Technological modernisation has given rise to new business practices. These forces are forever changing the financial services industry. This is exemplified in cross-border trade finance, with invoice finance on the export side and supply chain finance on the import side.
Trade finance is rapidly changing from an old-fashioned, paper-based industry controlled by traditional banks to a digital landscape where large transactions can be conducted and funded online. Here are five trends expected in international trade finance in 2020.
The Asian Development Bank estimates the unmet demand for trade finance to be $1.5 trillion (USD) annually. This gap is expected to remain (or grow slightly) reflecting the continued rise in open account trade. One reason for the gap is that banks have a decreasing appetite for financing cross-border trade.
In recent years, traditional financiers have reserved trade finance for their largest 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 (e.g. blockchain) will continue to capture attention as the industry tackles how to conduct the secure digital exchange of documents and funds. There’s no clear winner despite a tremendous 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. These are providers offering services to make regulatory compliance more efficient. These services include customer background checks, data security, data analytics and document digitisation.
The tech disruption has opened the door for new non-bank finance providers. These range from start-up FinTech platforms and boutique speciality firms to tech giants. They are all seeking a piece of the trade finance market.
People are frustrated by old-fashioned bank formalities. These providers bring a fresh perspective and approach to modern financing. They focus on bringing working capital relief to companies underserved by traditional banks.
These nimbler players are not bogged down by a stodgy culture or regulatory constraints. Banks are maintaining a foothold in the industry by investing or partnering with them.
But the expanding market also creates confusion as terminology and services are not standardised across the board. Exporters must be cautious. They must ensure they are receiving services from a legitimate, reputable provider and are not being enticed by a slick website with no real offer.
Banks may be less involved in trade finance activities but it doesn’t mean they’re out of the picture. As mentioned, they are financing independent FinTech ventures.
In addition, banks and other private equity firms are participating in trade finance by investing in non-bank financial institutions or securitised receivables assets. In this way, banks avoid compliance and regulatory costs but reap the benefits of low default rates and high equity returns.
This is a win for the market. With this capital support, non-banks can provide financing to segments not served by big banks, firmly rooting themselves in the finance industry.
The tariff war between the US and China may be waning 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 many banks unwilling to support new markets. This situation will only increase the demand for trade finance services from non-bank providers.
As we start the year, one thing is sure – 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.
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