Technological modernisation has given rise to new business practices and both of these forces are forever changing the financial services industry. This is especially true in cross-border trade finance, which invoice finance and factoring on the export side and supply chain finance on the import side. Trade finance is undergoing rapid change from an old fashioned, paper-based industry controlled by traditional banks, and into a digital landscape where transactions can be largely conducted, and funded, online. Here are 5 trends we’re expecting in international trade finance in 2020.
The unmet demand for trade finance is estimated by the Asian Development Bank to be $1.5 trillion annually. We expect this gap to remain or even grow slightly, reflecting the continued rise in open account trade. One persistent reason for the gap is that traditional financial institutions – banks – have a decreasing appetite for financing cross-border trade.
Banks have decreased their trade finance exposures over the last few years, except for their largest multinational clients. Strict capital and regulatory compliance rules have increased costs and cut into profitability. Geopolitical uncertainty is another factor causing banks to be very conservative in lending for import/export trade, particularly in developing countries.
Distributed ledger technology, the most prominent of which is blockchain, will continue to capture attention as the industry tackles how to conduct secure digital exchange of documents and funds. Right now, there’s no clear winner despite a huge amount of effort by competing initiatives. Establishing global industry standards that are available to all will take some time.
We’ll also be hearing more about “reg-techs”, a whole battalion of providers that offer various services to make regulatory compliance, and thus international trade, more efficient. Among the services offered by reg-tech companies are customer background checks, data security, document digitisation and data analytics.
The tech disruption has opened the door for new non-bank (or alternative) finance providers, from start-up fintech platforms to boutique specialty firms to tech giants, to grab a piece of the trade finance market. Banks are maintaining a foothold by investing or partnering with these nimbler players who aren’t bogged down by a stodgy culture or banking regulatory constraints. These providers have a fresh point of view that is especially appealing to GenX and Millennials who are frustrated by old-fashioned bank formalities.
These non-bank providers, like Stenn, are focused on bringing working capital relief to companies under-served by traditional banks. But the expanding market also brings the potential for confusion, as terminology and services are not standardised across the board. Companies need to be cautious to ensure they are receiving services from a reputable provider and not enticed by a slick website with no real offer.
Banks may be less directly involved in trade finance activities, particularly for SME companies, but it doesn’t mean they’re totally out of the picture. As mentioned, they are financing independent fintech ventures. In addition, banks as well as other private equity firms are participating in trade finance from the capital side, by investing in non-bank financial institutions or in securitised receivables assets. In this way banks avoid compliance and regulatory costs but reap the benefits of low default rates and high return on equity.
This is a win for the market. With this capital support, non-bank providers are able to provide financing to segments not served by big banks, firmly rooting themselves in the finance industry in the process.
The tariff war between the US and China may be abating, but this situation won’t make the international landscape less complicated. With a weakened World Trade Organisation and the general trend away from multilateral trade agreements, we expect to see more trade disputes on the horizon.
The trade war has forced companies to shift supply chains in new countries, which is time consuming, challenging and expensive. New business relationships must be forged, with suppliers reluctant to grant credit to new buyers and banks potentially unwilling to support new markets. This situation is only going to increase the demand for trade finance services from non-bank providers.
As we start the year, one thing is certain – 2020 will bring many new changes to the world of cross-border trade finance that will ultimately benefit companies in need of working capital, by providing more solutions in a more streamlined way.