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The interconnected world of trade finance, trade credit insurance and related services can be a mysterious one to outsiders. Too often, policymakers and businesses are unaware of the array of options available to them, or the benefits the sector brings to the economy. This in turn, can – and often does – lead to problems.

Recent policy developments, such as the proposed Late Payment Regulation in the EU, reveal a growing gap between the realities of business and finance, and the understanding of policymakers and the general public. 

This gap includes how financing and risk protection mechanisms benefit businesses and the wider economy. The result of this information gap is poor regulation and ultimately, less support getting through to the businesses that need it.

Lower levels of public awareness are not only a story of missed opportunities, but also of negative perceptions. Regulators and governments seek to use the tools available to respond to potential market gaps as they see them, which might involve enhancing competitiveness in specific sectors or promoting growth by establishing new trade channels.

Who is responsible for educating the public?

 In light of this, the trade finance and credit insurance industries should be more actively involved in informing such developments rather than reacting to them.

But too often, policymakers miss the bigger picture despite good intentions. It’s easy to blame those in charge for this failure, but we must do more as an industry to inform public discourse. 

Not only does this help clarify misunderstandings, but it ensures that the strengths of banks, insurers and other key financial institutions are leveraged in the interest of the wider economy. Ultimately, this can unlock funding and risk protection, which enable businesses to thrive.

In spite of these challenges, however, the level of economic support being given by banks and insurers is still enormous. 

For example, ICISA’s estimate is that up to 15% of world trade in 2022 was protected in some form by trade credit insurance. Additionally, direct support from banks and financing houses will be substantially higher than this. Despite this, the reported trade finance gap continues to grow.

According to the Asian Development Bank, it stood at nearly $2.5 trillion just last year. So this means we face a twin challenge a widening trade finance gap, as well as an insufficient understanding of the work of our sector in addressing this. 

At the same time, governments are also focused on addressing issues such as poor productivity, lower economic competitiveness and slower growth. As politicians look increasingly closely at the levers of industrial and economic policy, it is important that they understand fully how trade finance and insurance sectors fit in. 

Late Payments Regulation: Where industry engagement could have helped

The proposed EU Late Payments Regulation is a good example of where greater engagement by the trade credit insurance sector could have made a difference before problems arose. 

The Late Payments Regulation was developed to address negative payment behaviours in the EU. Payment terms are currently governed under the existing Late Payments Directive, which sets certain principles upon which member-state rules are based. 

This means that each country can take a somewhat different approach to the same question. In many cases, these systems work relatively well, but in others, late payment behaviours can lead to significant problems for businesses. 

While it impacts all businesses, it is particularly true for SMEs, where there is the added dimension of potential abuse by larger businesses. Equally, this can also lead to reliance on on-time payment, which can limit flexibility and increase friction and cost. 

As a result, the Commission has put forward a proposal for a regulation which would aim to rebalance the field in favour of SMEs, and harmonise the approach to payments across the EU. 

The proposals seemed to miss the mark in a way which would not only harm commerce within the EU, but create new difficulties. The proposed main change would shorten the maximum permitted payment timeframe for transactions from the existing 60 days to only 30 days. 

Moreover, under the rules today, businesses can negotiate longer payment terms where doing so is not grossly unfair to either party, which would not be possible under the new proposals. This contractual freedom is essential for companies where working capital, production and other key operational elements don’t fit neatly within the 30-day window. 

The practical implications of such changes have become clear, but the impact on financing trade under these conditions was largely ignored until recently. 

Internal research from ICISA members has indicated that changing payment terms in the proposed way would generate a new financing requirement for SMEs of around €2 trillion. 

It is unlikely that banks would meet this new financing requirement. Even if they were able to, the cost of interest on the financing would have serious inflationary impacts on European markets. 

Where does the Late Payments Regulation stand?

Following the publication of the Late Payments Regulation by the Commission in September 2023, the European Council and the European Parliament must develop their own versions.

Negotiations will then follow between all three bodies to develop a final view. European elections and subsequent changes in the European Commission during the Summer will complicate the timeline, but there is pressure for progress to be made prior before then.   

Discussions within the European Parliament have been contentious with divisions emerging even within political groupings. Despite this, the text has been debated and progressed through the influential Internal Market and Consumer Protection (IMCO) Committee.      

A draft version was ultimately agreed by the IMCO on 20 March. This includes options for extending the payment period to 60 days, if agreed between parties. An option to extend to 120 days for “slow and seasonal goods” was also introduced. The wider European Parliament will then vote on this in April as one of the last opportunities prior to the elections. 

The European Council will also develop its own thoughts, but there is even greater opposition there with member states understood to be unhappy with many of the provisions. So we shall have to wait a little longer to see the results of these discussions.

We have to wait a little longer to see the results, but it’s worth considering how we got to this point. This situation has come about (in part) because well-intentioned people sought a solution to a genuine problem. The issue is that a general lack of understanding of these important systems has led to sub-optimal solutions which ignore fundamental aspects. 

Misunderstandings about financing and risk protection are just one aspect of this issue. Even greater involvement from banks and insurers might not have completely prevented the situation.

However, greater continuous engagement by our sector would have wider benefits. This would leave politicians and officials with a much clearer understanding of the processes that businesses go through to access financing and the risks they face daily. 

A better-informed public discourse on this, and related topics, would limit the need to push back against such changes after they have already been proposed. It would also highlight the positive role our industry can play in society.

There’s a rising trend in financial regulation where banks and insurers are more and more expected to encourage improved practices among their clients. 

While businesses are ultimately responsible for their own activities, we cannot ignore our ability to influence clients and policyholders. This includes areas such as improving payment behaviours, debt management and recovery, and other elements of day-to-day business, particularly for SMEs. 

These efforts can have a positive impact on banks and insurers by limiting losses, but they also increase overall economic resiliency, giving wider benefits to the real economy. 

More broadly, our industry can play a leading role within public discourse to explain the steps businesses can take to protect themselves and to avoid scenarios where late payment and other negative behaviours start to have an impact. 

This would make the related trade finance and trade credit insurance sectors more widely understood by the public, help regulators and policymakers grasp the complexities of the ecosystem in which we work, and enable us to enhance the provision of financing and trade credit insurance to the community. 

In a world of increased misinformation, it is everyone’s responsibility to improve awareness of the facts.