Fintechs involved in trade finance are cropping up wherever goods are flowing, with the goal of serving SMEs faster and easier than big banks can – or want to. Digitalization and a revolution in how customers are served by these new non-bank providers can potentially leave traditional banks struggling or unable to catch up.
International trade has doubled since 2000, and banks have done well from it, raking in almost $50 billion in trade finance fees last year according to the Boston Consulting Group.* But the future does not appear as rosy, as global economic growth cools so does the trade that comes with it. Adding to the pressure, bigger banks have to deal with digitalization and the rise of fintechs that are able to offer trade finance solutions a lot faster, more hassle-free and covering more territory than what the established players can muster. So it is no surprise these new entrants are capturing attractive parts of the value chain from traditional players – and even serving new market segments like SMEs.
Banks Have Fallen Behind
Decades-old tools like letters of credit are steadily being replaced by open-account trade, improved global communication, increased legal protection, and a new abundance of counterparty information. This means that importers and exporters are increasingly trading without relying on the financial clout of banks.
Add to the mix the 2008 financial crisis, which brought a host of financial regulations meant to make the financial system safer. To stay on the good side of the regulators, banks now try to keep as much off their books as possible. According to the World Economic Forum, this has had one particularly adverse consequence: it contributed to the withdrawal of global banks from secondary markets, namely those in developing countries.
This is one key reason for the rise of a trade finance gap – essentially unmet demand – which was estimated by the Asian Development Bank- to be $1.5 trillion in 2018. With 80% of global trade enabled by some form of trade finance according to World Trade Organization estimates, banks are not winning any new friends by rejecting a good 50% of trade finance requests stemming from SMEs.
Enter the Disruptors
Fintechs are maximizing the promise of so-called disruptive technologies to drive down costs and serve clients better. This transformation is happening in all areas of financial services. On the consumer banking side, companies like Revolute and Monzo are shaking up mobile digital banking, Robinhood delivers no-fee stock trading, and SoFi provides consumer lending, to name just a few of the vast number of fintechs jockeying for market share and to unseat traditional banks.
In trade finance, fintechs are moving the market towards eB/Ls (electronic bills of lading) that shorten the payment cycle and improve the working capital of exporters, cheaper-to-process digitized documentation, and emerging blockchain tools that validate ownership, certify transactions, make payments as well as reduce duplicate and fraudulent documentation. Non-bank players are unlocking their innovative promise – while increasing speed and security via automation.
Traditional banks are trying to get in on the game as well, mainly through partnerships and multi-bank consortiums. There have been dozens of bank/fintech partnerships formed in the past few years. But it’s not easy to succeed. Bank culture leans more bureaucratic than innovative – merely by the sheer size of banking organizations. Legacy IT architectures and a tendency to fit new offerings on top of existing products are also preventing banks from realizing the full value of the digital promise. It’s no wonder that a recent study bank/fintech collaborations by Bank Innovation concluded, “When it comes to bank-fintech collaborations, banks are finding more failure than success.”
And it will only get tougher for those that do not embrace the digital revolution and become more agile. Today’s trade finance client wants less expensive, faster, secure and more accessible service – and simply put, it is the tech-savvy non-banks that are providing it.
Trade finance fintechs have the potential to make a lasting impact on economic development, by welcoming smaller clients and building relationships far-and-wide – in places where banks lack a presence due to regulatory restrictions or profit reasons. It’s expected that their ‘disruption’ will chip away at the trade finance gap and provide working capital relief in markets where it’s most needed.
*Boston Consulting Group – The Digital Revolution in Trade Finance, 2018
Stenn International Ltd. is a UK-based, non-bank trade finance provider specialising in cross-border trade. Stenn’s trade finance solutions are comprehensive and can be combined to cover the entire supply chain from purchase order to delivery of goods. Innovative practices allow Stenn to finance in sectors and geographic regions currently underserved in global trade. The company operates globally with offices in Buenos Aires, Los Angeles, Dallas, New York, Miami, London, Amsterdam, Dusseldorf, Berlin, Mumbai, Chennai, Singapore, Hong Kong, Guangzhou, Hangzhou, Suzhou, Shanghai and Qingdao. Learn more at https://stenn.com or follow us on Twitter, LinkedIn and Facebook.