Trade finance is an attractive business for banks, but the market is changing drastically. Technological innovation in the form of digitization of channels and products, switches in corporate behavior and expectations, regulatory changes and increasing market competition are fundamentally changing the trade finance market space.
What’s the attraction?
Global trade of goods has been growing at double digit rates since the early 2000s, outpacing the growth in nominal world Gross Domestic Product. This growth is even stronger in emerging markets, particularly in Asia. In 2013, Emerging Asia represented around one-fourth of the value of global exports.
Change is afoot
Technological innovation in the form of digitization of channels and products, switches in corporate behavior and expectations, regulatory changes and increasing market competition are fundamentally changing the trade finance market space.
Technological innovation – Lots of banks are still meeting the increased expectations on online channel sophistication through proprietary, mono-bank solutions. However bank independent platforms—portals and many-to-many host-to-host connections—offered by software vendors are gaining importance.
Switches in corporate behavior and expectations - Corporates are getting more selective in the use of trade finance instruments due to the relatively high fees and the complexity and time delays connected to their reliance on paper documents. In addition, the focus of large corporates is shifting away from their own needs to needs of their supply chain ecosystem consisting of large number of often smaller companies.
Increasing competition - It is likely that nimble start-ups will be the first to leverage blockchain technology for trade finance, further adding to the threat for traditional banks.
How can banks react?
Two ways in particular could be suited to give banks the competitive edge in a changing trade finance landscape:
Innovating in product and channel offerings. Extending the traditional trade finance products with sophisticated, online access and with supply chain offerings will be key for banks to safeguard their position and continue to drive growth.
Getting efficient and scaling in traditional products. Banks are modernizing their trade finance platforms, opting for proven technology solutions and maximum simplification and automation of processes. Outsourcing and offshoring strategies are imminent as the next step in the pursuit of cost savings.
There’s little doubt, trade finance is an attractive business for banks. Global trade continues to be on the rise and banks play an important role in facilitating the financing, payment execution and risk mitigation through the sales of trade finance instruments. The significant cross-sell potential, ability to build lasting and sticky client relations and the low loss ratios of the instruments make for an attractive business for banks.
But, for banks to be future leaders, they’ll need to step up their game—and they’ll need to do it fast, since competition from global and local players is getting fierce.