Citi Perspectives Fall 2023: Transforming Treasury

12 | Treasury and Trade Solutions Citi Perspectives Figure 1. Objectives of receivables finance Arbitrage financing costs Raise liquidity Shorten DSO Mitigate risk Improve sales Manage balance sheet © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citibank. How insurance has reshaped accounts receivable finance Trade credit insurance has been a very effective tool for several years, providing risk mitigation to corporates. Initially, it used to be on single name basis, whereas the concept, post pandemic has broadened toward a portfolio-based approach. Post pandemic, corporates that previously had domestic centric flows are increasingly diversifying both the regional and global flows. These new or augmented flows have resulted in new cross-border risks or political risks for global corporates. As a result, rather than just cherry-picking specific receivables, corporates have begun monetizing their entire portfolio by using an insurance cover. Currently, leading insurers with deep pockets on certain favorable industries are able to provide coverage not only on shorter 2 Trade Finance Global, Market update: Trade credit insurance market to grow from $10.3bn to $11.2bn in 2023, April 2023. tenor receivables but on long tenor receivables as well, as is common in the telecommunications and technology industries. As priorities and KPIs continue to change for treasurers and CFOs, off balance sheet solutions in addition to risk mitigation solutions continue to surge in popularity. For banks, the benefit is substantial as most of the time a large, diversified portfolio is made up of several buyers who are not clients of the bank. Hence, getting an insurance wrap with indemnity coverage of 90-95% allows banks to provide a holistic solution that can encompass the entire portfolio with blended pricing. For European banks, there is additional capital relief as they are able to secure probability of default (PD) substitution and benefit from low-risk weight on these structures, resulting in an efficient asset base. Further, with receivables being sold on a “true sale” basis, the receivable becomes derecognized from the balance sheet of the corporate and is replaced with cash. Traditionally, trade finance has been paper-based, however with the advent of new technology such as artificial intelligence, the majority of accounts receivable financing globally is shifting toward digitalized solutions. The emergence of fintechs in this space is a testimony of the transformation happening in trade globally. Digitalizing receivables monetization also aids greatly in fraud prevention, mitigating one of the key risks that accounts receivable financing has faced in the past. Like emerging trends in cash management, receivables financing has seen banks begin to prefer hosting full integration with their clients’ enterprise resource planning (ERP) systems for ease of operations and real- time updates. Government initiatives to support accounts receivable financing The global trade insurance market is estimated to be approximately $11 billion in 2023, swelling to an estimated $15 billion to $16 billion in 2027. 2 Today, Europe, the Middle East and Africa (EMEA) represents the largest market for trade credit insurance. However, with the shifting of supply chains globally we expect to see changes in these concentrations in