Trading with China: How cross-border transactions hit your bottom line
Hong Kong’s businesses have strategic advantages when it comes to cross-border trade. Not only is Hong Kong one of China’s largest export markets, it also has a bilateral trade agreement with the mainland.
But some of that strategic advantage has been ceded to an unnecessary foe – outmoded payment management. According to recent research, the hidden cost of facilitating cross-border transactions can have a significant impact on a business’s cashflow, especially for Hong Kong’s companies.
The Navigating China’s Cross-Border Payments, Opportunities and Challenges for Hong Kong Businesses survey recently conducted by American Express (AMEX), uncovers the ‘true’ cost of these payments. The survey’s authors found more than half of all payments between Hong Kong’s small and medium-sized enterprises (SMEs), and mainland China, still use old-fashioned cross-border payment methods. These include telegraphic transfers (89%), cheques (67%) and banker’s drafts (61%).
On the surface, these payment methods appear to be the cheapest available but they mask hidden costs. Businesses using these methods not only pay more, but they also miss out on advantages and risk reduction opportunities inherent in digital processes, such as e-fund transfers.
While corporates increasingly use fintech solutions and scalability to reduce payment costs, local SMEs (those in the US$2-20 million annual turnover range), and even their middle market counterparts (US$20-100 million annual turnover), generally achieve less than advantageous payment terms such as early payment discounts. Additionally, the research revealed another slug to the bottom line of smaller enterprises – longer cash conversion cycles.
When it comes to transferring funds, smaller companies also pay more than their corporate counterparts. Even worse, the less than obvious nature of these costs means SME owners may not even be aware of their impact on cashflows caused by poor end-to-end visibility.
The need to track receipt of funds, confirmations and recording of payment status all add to costs. Other issues facing Hong Kong’s SMEs include resource-intensive manual processing (many still use faxes and paper invoicing) and seasonal fluctuations in trading.
SMEs are particularly hard hit by seasonality. On average, their seasonal swings are double that of larger enterprises. The survey revealed SMEs’ cashflows oscillate by as much as 10% above average levels in peak periods but fell by 16% below average in off-seasons. This means alternative funding may need to be sourced to meet payment commitments. Such ‘emergency’ funding comes at a higher cost, and is often accompanied by stringent conditions.
Balancing seasonal cash flows, achieving economies of scale and negotiating more equitable payment terms all present ongoing challenges to Hong Kong’s SMEs.
According to the report, negotiating optimum payment terms in the cash conversion cycle inevitably sees SMEs worse off than their fellow corporates, with the average cash conversion cycle of Hong Kong SMEs stretching to 55% longer than their larger counterparts.
Cash Conversion Cycle: the longer the cycle, the heavier the cost
Source: American Express China Payments Survey
Businesses using outdated payment methods also miss out on early payment discounts offered to corporates, thereby missing out on savings, improved credit scores, greater efficiency in working capital and the opportunity to strengthen partnerships with vendors.
EXPLORING FINTECH SOLUTIONS
Given China is the world’s top exporter and Hong Kong is its second largest export market, it makes good business sense for SMEs and middle market operators to use effective fintech solutions to manage cashflows.
Technology can reduce hidden costs and offers solutions that can reduce transaction pain points, in addition to streamlining the entire transaction process. Those taking part in the AMEX survey rated tracking the visibility of payments highly, but 85.5% of respondees reported parts of their own processes were non-trackable. More than 60% of Hong Kong’s businesses admit tracking suppliers’ receipts posed a real headache, wasting time and money.
Hong Kong’s businesses are keen to improve their payment experience with mainland suppliers. Around 87% of those surveyed rated paper-based processing as their top issue, ahead of the need for standardised and consistent trading terms (60%).
Currency conversion also adds to costs. In 2017, more than $280 billion worth of products were exported from mainland China to Hong Kong. Since the US dollar dominates payments for trade with mainland suppliers (i.e. 70% of accounts payable for Hong Kong importers is in US dollars), it makes sense to reduce transaction costs by using a uniform global dollar payment solution.
SMEs and middle market businesses can also harness greater saving by shortening their cash conversion cycles. This funding gap currently varies from 153 days for SMEs to just 99 days for corporates. One solution available to SMEs is to partner with a third-party vendor with the ability to extend credit lines with specific credit terms. For example, one of AMEX’s solutions provides 60-day credit terms. Additional solutions include negotiating extended payment terms with suppliers and improving the visibility of payments by using a global payments solution.
In creating the survey – Navigating China’s Cross-Border Payments, Opportunities and Challenges for Hong Kong Businesses – AMEX’s researchers assessed more than 450 enterprises in Hong Kong. These included 202 SME enterprises, 176 in middle markets and 77 corporates (firms achieving $100 million plus annual turnover).
Respondees included business owners, CEOs, CFOs and treasurers from a range of sectors, dominated by manufacturing (33.5%), service sectors (17%), retail (10.6%), e-commerce (6.6%) and information technology/ telecommunications (5.3%).
To obtain your copy of the American Express Navigating China’s Cross-Border Payments, Opportunities and Challenges for Hong Kong Businesses survey please download the survey here.