Four strategies to simplify the trade finance collection process and generate more revenue

Published on December 6, 2022 by Richa Prakash

Documentary collection is an inexpensive payment method used extensively between parties to international trade. It is attractive to both buyers and sellers because bank charges are cheaper than for documentary credit, and it is less risky than open accounts. Importers and exporters with longstanding partnerships usually prefer this method, where a bank would act as their intermediary.

Bank charges for handling documentary collection are far less than charges for handling documentary credit, but charges for maintaining an operating environment for this process are high. Although participating banks do generate revenue from the high volume of collections handled, the margin between the cost of running the process and the revenue generated from processing fees is not wide enough.

Factors that account for a large portion of bank revenue include increasing volumes and competition; reduced turnaround time and urgent client requirements; staff recruitment, retention and engagement; and office space, systems and technical support.

1. Increasing volumes and competition

Cross-border trade is not a new concept for importers and exporters. Over time, the parties start trusting each other and agree to shift from letters of credit (LCs) to documentary collection due to the exorbitant bank commissions charged for handling LC transactions. Since the collection process is simple and benefits the trading parties, volumes handled with this type of transaction are higher, and bank fees and commissions charged over the documentary collection lifecycle need to be competitive.

2. Reduced turnaround time and urgent client requirements

Increased volumes require not only handling a large number of documents, but also fast processing. Increased trade transactions have increased the workload at ports, which require goods to be cleared as soon as they arrive or the payment of high demurrage charges. Customers transfer this pressure to banks, requiring urgent document processing and a reduction in turnaround time.

3. Staff recruitment, retention and engagement

Unless the function of processing collections is automated, it would need to be handled manually, requiring employee recruitment, training, engagement and other costs. Although deploying bots could reduce some of the cost, the need to remain flexible entails maintenance overhead costs, requiring human intervention. Thus, the process — from sourcing to deploying new talent — takes time, aggravating the difficulty faced when transaction volumes increase.

4. Office space, systems and technical support

Although we learned amid the pandemic to minimise the office space required, the need for systems and technical support has increased. With the change in work culture adopted by almost every organisation, the cost of system procurement and deployment of applications with additional security has increased significantly.

How to resolve these issues:

Resolving these issues could reduce the significant costs incurred for maintaining the systems necessary for documentary collection operations. The simplest strategy is to outsource the process to a service provider; this could significantly reduce the overall cost.

How Acuity Knowledge Partners can help

We have extensive experience in working in the sector and believe in delivering only the best quality. We embrace transformation and provide an improved customer offering to help you grow while mitigating operational risk and delivering efficiencies. We list below some of the benefits we offer:

  • Competitive edge due to our global presence
  • Access to low-cost skilled labour and subject-matter experts
  • Resource management including hiring, training and retaining staff
  • Well-equipped offices and technology
  • Tailor-made process restructuring for improved efficiency and process simplification
  • Quality and timely delivery while boosting productivity with strict adherence to deadlines
  • Data confidentiality
  • Easy project management
  • Dedicated experts able to handle several transaction processes

About the Author

Richa has pursued B.Tech(IT) from Bharati Vidyapeeth, Pune and MBA(Finance) from Institute of Marketing and Management, Delhi. She is a CDCS certified with around 11 years of rich experience in international trade finance, customer service & relationship management. She has a rich experience of various trade process and platforms migrations along with several process automations in trade finance operations.

Originally published at https://www.acuitykp.com.

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/