Many companies trade outside the borders of their own countries. This presents fresh challenges for credit managers who are looking to make reliable credit risk decisions in a less familiar context. There are the obvious considerations relating to financial instability in parts of Europe. However, further afield – in Africa, Asia and the Middle East – it is also wise to keep a watchful eye, not just on economics, but on the broader picture in order to understand the international landscape from a credit risk perspective.
“Managing credit risk effectively is not just about looking at a particular client, but the companies within the group, the regions they are located in, the markets in which they trade, the executive management team and ultimately where ownership resides,” says Gary Grant, group credit manager at Computers Unlimited. “This is particularly so for overseas trading. There’s now a constant shifting when you consider the risks that businesses engage in both politically and economically. Globally, regions are more interconnected with regards to exposure to risk which must be assessed.”
The UK presents a typical example of a country in which businesses can quickly gain confidence and therefore their impact on risk can change. In the third quarter of 2015, according to the results from the latest Chartered Institute of Credit Management (CICM) Credit Managers’ Index, confidence in manufacturing and services has fallen slightly. While performance in both sectors overall remains positive, these figures come on the back of two very strong quarters where the Index recorded an all-time high.
So, companies must be alert to changes in credit status not just on a monthly, weekly, or even daily basis, but in real-time. Finance departments need tools that can track every aspect of a customer’s business – from their supply chain and their credit history to their clients and the factors that make them able to pay or likely to default on credit. Visibility into the current financial health of customers lets companies understand their exposure instantly as “very good risk”, “low risk”, “average risk” or “high risk.”
A global perspective
An extra degree of caution is prudent – and usually automatic – for companies trading outside their own domestic sphere, but at the moment it is more important than ever. Large parts of the world are still struggling to emerge from the economic doldrums, or are badly affected by fast-moving political or regional turmoil. This makes the credit risk landscape even more uncertain and liable to change in a moment.
“It is prudent to watch the eurozone,” says Grant. “One could easily be blindsided, seeing an apparent increase in trade and improve credit terms for a growing business. When you are dealing with suppliers with better intelligence who are aware of issues and have reduced their exposure, it leaves you holding the majority risk.
“It can be difficult to reach reliable decisions, particularly if sufficient credible information is unavailable. This can result in a lack of confidence to continue trading with a customer or in a territory on the same terms and with the same levels of risk exposure, ultimately stagnating growth.”
Stuart Hopewell, credit manager at Fujifilm, agrees: “The landscape has changed and everyone has become more cautious,” he says. “We think the financial crisis is behind us, but businesses are still working with more subtle checks and balances. We now have better data analysis and this is helping us to be more confident about making decisions, which in turn leads to better credit lines and more flexibility.”
The need for credible, up-to-date information about customers is very apparent, and never more so than when trading overseas. It is crucial to determine the credit risk of companies operating in unfamiliar areas based on “on the ground” intelligence, so that an accurate picture can be developed. The best way to do this is by using a software tool that synthesises daily intelligence from global sources, rather than just local.
Businesses also have a duty to their own shareholders to determine the nature and extent of the significant risks they are willing to take in their export arrangements. This is something that the board of directors will want to see, as they are responsible for sound risk management and internal control systems. With the appropriate trade credit management and intelligence tools in place, directors are well positioned to demonstrate governance – not just to shareholders, but also to their own auditors.
According to Grant: “It is important that credit managers keep an ear to the ground, understand not just the customer, but the customer’s customer; how they manage their operations; where they intend to be in five years’ time and more broadly the risks attached to the markets they are currently involved in and those they are targeting in the future.
“Increasingly, we will continue to rely on credible intelligence and software solutions to optimise the credit/risk function and positively impact the bottom line. A good trading relationship with a customer is great, but is always best if presented with reliable data and analytical intelligence, which can therefore tell the full story.”
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.