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Swapping manual complexity for digital efficiency: the future of trade finance

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Swapping manual complexity for digital efficiency: the future of trade finance 1

By Alisa DiCaprio, Head of Trade and Supply Chain at R3 

Trade finance is going through a period of unprecedented evolution. Once an industry notorious for its stubbornness in the face of change, new and innovative digital technologies have now matured to the point where they are finally transforming it into a more streamlined and cost-effective place to do business for all participants.

Some of trade’s biggest operational challenges – like incorrect documentation and KYC, non-interoperable systems, poor visibility, manual reconciliation – are now being addressed and overcome by forward-thinking digital solutions.

Enterprise blockchain is perhaps the most promising – and appropriate – technology to emerge for this sector. Trade is inherently a decentralised system. The industry is heavily intermediated – predominantly by banks that help to facilitate transactions and provide the financing behind them, but also by insurers, customs officials and other market participants. Over and over again firms have tried to apply centralised solutions to this decentralised system, which of course has never really worked.

The decentralised nature of blockchain makes it a perfect fit for trade finance. For the first time the entire industry is getting behind a technology and moving it into real world deployment at record pace.

Meanwhile, regulators are working with technology providers to understand how to audit and gain insight into the transactions taking place on these new blockchain-based platforms, and ensuring suitable laws are in place, including those relating to electronic documentation and electronic signatures.

The architecture underpinning the entire ecosystem of trade is undergoing complete digital transformation – but how are participants benefiting from this change?

Unravelling complexity

Many of the processes and technologies underpinning trade finance have not been modernised in decades. The result is that those transactions continue to rely on paper-heavy processing, unsuitable for the current digital age. Traditional technology required corporates to log into multiple portals and juggle relationships and documentation for each shipment.

These inefficiencies in trade finance mean that nearly USD $1.5 trillion of demand for trade finance is rejected by banks, according to the Asian Development Bank (ADB), with 60% of banks expecting this figure to increase over the next two years. Developing markets that rely heavily on access to trade can be severely hindered through these outdated processes.

In addition, businesses all over the world must navigate the growing threat of cyber-attacks, changing regulations, and ever-changing sanctions lists. Despite this complexity, cumbersome and time-consuming paper-based exchanges are still commonplace.

Take, for example, invoice financing. While a common activity, managing invoice payments and terms can be slow and inefficient for companies and their trading partners. They must navigate different currencies and jurisdictions, each with unique requirements in terms of contract terms and payments.

By digitising these manual processes and superseding ageing legacy systems, a technology such as blockchain has a real impact on reducing the costs, risks and delays to participants involved in trade finance.

Alisa DiCaprio

Alisa DiCaprio

If applied effectively, the technology has the potential to unlock the potential $1.5 trillion opportunity in global trade finance. Companies of all sizes will benefit from better visibility into trading relationships and easier access to financing options, beyond point-to-point relationships, to a global network of trading parties.

A decentralised, global network

Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. While the rollout has been more gradual than some of the more over-enthusiastic predictions, many see it as a brilliant innovation capable of remedying a lot of the operational pain-points perturbing financial services. As such, there is growing debate about how blockchain can provide decentralised solutions to solve many of the problems facing trade financing.

One such solution is real-time visibility, which is available via permissioned access to authorised network users, and gives buyers and sellers unprecedented transparency into the status of their transactions.

This single source of truth and use of smart contracts could remove a number of inefficiencies in the paper-heavy processes that exist in trade finance, such as negotiations of letters of credit. In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process.

Achieving the network effect

In order to move towards a truly digitised and connected ecosystem for trade finance, mass adoption on a global scale is essential. This elusive network effect can only be achieved if technology players prioritise forward-thinking and inclusive integration solutions that lower the barriers to entry for all types of companies involved in the trading process.

If only a handful of firms adopt a blockchain solution for invoice financing, for example, the solution is useless if one company needs to trade with another that is outside this circle of early adopters. All the other benefits of blockchain such as speed, efficiency and lower costs mean nothing if you cannot use the platform to connect with the necessary counterparties.

Like any piece of enterprise technology, blockchain will be most useful when used in conjunction with existing systems. The reality is that most businesses are not full digitally native and so will continue to rely on legacy systems – all to different extents – in the near future.

The key to unlocking blockchain’s true potential, therefore, is not to try and oust these but to make sure the technology fits into the right places, with minimal cost and disruption to a firm’s day-to-day business. Put simply, integration holds the single most important key to rewiring the $8 trillion global trade finance market.

As Head of Trade and Supply Chain at R3, Alisa is responsible for trade strategy, standards and governance design. Alisa was previously a senior economist at the Asian Development Bank and holds a PhD from MIT.

Finance

VAT domestic reverse charge set to impact over 1.2 million construction workers from 1st March

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VAT domestic reverse charge set to impact over 1.2 million construction workers from 1st March 2
  • HMRC’s new VAT domestic reverse charge for building and construction services comes into effect from 1st March 2021
  • Construction firms could see disruption in trader/supplier relationships as well as potential issues with cash flow due to the change

HMRC’s new VAT domestic reverse charge for building and construction services comes into effect from 1st March 2021. With this in mind, specialists from Chartered Accountancy practice, Sheards Accountancy delve into the impact the legislation will have on both the construction and property industries.

The reverse charge will apply to all CIS registered businesses buying and selling construction services that are subject to CIS reporting, apart from those that are zero-rated, up to the point in the supply chain where the customer is the end-user. At this point, the normal reporting and collection of VAT resumes.

Where the reverse charge applies, rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT. In practice, this will mean that where there is a chain of contractors/subcontractors working on a building project, for example, none of those entities will add VAT to their invoices, other than the main contractor who is invoicing the end-user of the property.

Currently, in Great Britain, there are 290,3741 registered construction firms with 1,279,000 people employed in the industry. The construction sector has a monthly output of £14,014 million2 with an average weekly earning in the industry of £6481. But the industry has faced a number of challenges in recent years, which saw 3,502 insolvencies1 in the construction sector in 2019, equating to around a fifth of all insolvencies.

Kevin Winterburn, director at Sheards Accountancy commented: “The changes are a response to what HMRC have described as significant VAT fraud in the industry but they do in a way reflect a lack of trust to those operating in the sector from HMRC. The changes could have huge impacts on a company’s cash flow, so it’s essential that construction workers speak to their advisors, traders and suppliers ahead of 1st March.”

One of the biggest challenges for businesses in the sector is cash flow and a recent survey revealed that 1 in 53 construction companies say cash flow is a constant problem, with 84%4 of construction companies reporting that they had problems with cash flow. When the VAT domestic reverse charge comes into play on the 1st March 2021, experts predict this could have a negative impact on the already stretched cash flow issues in the construction industry, so it’s important for firms to review their existing work pipelines and relationships to prepare for the change.

Specialists from Sheards Accountants share their top considerations to prepare for the VAT domestic reverse charge changes:

  1. From a supplier point of view the legislation change will mean:

  • You will need to continue to validate sub-contractors for CIS purposes as usual
  • You will need to check and validate your CIS services customer’s VAT status
  • You will need to check if you have confirmation that your customer is the end-user – keep a record of it
  • If the customer isn’t VAT registered – no change to the current process, charge 20% VAT on income
  • If the customer is VAT registered but also an end-user – no change to the current process, charge 20% VAT on income
  • If the customer is VAT registered but is not an end-user– reverse charge VAT is applied
  1. From a customer point of view, the legislation change will mean:

  • You will need to inform your supplier whether or not you are the end-user
  • If you are the end-user, you will be charged 20% VAT and you will be able to reclaim it if you are VAT registered
  • If you are not the end-user and the invoice is subject to CIS, the supplier’s invoice should be subject to reverse charge and you can’t reclaim any VAT on it
  1. Review your existing trader relationships. It’s more important than ever to have a clear picture of all the traders and various suppliers you could work with on a project. Reviewing the various traders you will work with ahead of beginning a project will allow you to identify where the VAT should and should not be.

  2. From the 1st March 2021, invoices will have to state that the reverse charge is being applied and no output VAT should be charged. The VAT-registered customers will then need to charge themselves VAT and then claim relief in the normal way. They will do this by using the reverse charge tax rate.

  3. If you are on the flat rate scheme – you may need to leave before 1st March 2021. This should be discussed with your accountant beforehand.

  4. Looking further down the line at work which will begin after the 1st March but which might have already been agreed in contracts, these may need to be reviewed in order to reflect the changes. Contracts should clearly state where VAT is being charged and it’s important that any existing contracts are amended to avoid any issues with payment once a job is complete.

  5. Projects existing prior to 1st of March will need split treatment if they are continuing post 1st of March. If you’re unsure of how to do this, speak to your accountant.

Kevin summarises: “The VAT domestic reverse charge has been a long time coming and it’s something everyone in the industry has been aware of since 2019. But with the 1st March quickly approaching, it’s important for firms in the construction and property industries to start implementing changes to the way they work to make sure they are covered.

“We hope by highlighting the key considerations for everyone in the industry, including suppliers and customers, the changes and responsibilities of each party will be clearer.”

To find out more about the VAT domestic reverse charge please visit: https://www.sheards.co.uk/news/sheards-blog/archive/article/2021/January/vat-domestic-reverse-charge-for-building-and-construction-services

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Finance

Global dividend payouts forecast to revive in 2021

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Global dividend payouts forecast to revive in 2021 3

By Joice Alves

LONDON (Reuters) – Global dividend payments could rebound by as much as 5% this year, a new report estimated on Monday, after the coronavirus caused the biggest slump in payouts since the financial crisis more than a decade ago.

Companies’ payouts to shareholders plunged more than 10% on an underlying basis in 2020 as one in five cut their dividends and one in eight cancelled them altogether.

A total of $220 billion worth of cuts were made between April and December, based on investment manager Janus Henderson’s Global Dividend Index. But there are signs companies are beginning to reinstate at least some of them.

Janus Henderson’s report warned that dividends could still fall 2% this year, in a worst-case scenario. But its best-case scenario sees 2021 dividends up 5% on a headline basis.

“It is quite likely we will see companies pay special dividends in 2021, utilising strong cash positions to make up some of the decline in distributions in 2020”.

Banking dividends will be likely to drive the rebound in payouts in 2021, the report said, after the European Central Bank and Bank of England eased blanket bans for lenders on dividends and buybacks. These were imposed during the first wave of the crisis to prepare for a potential increase in bad loans.

UK lenders Barclays and NatWest resumed payouts this month.

Last year, dividend bans meant banks cut or cancelled $70 billion of payments globally, according to the report.

But the overall global dividend cuts proved less dramatic than expected. In August, Janus Henderson had expected the virus to drive corporates to cut $400 billion worth of dividends, nearly double the eventual outcome.

A resilient fourth quarter of 2020 helped, said Janus Henderson. The likes of German car maker Volkswagen and Russia’s largest lender Sberbank restored payments.

Mining and oil companies cut dividends after a slump in commodity prices, while consumer discretionary companies also took a hit following lockdowns.

European dividends, not including Britain, fell by 28.4% on an underlying basis in 2020 to $171.6 billion. “This was the lowest total from Europe since at least 2009,” Janus Henderson said.

(GRAPHIC: Dividend cuts by region –

Global dividend payouts forecast to revive in 2021 4

In contrast, North American payouts rose 2.6% for the full year, setting a new record of $549 billion, the report said. Canada had the fewest dividend cuts anywhere in the world, the index showed.

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Former Bank of England Governor Carney joins board of digital payments company Stripe

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Former Bank of England Governor Carney joins board of digital payments company Stripe 5

By Kanishka Singh

(Reuters) – Mark Carney, former head of the UK and Canadian central banks, has joined the board of U.S. digital payments company Stripe Inc, days after the company was reported to be planning a primary funding round valuing it at over $100 billion.

“Regulated in multiple jurisdictions and partnering with several dozen financial institutions around the world, Stripe will benefit from Mark Carney’s extensive experience of global financial systems and governance”, the company said on Sunday, confirming a report by the Sunday Times newspaper.

Forbes magazine had reported on Wednesday that investors were valuing Stripe at a $115 billion valuation in secondary-market transactions.

A senior Stripe executive told Reuters in December that the company plans to expand across Asia, including in Southeast Asia, Japan, China and India.

The company offers products that allow merchants to accept digital payments from customers and a range of business banking services.

Stripe raised $600 million in April in an extension of a Series G round and was valued back then at $36 billion.

Consumer-facing fintechs have seen a boost to their businesses during the COVID-19 pandemic, as people have been staying at home to avoid catching the virus and have increasingly been managing their finances online.

Carney, who headed the Bank of England and the Bank of Canada, had a 13-year career at Wall Street bank Goldman Sachs Group Inc in its London, Tokyo, New York and Toronto offices.

He is the United Nations special envoy on climate action and finance.

(Reporting by Kanishka Singh in Bengaluru; Editing by William Mallard)

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