Mitigating Risks in Int’l Payment

Vietnam has entered many new-generation free trade agreements (like CPTPP and EVFTA) which offer golden opportunities for Vietnamese exporters to seek partners and expand potential consumer markets. However, unlocking a new market also comes with a lot of risks and the biggest risk that exporters will face is not being paid by importers. In that context, the use of trade credit insurance is likened to a solid “shield” to help reduce risks, protect the interests and assets of exporters and help them feel secure in doing global business.

Opportunities and risks come together

According to expert forecasts, difficulties and uncertainties in the global economy and global trade in late 2022 will not be overcome immediately but will last until the middle of 2023. While major markets like the EU and the U.S. are struggling in the recession, prolonged inflation, and a sharp decline in consumption power, Vietnamese exporters have actively planned to reach out to new niche markets, including the Middle East (e.g. Qatar, Morocco and Oman) and Africa (e.g. Ghana and Mozambique) that emerge as potential export markets for Vietnamese firms.

According to experts, now is a favorable time for Vietnam's key export industries such as spices, food and seafood to expand long-term cooperation with markets in the Middle East and Africa. Unlocking these two niche markets is a strategic direction and has important long-term implications.

Mr. Dau Anh Tuan, Deputy General Secretary, Director of the Legal Department (Vietnam Chamber of Commerce and Industry - VCCI), said that due to global difficulties, to have stable orders, Vietnamese exporters often look to expand into niche markets. Nevertheless, when making international payments, exporters need to consider factors such as trade fraudulence, overdue payment and insolvency. Besides, most Vietnamese exporters have not carefully analyzed legal contracts from brokers or lack market information to make the right decisions to avoid fraud in international payments.

According to the U.S.-based Association of Certified Fraud Examiners, global companies lose about 5% of their revenue each year to fraud. The average value of a scam is US$1.7 million.

At a workshop on the prevention of disputes and fraud in international trade hosted by VCCI in collaboration with the Import-Export Department (Ministry of Industry and Trade), Mr. Nguyen Minh Duc, a legal expert at VCCI, also provided many remarkable figures. Globally, 49%, 47% and 46% of companies said that they were victims of fraud and economic crimes in 2018, 2020 and 2022, respectively. In Vietnam, 52% of businesses surveyed by auditing firm PwC said they had experienced fraudulence or other economic crimes in the two years before the survey, higher than 46% in the Asia-Pacific region and 49% in the world. “Vietnam's entry into a series of FTAs has brought golden opportunities for exporters to find partners and increase export value. Nonetheless, the more open global integration is, the higher the likelihood of disputes, fraud and commercial payment risks,” he warned.

Sharing the same view, Ms. Vu Thi Duc Hanh, Country Director of Atradius Vietnam, said, expanding into new markets is an attractive and dynamic strategy in terms of seeking growth. However, selling into new foreign markets often presents unforeseen challenges and risks. One of those challenges is competition and it may just be the right payment term. Exporters certainly always want to get payment as soon as possible while importers seek to receive the goods as soon as possible and delay payment as long as possible. The following are the main payment methods for international business transactions.

For Vietnamese exporters, until payment is received, any sales are considered gifts to importers only. Therefore, exporters must consider which payment terms are feasible or desirable for both parties.

Solutions for exporters to minimize potential losses due to non-payment

Accessing and managing customers' credit risks is an ongoing process and making decisions too quickly without enough information is potentially risky. Furthermore, if a business spends so much time making decisions, customers may easily misunderstand that it does not want to work with them and it may lose business opportunities as a result.

Therefore, to manage risks in international payment, Vietnamese exporters need to thoroughly understand their customers, including financial capacity, business history, export and import fields. The ideal time to check a customer's financial position is prior to the transaction, including their long-term relationship with suppliers and their ability to meet payment obligations.

Companies can start by checking basic information, such as the company's legal name and registration, to make sure that it is dealing with a legitimate entity. Then, they should move on to financial records, including the ratio of the company's trading volume to its size, the transaction history of products that it is dealing in, and its payment history to check past late payments and defaults.

“The key is to get to know your customers well, and this includes their financial health. The ideal time to conduct a review is when they publish financial statements to easily figure out warning signs (Are they too heavily indebted? Do they change suppliers too often or do they intensify pressure on their suppliers to extend their credit lines?) Any of these signs could herald financial stress. A financial audit will expose potential customer warnings and give businesses enough information to adjust payment terms and procedures,” she said.

Additionally, to limit risks in international payment, companies need to actively learn about legal regulations on import, export and payment in target markets to find appropriate countermeasures. For example, the Vietnam Trade Office in Pakistan recently issued a warning to businesses that are exporting goods to Pakistan that the State Bank of Pakistan (SBP) made policy changes. On January 24, 2023, SBP announced that it will abolish the requirement that importers must obtain permission for issuance of foreign currency before importing but this agency recently issued a new regulation effective through March 31, 2023. Accordingly, Pakistani commercial banks are allowed to carry out procedures and release documents to importers with shipments that arrived at Pakistani ports or were delivered from January 18, 2023 or earlier, provided that importers have an agreement with partners for 180 days of late payment or payment from a third country. This is SBP's urgent solution to deal with Pakistan's increasingly acute foreign currency shortage.

With this new regulation, Vietnamese exporters to Pakistan are facing the risk of non-payment. To avoid falling into such situations, they need to have an appropriate credit management program to minimize payment risks and protect their interests and assets.

Remarking more specifically on the advantages and disadvantages of this credit risk management tool, Ms. Vu Thi Duc Hanh said that commercial credit insurance safeguards clients’ receivables and protects businesses from unpaid bills due to clients’ delay, bankruptcy, default, political risk or other reasons that policyholders agreed with insurers. In addition, using trade credit insurance helps policyholders confidently make inroads into new niche markets when they can grasp big data about markets that Vietnamese exporters seek to enter.

By My Chau, Vietnam Business Forum