Two weeks ago, I shared with you why trade finance is a business you can’t ignore. This week, I’m going to share why the business is changing and what you can do about it.
Technological innovation, switches in behavior and expectations, regulatory changes and increasing market competition are fundamentally changing the trade finance market space.
Let’s look at digitization. When it comes to corporates, they increasingly rely on electronic channels to interact with their banks. This is also the case for trade finance. Corporates are expecting electronic channels to become more and more sophisticated, not only providing basic transaction services, but also providing them with access to advanced reporting, forecasting and simulation services for trade finance, even more so integrated with different transaction banking products like payments, foreign exchange, liquidity and cash management.
Then, there are switches in corporate behavior and expectations. Corporates are getting more selective in the use of trade finance instruments due to the relatively high fees of trade finance instruments, and the complexity and time delays connected to their reliance on paper documents.
When it comes to regulatory changes, responses like Basel III have led to the relaxation of capital requirements for trade finance assets. This is paving the way for a renewed interest in trade finance, especially in those regions with high Basel III compliance.
Increasing competition is changing the landscape further. Large global banks continue to play an important role, accounting for a quarter to a third of global bank-intermediate trade finance. However, local and regional banks, especially in emerging markets, are challenging these global banks, leveraging their deep local relationships and understanding of local markets. And recent years have shown the emergence and success of non-bank players further adding to the threat for traditional banks.
What’s a bank to do?
In a changing trade finance world, innovation in product and channel offerings, and efficiency and scale in traditional products will prove to be critical for banks. 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.
And, while these new products and channels are emerging, traditional trade finance is becoming more and more commoditized, leading to growing pressure on the need for efficiency in delivery. Banks are therefore 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.
Bottom line: trade finance is an attractive business for banks, and a business not worth ignoring. But, times are changing and for banks to keep up, they’ll need to step up their game and consider strategies in product and channel innovation, and efficiency and scale in traditional products.
I hope you enjoyed this series. To learn more, read “Trade finance: The landscape is changing—are you?”