In the course of business many companies by nature will issue numerous guarantees to their customers through banks and sureties. Over time they find themselves accumulating a significant number of outstanding guarantees issued by different guarantors for different beneficiaries.
In the end participants are met with a complicated and scattered distribution of outstanding guarantees, physically held across a wide range of counterparts.
And this is where the problem begins. At heart, the problem today is that the issuance and storage of guarantees is spread across multiple participants while the guarantee related process is manual and paper based.
This makes it an unnecessary costly process, that may include handling fees, physical processing, courier and storage fees.
Digitizing the issuance and safekeeping of guarantees promises to bring substantial cost reduction to all parties involved.
A study was conducted in cooperation with PwC – one of the leading experts in trade finance – to analyze different use-cases and provide an independent opinion on the cost savings and different benefits gained by all parties upon digitizing the guarantee life cycle.
The guarantee process flow
In its simplest form a guarantee transaction involves three parties: an applicant, a beneficiary and a guarantor. From a high-level perspective a typical end-to-end lifecycle of guarantees consists of seven steps with all parties involved.
During these processes many manual handlings and activities take place leading to costly and cumbersome labour-intensive guarantees with suboptimal processing time.
Findings
The study found that in six out of the seven steps costs can be reduced significantly, by utilizing the digital possibilities that are already available through the Guarantee Vault.
Following the course of the research, they argue cost savings can be reached through direct and indirect benefits. Direct benefits impact cost savings directly by removing specific expenses while indirect benefits impact cost savings through efficiency means and risk reductions. These benefits are further divided into savings specific to labour costs and savings specific to paperless guarantees.
The study addresses the costs saving potential for each of the three participants involved when they use digital guarantees through the Guarantee Vault:
- A. Applicant
- B. Guarantor
- C. Beneficiary
A. Applicant cost savings
As there is no one-size fits all approach to calculate the potential cost savings for applicants, they approached this by differentiating two types of companies:
- Trade oriented business
- Production oriented business
Next, based on assumptions for one typical guarantee for each of these two types of applicants, the business case was calculated. This resulted in a staggering cost saving potential between 63% and 68% per guarantee.
The cost savings are found in multiple areas of handling guarantees as well as throughout the end-to-end lifecycle of guarantees.
B. Guarantor cost savings
Guarantors typically process many guarantees on a daily basis. Based on assumptions for one typical guarantee use-case, the business case was calculated. Please note that this is based on an average as guarantors have individual processes that are not always comparable, but a staggering cost saving potential of approximately 68% per guarantee was identified.
The cost savings are found during the end-to-end process of guarantee issuance and safekeeping.
C. Beneficiary cost savings
As for the beneficiary the same approach applies as for applicants; there is no one-size fits all approach to calculate the potential cost savings for beneficiaries.The consultancy approached this by differentiating two types of companies:
- Trade oriented business
- Production oriented business
Next, based on assumptions for one typical guarantee for each of these two types of applicants, the business case was calculated. This resulted in a substantial cost saving potential between 37% and 48% per guarantee.
The cost savings are found in multiple areas of handling guarantees as well as throughout the end-to-end lifecycle of guarantees.
Utilizing the opportunities of digital guarantees pays off
Once the benefits of digital guarantees are understood and companies embrace the digitization of the guarantee process, significant cost reductions will follow naturally.
By using the Guarantee Vault each company independently can save on costs and increase efficiency throughout the end-to-end lifecycle of guarantees.
For more details on the PwC study please download the findings. Would you like to have a detailed cost saving calculation for your organization? Please reach out to us.