BPO Boost Can Help UK Corporates Seize CEE Potential

UK corporates are increasingly looking outside the UK and Western Europe for growth – with the Central and Eastern European (CEE) region attracting particular attention. However, higher counterparty risk and local-market complexities present barriers to tapping the region’s potential. David Vials, Head of Corporate Coverage for UK and Ireland at UniCredit, explains how moving from traditional trade finance instruments to digital tools such as the Bank Payment Obligation (BPO) can help mitigate these risks, while local market expertise will enable them to navigate the complexities of the territory. 

UK exports to the CEE region are currently worth around GBP 16bn and have doubled over the past decade. Yet there remains considerable untapped potential for UK corporates looking for regional opportunities that strike a balance between growth, risk and cost efficiency. The CEE region, which has over 100 million consumers and a combined GDP of over GBP 1tr, is one such market. 

Indeed, UK Trade & Investment is targeting a doubling of CEE trade to GBP 30bn by 2020, and it’s easy to see why. For one, growth rates in the region have consistently outpaced the rest of Europe – Slovakia, for example, averaged 3.6% GDP growth in the decade to 2016 compared with an EU average of 0.8%. The region also has a more competitive cost base than established EU markets and a level of growth sustainability equalling that of the emerging markets – an attractive mix. Low public debt levels and GBP 170bn of EU funding to boost investment in infrastructure, energy and innovation between 2014 and 2020 further strengthen its appeal.     

Avoiding common pitfalls in the region 

But while the door is open to CEE trade, a number of risks and challenges must be carefully negotiated. For one, dealing with new partners in unfamiliar markets leads to a higher risk of buyers not meeting payment obligations in a timely manner, and UK corporates will be looking for ways to mitigate such risks in their activities abroad. Traditionally, documentary methods such as letters of credit and letters of guarantee are used for this purpose, but digital innovations are now offering ways of not only protecting corporates from settlement risk more quickly and more efficiently than paper-based methods, but are also giving access to innovative financial solutions for both buyer and seller.

On top of this, businesses still face challenges due to the administrative, regulatory and cultural environment of the region. A recent report published by the Economist Intelligence Unit highlighted areas such as excessive bureaucracy and sector-specific taxation, red tape in public-sector procurement, taxation systems in need of reform, and arbitrary legislation that could pose challenges to UK corporates’ operations in the region. In this regard, intimate local-market knowledge and steady guidance from banking partners will ensure trade and investment with the region can reach its full potential with minimal disruption or risk. 

Digital tools paving the way

For UK corporates looking to make the move into the region and negotiate risk, digital trade finance tools are simplifying the process significantly – offering improved access to bank finance and support. One such tool is the BPO, which involves an irrevocable undertaking by the importer’s bank in favour of the exporter’s bank, to make a payment at sight or upon maturity subject to the comparison of digital trade data. It provides the assurance of payment of traditional instruments such as letters of credit and letters of guarantee, but with enhanced speed, reliability and convenience – as well as at lower cost. The BPO mitigates counterparty risk for buyers and sellers alike, and furthermore enables flexible financing propositions across the supply chain, from pre-shipment to post-shipment. 

But UK corporates should bear in mind the importance of a trusted banking partner to oversee trade enabled by the BPO. For its part, UniCredit is a frontrunner in BPO implementation in the CEE region – performing the first BPO transaction in Romania (as well as in Italy and Germany), where early adopters have given resoundingly positive feedback. To build on this experience, we are now also the first BPO-ready financial institution operating in other CEE countries such as Bulgaria and Austria. 

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To see the full benefits of implementation, the BPO must also be fully digitally enabled, with no manual processes causing bottlenecks. This is why UniCredit has created a single digital platform that enables companies to execute BPO transactions electronically from baseline to settlement. This platform is already live, and incorporates client feedback to ensure maximum efficiency and usability in streamlining their processes.

The BPO is not the only product that can benefit from digitalisation. To this end, UniCredit is developing a digital trade finance platform in key markets, which will also be available for clients in the UK – offering a wide range of working capital solutions in a streamlined and convenient manner. Those looking to broach CEE markets can take advantage of this – using techniques such as receivables finance, for instance, to mitigate overexposure to counterparties in the region.     

Knowing the market

Beyond implementing digital trade finance tools, corporates can also look to their banks for strong local knowledge of both their home and destination markets to ensure trade and investment with CEE countries is not hindered by cultural, regulatory or administrative concerns. The CEE region has yet to see full economic convergence with Western European business structure and so key differences remain. As a result, banks have a central role in guiding corporates hoping to expand into the territory. UniCredit is the market leader in corporate banking in CEE, and our understanding of cultural practices in different parts of the region enables our partners and clients to overcome cultural barriers, conduct business effectively, and find new opportunities in a manner that takes into account the region’s varied commercial and political contexts. And by leveraging best practices from different markets where UniCredit is engaged, we are providing more focused products to more customers in more of the markets we serve.

With strong economic fundamentals, the CEE region continues to move firmly in the right direction. These markets represent a serious opportunity for UK corporates, with huge swathes of potential still remaining untapped. And, while the challenges may appear formidable, corporates have the resources to overcome them. Through the use of innovative digital trade finance tools, and expert guidance from market insiders, the UK’s corporates can flourish in the CEE region.