A number of cross-currents is buffeting the global trade finance business. These include a change of strategy by global banks and the entrance of smaller players – both bank and non-bank – as well technological change. All of which means there could be a lot of turnover in the sector, according to Greenwich Associates.
“Greenwich Associates projects that among large companies using trade finance, approximately 45% of companies in the US, about half of European companies and approximately 80% of Asian companies will shift business among trade finance providers in 2018,” says Greenwich in a new report, “Trade Finance: A Market Eager for Disruption.”
For big banks, this has meant going from a shot-gun approach to a more specific or targeted strategy. “With some degree of variation, most [big banks] have pulled back from strategies based on capturing broad market share and increased focus on the specific clients, products and geographic regions that present the best profit potential,” Greenwich says in its report. This means offering new products as well as advisory services when it comes to areas of the business like A/R and A/P financing as well as other “integrated solutions” like cash management, hedging and liquidity management. This is leading stickier relationships that can be more lucrative down the road as a result of cross-selling.
However, big banks’ strategy shift has left an opening for other banks. And in this instance, Japanese banks are making a big push into the sector – and they’re also reaping the rewards, say Don Raftery, managing director, banks at Greenwich. “Companies that commit a lot of capital, particularly credit, are winning a lot more ancillary business,” Mr. Raftery says. “Japanese banks are putting significant credit on the table and getting rewarded for it. There’s been an uptick in their use for trade finance, for FX and interest-rate derivatives.”
Meanwhile, in Europe, global trade finance is trickling down to more regional bank players as well as non-banks. This is “money in motion,” says Greenwich, and in Europe the smaller footprint of bigger banks “is opening the door for local banks that feel pressure to ‘internationalize’ the service offerings in their home market(s) to keep pace with the needs of clients increasingly focused on cross-border trade. Across the European region, second- and third-tier banks are investing heavily in the business and starting to see results.”
Corporates are “stringing together smaller local banks” who have a good handle on local rules and regs and a generally better view of the landscape. All this isn’t to say the bigger banks are pulling back too far. They’re just not expanding as much, Mr. Raftery says. “They’re just settling in more deeply” with known clients.
Technology
Technology is another driver for change. With global trade getting toward real-time payments, companies are looking to automate all phases of transaction banking. Greenwich cites a study from the Organisation of Economic Co-operation and Development (OECD) that estimates that “15% of the overall value of traded goods around the world is comprised of hidden costs, much of it a result of the manual processes underlying most transactions.” These equals losses of $100 billion per year, although Greenwich notes costs “could be much higher because these OECD numbers do not take into account the impact of the opacity inherent in these manual systems.”
Further, “with transaction histories stored on paper, it is difficult for banks to access information needed to assess companies’ risk and credit histories, making bank capital more expensive and less available to companies looking to finance transactions,” Greenwich notes.
Greenwich also says companies shouldn’t get overly excited about distributed ledger technology (DLT). “Change is certainly anticipated in the form of new technologies” like DLT, “but despite a stream of exciting headlines about blockchain advances and ventures around the world, the industry still hasn’t figured out exactly how DLT will function as a common process … in trade finance, and significant challenges remain ahead for developers.”
Mr. Raftery says this means that DLT, while promising, “is not going to be used across all lines of business.” It does have certain use cases, “but it’s not as holistically transforming of the cash trade business” as many thought. For instance, while DLT offerings transparency, that might be too much transparency for banks, who’d rather not reveal things like share of wallet to clients or competitors.