By Ted Howard
Greenwich: Changes to global trade finance sector means “money in motion.”
A number of cross-currents are buffeting the global trade finance business. These include the pullback by big 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.
“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 Associates in a new report.
For big banks, this has meant going from a shotgun approach to a more specific strategy. In fact, they are going in this direction knowing full well that smaller players will pick up what they’ve left behind. “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 leads to stickier relationships that can be lucrative down the road for those banks.
Meanwhile, particularly in Europe, global trade finance is trickling down to smaller players as well as nonbanks. This is “money in motion,” says Greenwich, and in Europe the shrinking footprint of global 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.”
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 equal 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.”