The news that more than 1,000 banks, asset managers, payments firms and insurers from the European Union (EU) are planning to set up in the UK post-Brexit is a positive sign, especially for those in the treasury sector.
The concentration of financial institutions will result in increased investment, collaboration and competition, leading to an even healthier financial sector in the UK. Treasurers are set to benefit from this influx of new businesses – providing options for investment, profit and growth.
The migration of EU-based firms continues to solidify London’s position as a hub for financial services and global commerce. This demonstrates how much value businesses place on having a UK presence. This is not only positive for traditional financial services, but the high concentration of firms also means that fintechs – particularly those serving the treasury and global trade sectors – will continue to thrive in the market.
Given that investment in UK fintech has repeatedly surpassed its European peers, generating an industry trade surplus of about $88bn, there is little doubt that more businesses in London will mean more funding for the sector. In short, the increased number of financial firms in the capital city is set to create a new wave of innovation for the sector.
For treasurers, more fintech innovation and increased diversity of financial services mean more opportunities to work together with the wider business ecosystem.
One particular area of focus for treasurers is to increase options for funding to facilitate cross-border trade. Trade finance technology naturally has a part to play in this process. With global corporates and small and medium-sized enterprises (SMEs) collectively needing an estimated $1.5tr. more in funding, fintechs have the potential to open up the trade finance market to a wider range of participants and close this gap.
This issue will no doubt come to a head over the coming years as the traditional funders for corporations – banks – comply with Basel IV demands for high capital requirements when offering trade finance. For treasurers, this means access to funding is only going to get harder unless the market can be opened up to other participants able to fill the funding liquidity gap to corporates.
The truth is, there are numerous buy-side institutions that are ‘cash-rich’ and fully equipped to fill the funding gap for treasurers and free up banks to continue offering trade finance to corporates. The infrastructure and technology that enable this to occur seamlessly are the only things that are missing.
There is, therefore, a compelling case for broader fintech investment and innovation in the sector. The heavy reliance on paper-based processes, alongside the need for improved connectivity between corporates and their funders, mean that the market is ripe for fintechs to overhaul the industry and reap the financial rewards.
However, the inability to access the market and the lack of an efficient trading infrastructure have long been barriers for institutional investors. Therefore, the key to addressing the trade finance gap for treasurers lies in the creation of a liquid and scalable trade finance marketplace.
Over the past 12 months, more than 20 banks, institutional investors and global financial institutions took a significant step towards enabling greater access by launching the Trade Finance Distribution (TFD) Initiative. They will use technology to transact trade finance instruments such as letters of credit, factoring, export credit and insurance between each other. This is the first time trade finance instruments have been traded in such a standardised and electronic manner.
Given that international trade will become increasingly important in the months and years to come, especially post-Brexit, the sector will undoubtedly rise to meet the challenge through innovative ways.
This is where fintechs are crucial. By working together, this will enable those with larger cash resources to shoulder some of the funding responsibilities and ensure corporates access the money they need.
Treasurers have much to gain from looking at the fintech market as an opportunity to improve funding and increase collaboration with banks and other financial institutions. The value of the sector cannot be underestimated and there is no doubt that the industry will blossom as more EU businesses arrive in London.