The ICC Banking Commission recently revealed the findings from its 10th Annual Survey of the global trade finance industry. Olivier Paul, Head of Policy at the Banking Commission, looks at two key areas for corporate treasurers: supply chain finance and digitalisation.
Arguably, few issues in the treasury and trade finance spheres have garnered more attention recently than supply chain finance (SCF) and digitalisation. Our latest Global Survey – which polls over 250 banks in 91 countries – provides some hard facts to supplement the rhetoric.
When it comes to SCF, the survey confirms some substance to the hype around this emerging area of business. With traditional trade finance (mainly documentary letters of credit) provision on the up, we are now seeing corresponding growth in SCF. As many as 43% of respondents said their SCF business grew last year, with the largest banks – those with portfolios exceeding US$10 billion – reporting the biggest rise in SCF, more than 30% year-on-year.
It is interesting to note that five banks (2% of respondents) said their trade financing business is entirely focused on SCF. This may reflect the coming evolution in how international commerce will be financed: with new entrants carving out differentiated value propositions in SCF, focusing on high-growth, open account flows and bypassing traditional trade finance altogether.
Of the eight SCF techniques in the ICC’s Standard Definitions for Techniques of Supply Chain Finance, the majority of activity was concentrated in four: payables finance, receivables discounting, factoring and loans or advances against receivables. The most significant uptake in North America was for payables finance, identified by 52% of respondents, while factoring was the most cited in central and eastern Europe (CEE) – identified by 57% of respondents.
What treasurers need to know
For global treasurers, these findings should drive a reassessment of their financing options. With more banks moving into SCF, treasurers of large companies should consider how a SCF programme could help with risk management, the security of their supply chain network, and working capital optimisation. Meanwhile, smaller companies operating within larger supply chains may find opportunities to access finance that were simply not available previously.
Meeting the global trade finance gap (estimated by the Asian Development Bank to be around US$1.5 trillion annually), will undoubtedly rely on fulfilling the huge unmet demand for SCF financing. As such, the importance of technology in this evolution in international commerce cannot be overstated.
So far, we have seen some promising steps with respect to new trade finance and SCF platform development, technology-enabled delivery models, and Distributed Ledger Technology. Further, the Survey suggests that over 60% of bank respondents have implemented, or are in the process of implementing, technology solutions to digitalise their trade finance operations.
However, the Survey also provides a reality check. Only 9% of banks reported that the solutions implemented have so far led to a reduction of time and costs in trade finance transactions, while 30% of respondents remain 1-2 years away from implementing technology solutions. Most surprisingly, 7% say digitalisation is not on their agenda at all.
We must accept that this reflects the significant cost of investment and time of upgrading capabilities – as well as the pressures on short-term success rather than long-term future-proofing. But it also highlights the importance of adapting global trade finance rules to allow banks to capitalise on new opportunities. It is for exactly this reason that we launched a digitalisation working group last summer with a focusing on ensuring the e-compatibility of trade finance rules, and establishing a set of standards to enable digital connectivity for providers.
Corporates are at the heart of any trade transaction and, arguably, stand to benefit most from the industry’s digitalisation. It is therefore important that corporate treasurers engage with their banks in constructive dialogue. We have to accept that conservative, incremental advances will not do, and we should aim for fully digital trade in the long-run. But we need to work collaboratively to achieve this.
Together, digitalisation and the development of SCF propositions hold much potential for progress in bringing more trade financing capacity to the market. Yet work remains to be done.