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Fintechs Unbound by Regulatory Burdens Facing Traditional Trade Finance Banks


Current regulatory climate is stifling lending

Banks active in trade finance have seen their freedoms curtailed by stricter regulations – in Europe via Basel III regulations and in the US from beefed-up compliance rules – while already feeling overwhelmed by bureaucracy, rising loan processing times and sinking reputations. So it comes as no surprise that their commercial lending focuses on larger deals with “safe” names while steering clear of smaller firms in markets viewed as having weaker governance, further contributing to the estimated $1.5 trillion trade financing gap that hurts SMEs in developing economies the most.[1] A 2018 ICC survey found that over half of banks rejected trade finance transactions due to internal or external policies, while spending up to $500 million annually on “Know-Your-Customer” (KYC) regulations (and 29 % of rejected trade finance requests stem from KYC concerns)[2].

In January of 2013, new Basel III guidelines supported short-term self-liquidating trade finance instruments: fewer liquid assets were now needed against contingent trade liabilities, thus increasing the availability of funding for trade.[3] The new rules were meant to improve capital adequacy and liquidity while reducing risks associated with lending to avoid another near meltdown like the world saw during the last global financial crisis. But the unintended consequences is that trade finance is lumped into riskier bank assets, threatening its availability. And navigating compliance between different jurisdictions means continual adjustments – an expensive undertaking that banks prefer to avoid. Thus the aforementioned trade financing gap persists, as these and other internal constraints prevent banks from capitalizing on the new rules.

Enter the fintechs – without the regulatory headaches

This is probably not the first time that banks cite regulations as an excuse to reduce trade financing lines – or that non-banks have stepped into the fray. These non-banks know that trade finance products have lower risk profiles as well as smaller default and loss rates. For them, Basel III liquidity requirements have actually made it easier to hold trade finance assets. As trade documentation moves online, the easier and quicker financing trade becomes, allowing non-banks to create a niche for themselves via state-of-art technology, speedy financing, electronic bills of laden and blockchain/cloud-based formats. Tools like letters of credit are steadily being replaced by open-account trade, improved global communication, increased legal protection and better counterparty information. 

Fintech players continue to develop solutions that reach customers online and with more transparency, bypassing traditional distribution channels. Accounts receivable finance, for instance, is being used among non-banks to stabilize the supply chain and improve buyer/supplier relationships, while making working capital more efficient without disrupting the global flow of goods. Fintechs are using cloud-based storage of accounts receivable data, making it easier for any supplier or SMEs anywhere in the world to access proprietary information, track the supply chain’s financial flow, as well as data identifying credit and non-creditworthy customers, verifying transactions and ensuring that receivables can indeed be financed.

Trade finance banks must work around the regulations or lose more business to fintech and non-bank players

Regulators and the banks are grappling with the blossoming alternative trade finance platforms, as regulatory needs differ from jurisdiction to jurisdiction. Some authorities are acting within existing frameworks, while other are putting rules in place geared specifically towards fintech and other non-bank finance providers. For example, in countries like Germany, the Netherlands and Singapore, fintech lending platforms are subject to the same rules for investor protection, risk management and capital and/or liquidity requirements as other financial service intermediaries.[4] Trade finance loans are low-risk financing, so requiring high capital and liquidity cover for these loans penalizes an instrument that supports global trade. Regulatory issues or government rules notwithstanding, fintech models that offer this much-needed support are becoming key to the financial supply chain, meaning banks could struggle for relevancy in the future. Thus, traditional trade finance banks have to ask themselves whether the value Basel III adds compensates for the headaches created. As long as these banks continue to be sidetracked with these issues, fintechs and other non-banks will continue to expand their service range and customer base, thus taking over a bigger slice of the trade finance pie.

[1] Asian Development Bank Report, 2019

[2] Global Trade – Securing Future Growth: 2018 ICC Global Survey on Trade Finance

[3] Bank for International Settlements: FinTech Credit: Market structure, business models and financial stability, 2017

[4] Bank for International Settlements: FinTech Credit: Market structure, business models and financial stability, 2017

About Stenn

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 TwitterLinkedIn and Facebook.