently volatile and complex nature makes integrating such analysis into precise strategies and solutions a formidable task. Nenci explains: “For banks and multinationals today, escalations in geopolitical tensions can clearly have serious implications. They may amplify reputational risks, increase scrutiny on sanctions and compliance, and challenge ethical practices and transactions. Disruptions in supply chains and fluctuations in investor confidence are also potential outcomes.

“Financial institutions [FIs] closely monitor geopolitical stability because when we support our clients in a particular country, we are all exposed to geopolitical risks. In my role at UniCredit, my priority in the daily business is to consider each country’s risk profile in light of geopolitical dynamics to protect our clients. It’s not a matter of  simply restricting credit availability, we are protecting and advising our clients. It’s a significant challenge but essential.”

Holistic and sophisticated analysis

While FIs invest heavily in understanding geopolitical risks, translating this thorough analysis into actionable strategies remains elusive and challenging for those involved in cross-border activities.

Nenci says: “Do any of us have the perfect recipe for assessing and integrating geopolitical risks into solutions and services for clients? It’s not an exact science. What is clear, however, is that we must strive to convert qualitative geopolitical drivers, such as sociopolitical stability, into measurable factors.”

At UniCredit, as at other institutions, various operational areas, including trade finance, heavily depend on geopolitical considerations. That requires, says Nenci, significant investment in time and effort on monitoring developments globally and responding promptly to them. Much depends on robust control functions encompassing legal compliance and effective, up-to-date country risk assessment. A crucial lesson UniCredit has learnt over the years is the importance of holistic analysis. Focusing on the probability of default in one country, without considering all associated components, runs the risk of overlooking the critical factors necessary for truly informed decision-making.

Nenci adds: “When dealing with geopolitics, forecasting is essential but absolute certainty remains elusive. Nevertheless, our analysis has become more sophisticated in recent years. At the same time, corporates are keen to understand in greater detail why the bank may suddenly reduce exposure in a particular country, and the reasoning behind such decisions. For our part, we recognise of course that we have the responsibility to explain our decisions and our educational initiatives for clients are crucial at this juncture as they navigate through the many uncertainties in today’s world. We engage daily with clients to provide as much clarity as we can on how changes in working capital, trade finance, and credit availability will impact them.”

Gearing up trade finance for a digital revolution

One major development during the pandemic was the accelerated adoption of digital solutions in trade finance and working capital management. FIs and businesses increasingly rely on digital platforms to enhance efficiency, transparency, and security in their operations.

Nenci explains that UniCredit’s own digital transformation, bolstered by fintech expertise where necessary, has significantly improved efficiency and transparency in trade finance operations. Despite regulatory challenges, the bank’s investments in technologies such as optical character recognition (OCR) and AI, for example, have streamlined document processing and enhanced security measures. The roll-out of e-signature capability, notably in Romania, Czechia, and Slovakia, has successfully simplified the process of guarantee issuance.

Meanwhile, the bank’s trade finance online module, a new functionality for accepting clients’ orders and processing trade finance, is also showing considerable promise. It is currently operational in Bulgaria, with 75% of transactions already being handled through this digital platform. And in Central and Eastern Europe, UniCredit has succeeded in fully digitising its working capital services, providing clients with an end-to-end digital platform for managing solutions.

The  digital capability of UniCredit’s more established platforms is also being further enhanced. These platforms include Trade Finance Gate (TFG), which offers real-time tracking, document management, and streamlined communication with UniCredit’s trade finance specialists, making the entire process more transparent and efficient for clients. The improvements have led to greater use of the TFG service, with more than 75% of transactions being performed by onboarded clients and  more than 26,000 transactions processed in 2024, an increase of over 200% since the Covid pandemic (one year after the platform Go-Live).

The bank’s digitisation efforts extend to working capital services, where it is leveraging technology to provide more accurate and timely insights into clients’ liquidity positions, helping them make more informed decisions.

Elsewhere, the bank’s Smart Factor platform, developed by UniCredit Factoring for enabling clients to manage their advance payment on receivables, has been “considerably strengthened”, says Nenci. As a factoring solution, Smart Factor offers a single, user friendly digital environment for all services, information, and devices, and for the assignor’s and debtor’s positions. Document exchanges and interactions take place on the platform, where they remain archived paperless, reducing the administrative burden and costs for clients. Further digitalisation and automation of the process means clients can now set up a dedicated periodical report. Simplified procedures for loading invoices quickly and in self-service mode with digital signature capability enabling immediate assignments of credits.

More broadly, the bank is currently dedicating substantial effort to developing innovative trade finance solutions that integrate multi-banking platforms. A primary objective here is to simplify complex processes and standardise different systems within corporate financial operations. Nenci believes this initiative has the potential to revolutionise how clients manage their finances across multiple banks, introducing a new level of efficiency and convenience.

UniCredit is also focusing on developing digital solutions to enhance efficiency and reduce costs in the bills of lading space – an interesting and highly challenging problem. Electronic bills of lading (eBLs) still encounter significant regulatory obstacles in many markets, but UniCredit remains cautiously optimistic that these hurdles will be cleared over the coming years.

Nenci acknowledges: “The regulatory barriers for eBLs in many jurisdictions are indeed challenging. However, as a bank, we are actively engaging with regulators to address these issues and pave the way forward. In a world where cutting costs, accelerating transactions, and streamlining the trading experience for clients are paramount, harmonising eBL rules really is in everyone’s best interests.

Stay vigilant

Looking ahead near term, Nenci anticipates that for the remainder of 2024 traditional trade finance products such as LCs and guarantees will remain stable, enabling UniCredit to manage them effectively.  Working capital performance will be more dependent on the dynamic of interest rates and credit availability, as the last months showed with corporates reducing utilisation of existing working capital programmes.

The uncertain business outlook underscores the need for treasurers and CFOs to maintain heightened awareness of evolving credit and geopolitical risks, advises Nenci. UniCredit is also increasingly urging clients to evaluate the sustainability of their internal processes and adopt digital solutions, highlighting that such action can not only reduce costs and enhance efficiency but also significantly boost resilience.

She adds: “It is essential for corporates to leverage on FIs’ expertise. UniCredit has a fundamental purpose: empower communities to grow. For our part, and undoubtedly for others, it’s imperative in today’s macroeconomic and geopolitical landscapes to support our clients with comprehensive strategies and solutions based on thorough risk assessments.

“We are committed to evaluating overall compliance, legal, geopolitical, political, and macroeconomic factors, whether aiding a client’s business expansion or advising caution due to risks. The trade finance sector has always been complex and essential for corporate operations, not a luxury. Therefore, leveraging all available tools is crucial to  manage it effectively in this evolving new era, delivering best-in-class service for our clients and communities.”