Other parts of this series:
New technology and thinking can reclaim a banking mainstay
Trade finance was once one of the most profitable products in the corporate banking portfolio, but it has become much less profitable due to a variety of factors. These include a heavy regulatory burden (reflecting sanction screening and anti-money laundering initiatives) as well as margin pressure from traditional competitors and new non-bank competitors such as fintechs, neobanks, platforms and the so-called “collaborative economy.”
To succeed in this environment, incumbents have launched innovative initiatives, as we saw at SIBOS 2018. These include consortia to connect the ecosystem and the use of new technologies to simplify processes such as AI, RPA (robotic process automation), optical character recognition, NLP (natural language processing) and deep learning. Banks now need to simultaneously address untapped markets, such as Asia-Pacific and small-to-medium-sized enterprises (SMEs) while rethinking their core operations.
Emerging markets represent much of the growth potential for the global trade finance activity, with the developing world being the major growth engine. Trade flows in Asia were $US 10.6 trillion in 2016, while US trade flows were $3.4 trillion and European flows were $10.2 trillion. This shift is also accelerated by the trend towards inter-regional trade, in which the Asia-Pacific region is expected to generate the most important volume growth in trade flows.
However, with a strong need to limit their geographic exposure to ensure operational efficiency, global banks are left with two options:
- Participate in one or more Trade Finance Syndication pools to gain geographic exposure, or
- Focus on key geographic centers of interest and broaden the client base, to optimize the cost to serve and generate enhanced profitability
In emerging economies, a major component of the trade finance potential lies within the SME business, as international corporations already have established connections with major international banks. More than half (56 percent) of SME trade financing applications get rejected, however, representing $1.6 trillion of financing gaps.
In developed markets, banks are facing a different challenge. As the world’s polarity has changed and what were once developing markets are now considered the main drivers for global business, the relationships between players has also evolved, along with the confidence they place in their counterparts.
Major developed-market clients are more and more willing to develop supply chain finance solutions with their providers, driving down the use (and as a result, the margins) of traditional trade finance products. Large corporate clients are now searching for end-to-end payment and working capital solutions.
They expect such solutions to be easy to use, globally available and, most importantly, to encompass different standards that are adaptable to specific cases. Clients demand a holistic approach to their needs, irrespective of the underlying product. This shift is forcing banks to reconsider their business models, to work more from a client-centric perspective than within the different product-centric constraints.
Successful players are taking different directions, including:
- Rebuilding their operations and their underlying IT systems, which would enable maintenance of a range of specifics, but is very costly and less agile in an open ecosystem, or
- Buying new systems. With state of the art product processing capabilities and digitally native interfaces, built-in trade finance packages can now allow banks to quickly and efficiently propose relevant solutions to their clients, including interoperability of blockchain-based platforms and API libraries.
In my next blog, I will tackle the topic of Open Banking and banking as a service, which are among the next steps banks are now considering in response to potential customer needs in this area.