Local Footprint No Longer an Advantage for Bigger Trade Finance Banks
As Bob Dylan famously sang, “The times they are a changin.’” In the world of global trade, this rings truer than ever. Gone are the days of big bank monopoly over trade finance. Emerging technologies like blockchain and artificial intelligence (AI), digitalisation, automation, shifting consumer demands and the tech-savviness of the up-and-coming Millennial banker are radically altering the import/export financing landscape – especially for SMEs and rapidly developing global markets. SMEs are finding that digitalisation initiatives in trade have delivered tangible value and are starting to succeed on a larger scale.
Today, those trade banks with large branch networks are stuck with high overhead, legacy systems and antiquated lending rules. Moreover, consolidation in the last 25 years has seen many correspondent banks – the traditional trade financing shops – replaced by the bigger, impersonal multinationals. And now these behemoths see their international branches playing a declining role, either replaced by non-bank digital trade financiers, or as the victims of their own reluctance to extend trade credit to SMEs. Finally, many SMEs distrust the entrenched multinationals and do not view them as local “partners” anyway – stringent Know-Your-Customer rules handed down from a head office located elsewhere (and perhaps oblivious to realities on the ground) help fuel that perception. Banks might be ‘visible’, but they certainly are not ‘present’. This is all despite SMEs being a growing piece of the trade finance pie. Bain & Co (2019) – a global management consultancy firm – predicts fintechs could generate an extra $2 billion on top of the $8 billion generated annually in trade finance fees–much of it from SMEs in under-served markets. These trade volumes are expected to top $1 trillion by 2026.
For emerging trade finance shops, ‘accessibility’ is the new buzzword. Big data and cloud-based technology offer new prospects for reducing trade finance paper clutter by bringing documentation securely online and in digital form. Cross-border transactions using varied digital modes continue to grow in tandem with the advanced gateway technologies that support them, bringing more convenience to a wider client base faster and at a lower cost. Unlike traditional banks, the fintech can say “yes” to faraway business in developing countries. Together with other non-bank players, they are picking up the slack where banks lack a physical presence or building one is not a priority. And since their use of state-of-the-art technology allows them to operate in many countries while being physically located in one, fintechs have great opportunities for continued global expansion.
Being recognized as non-bank financiers, fintechs also benefit from much less regulation while being equally legally compliant and dependable, using agile technology and a nimble approach, tapping into the local lending ecosystem, networking with local market professionals and building a durable client base quickly. Any trust or security issues – a so-called “bank strength” – are being neutralized by technology. Digitalisation and automation is a key source for increased operational efficiency and faster, better control over documentation and operational risk (and the banks begrudgingly acknowledge this). Blockchain can address the paper traffic in trade finance, radically redefining global trade processes. Data capture via a web-based graphical user interface, IoT (Internet of Things) and the data it generates has promising implications for reducing barriers to entry, faster trade transaction data across different locations and documentary processing across entire supply chains (e.g. “supply chain finance – including online supply trade finance). Add increasingly lower counterparty default risks to the mix, and the overall attractiveness of the fintech model become clearer.
Fintechs, for their part, will continue – and are eager – to expand their service offerings across international borders: Only 15% operate in more than a handful of countries today, but over 50% plan to be in five or more countries in five years’ time, while 90% of want to expand to more than three in the same period*. Big bank initiatives like “we.trade”, “Trade Finance Gate” and the “Trade Information Network” aim to become industry standard in multi-bank trade finance and steal some of the thunder back from fintechs, under the motto “if you can’t beat ‘em, join ‘em!” In a 2017 report, the Boston Consulting Group (2017) pointed to the big banks hoping to use these networks not only to stave off the client exodus, but to save them $ 2.5-6 billion by 2022 – so that they have bigger “war chests” to combat the growing fintech “threat”. But it might be too late for banks to jump onboard – or stop – the proverbial train: what they view as a looming threat with growing alarm are seen by digitally-savvy clients and hungry SMEs worldwide with growing excitement and increasing promise. Time – and technology – is on the side of the customer-centric, wide-reaching, fast-acting and lower-cost digital trade financier of the future. For fintechs like Stenn, that train has already left the station.
*Roland Berger Consultants – Fintech in Europe: Challenger and Partner (2016)
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.