Back

Why are banks being replaced by FinTechs for trade finance?

20 Nov

,

2021

The trade finance landscape was influenced by Covid

The Covid-19 pandemic profoundly harmed global trade and supply chains. Covid-19 also slowed the growth of companies and economies everywhere.

Small- and medium-sized enterprises (SMEs) in emerging markets were hit particularly hard. These firms had already found secure trade finance from banks difficult enough to obtain, yet working capital is essential for these businesses to run effectively.

Many SMEs found that their banks rejected them for finance. The reasons varied. Some banks cited external policies while others cited a lack of credit history. In 2020, finance rejection rates reached all-time highs, adding to the estimated $1.5 trillion (USD) trade finance gap

These developments spelt disaster for some SMEs. However, Covid-19 paved the way for significant digital advances in cross-border trade. In response to supply chain disruption, many existing financiers digitised their business models. 

FinTechs provide an easy digital finance solution

FinTech start-ups emerged to help Exporters and Importers secure global partnerships. Through non-recourse factoring (explained later) financing became more accessible for SMEs. Most of all, the solutions have delivered real tangible value.

This shift in consumer demand and the emergence of technology have affected the trade finance industry. Banks are no longer seen as the go-to trade finance providers. Instead, FinTechs are being recognised as facilitators for SMEs in developing markets.

These 'non-banks' provide digital trade finance in areas that banks have been reluctant to service. SMEs will often find obtaining finance quicker from a non-bank these days. These financiers are digitally-minded, while banks remain stuck in their ways. FinTechs can use cloud technology and secure documentation that serves a broader range of clients (and at a lower cost). There is no longer a need for paper-based applications, and cross-border trade deals are growing thanks to the advanced technology that supports them. FinTechs have an excellent opportunity for global expansion as they can operate in many countries.

Bain & Co - a global consultancy firm - predicts FinTechs could generate an extra $2 billion (USD) annually in trade finance fees. Much of this will come from SMEs in areas under-served by banks. These trade volumes are expected to top $1 trillion (USD) by 2026. 

The dwindling reputation of banks

Banks active in trade finance have many regulatory boxes to tick. In Europe, the Basel III framework introduced stricter compliance rules. Regulatory needs vary across countries and regions, so many banks can only finance SMEs in the same country. Also, numerous SMEs have been refused loans by their banks due to having limited or no credit history. In addition, banks often cited Know Your Customer (KYC) risks as reasons not to provide finance. This doesn't help the perception of banks in the eyes of many SMEs.

FinTechs are not bound by the same level of regulations as banks. This is why they can serve a broader client base more quickly. FinTechs benefit from this flexibility and remain legally compliant and dependable. They take an elegant approach and make the application process easy and quick.

The use of technology in secure digital finance

The non-bank model is attracting more interest from SMEs around the world. Non-bank financiers can foster strong feelings of trust within customers, which can be attributed largely to the technology they use.

  • Blockchain technology can record transactions digitally and securely.
  • Documentation processing can be eased with web-based data capturing.
  • Cloud-based storage of accounts receivable data allows SMEs to access proprietary information and verify transactions easier.
  • Electronic bills of lading (eBLs) can replicate the functions of paper-based bills of lading.

Another appealing aspect of FinTech trade finance is the lower default risks. Non-recourse financing ensures that the financier remains responsible for chasing payments from Importers.

FinTechs are willing to serve as many international customers as possible. Only 15% operate in a handful of countries, while over 50% plan to be in five or more countries in five years.*

Are banks as reliable anymore?

In an attempt to stay competitive, bank initiatives like 'we.trade', 'Trade Finance Gate' and the 'Trade Information Network' have been introduced. According to the Boston Consulting Group (2017) banks hope to use these networks to attract clients to multi-bank trade finance. These participating banks hope these networks will save them up to $6 billion (USD) by 2022. They hope this additional cash will provide room for more international trade finance activities.

However, it might be too late for banks to be agile competitors in the trade finance space. FinTechs have solidified their places and it will be hard for banks to bring many SMEs back on board. These non-banks have a positive reputation in the eyes of many international customers. They are becoming crucial for the financial supply chain.

*Roland Berger Consultants - FinTech in Europe: Challenger and Partner (2016)

 

Legal information

© Stenn International Ltd. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following:

  • You may copy the content to your website page but only if you acknowledge this website as the source of the material and provide a backlink to this article.
  • You may not, except with our express written permission, distribute or commercially exploit the content in any other way. 

Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.

Author

About Stenn

Since 2016, Stenn has powered over $20 billion in financed assets, supported by trusted partners, including Citi Bank, HSBC, and Natixis. Our team of experts specializes in generating agile, tailored financing solutions that help you do business on your terms.

Talk to our team to get started

Want to take Stenn for a test run? Ready to go all in? Either way, we want to hear from you.
Importers
Exporters
Trade
Importers
Exporters
Trade
Importers
Exporters
Trade
Importers
Exporters
Trade

Secure your fast, flexible financing today

Get the capital you need without the headaches. Quick application, zero collateral, and no upfront costs.
Get funded now