Trade finance has delivered value over centuries by making sure exporters are paid and importers actually receive the goods they need. It facilitates 80 per cent of merchandise trade flows annually. But there is a supply and demand trade-finance gap, with varying estimates of its size put forward by a range of financial institutions. The most recent estimate comes from the Asian Development Bank, which puts the gap at US$1.5tn. According to trade policy experts and analysts, a combination of harmonising regulations and an acceleration in the adoption of technology in trade-finance and factoring would be the most promising developments to address this issue – whilst also help banks boost their traditional trade-finance revenues.
Indeed, of the financial institutions responding to the most recent survey by the International Chamber of Commerce (ICC), 93% cited regulation as a key concern. The industry consensus appears to be that harmonisation, essentially ensuring equal treatment of trade finance transactions among different regions is certainly part of the solution. This will require co-operation and consensus at a Government level, and some support from supra-national agencies and world trade bodies such as the World Trade Organisation (WTO) to help deliver such an outcome.
Given this, with trade tensions globally rising rather than fading, particularly between the US and China, a more rapid adoption of technology by the financial institutions that provide trade finance facilities becomes more important. Many transactions remain on paper and most are processed by hand, so the ‘digitisation’ of the sector holds significant potential to address the trade-finance gap. Indeed, the ICC has estimated that as many as 350 million more businesses could begin exporting as a result of a move towards digitisation.
It should also help the banks and other institutions that provide trade finance services. Despite the increase in international trade, banks are pessimistic about the growth in volume of overall traditional trade-finance that they provide. A recent ICC survey revealed that banks do not expect any growth in the years ahead and as a result, the share of traditional trade finance in revenues is expected to fall to about 20% of overall trade finance revenues by 2020.
The role of traditional trade-finance transactions, which currently account for around 50% of the banks’ revenues generated from trade finance, currently looks set to be reduced in favour of open-account trading, where the goods are shipped and delivered before payment is due. Given that traditional trade-finance today, is the most profitable revenue source from international trade for many banks, they will not fully benefit from the growing volume of international trade.
An increasing role for technology can therefore help banks boost their traditional trade-finance volumes by facilitating the finance of the whole trade lifecycle and systematising and bringing existing processes into the cloud. Linking the trade process, rather than treating elements such as the import of goods and receivables as individual pieces, and using cloud-based solutions, such as the LendScape platform, helps to increase cashflow efficiency and minimises risk. It also allows finance providers and banks to offer a holistic lending solution to fund the working capital and trade finance requirements of a business, to provide the cash where and when it is needed to benefit of businesses, banks and world trade.
Trade finance has delivered value over centuries by making sure exporters are paid and importers actually receive the goods they need. It facilitates 80 per cent of merchandise trade flows annually. But there is a supply and demand trade-finance gap, with varying estimates of its size put forward by a range of financial institutions. The most recent estimate comes from the Asian Development Bank, which puts the gap at US$1.5tn. According to trade policy experts and analysts, a combination of harmonising regulations and an acceleration in the adoption of technology in trade-finance and factoring would be the most promising developments to address this issue – whilst also help banks boost their traditional trade-finance revenues.
Indeed, of the financial institutions responding to the most recent survey by the International Chamber of Commerce (ICC), 93% cited regulation as a key concern. The industry consensus appears to be that harmonisation, essentially ensuring equal treatment of trade finance transactions among different regions is certainly part of the solution. This will require co-operation and consensus at a Government level, and some support from supra-national agencies and world trade bodies such as the World Trade Organisation (WTO) to help deliver such an outcome.
Given this, with trade tensions globally rising rather than fading, particularly between the US and China, a more rapid adoption of technology by the financial institutions that provide trade finance facilities becomes more important. Many transactions remain on paper and most are processed by hand, so the ‘digitisation’ of the sector holds significant potential to address the trade-finance gap. Indeed, the ICC has estimated that as many as 350 million more businesses could begin exporting as a result of a move towards digitisation.
It should also help the banks and other institutions that provide trade finance services. Despite the increase in international trade, banks are pessimistic about the growth in volume of overall traditional trade-finance that they provide. A recent ICC survey revealed that banks do not expect any growth in the years ahead and as a result, the share of traditional trade finance in revenues is expected to fall to about 20% of overall trade finance revenues by 2020.
The role of traditional trade-finance transactions, which currently account for around 50% of the banks’ revenues generated from trade finance, currently looks set to be reduced in favour of open-account trading, where the goods are shipped and delivered before payment is due. Given that traditional trade-finance today, is the most profitable revenue source from international trade for many banks, they will not fully benefit from the growing volume of international trade.
Artcile Written by: Kevin Day
First appeared in: Finextra blog article