Are FinTechs and Banks Bound by the Same Regulations?

July 25, 2022

Lending in the Current Climate

Stricter regulations have affected the freedoms of those banks that are active in trade finance. The Basel III framework has been introduced in Europe and compliance rules have been strengthened in North America. Banks are already overwhelmed by bureaucracy, loan processing delays and sinking reputations, so it is no surprise that they are feeling increased pressure.

Banks are now refusing loans to small firms in markets with weak governance. Banks may also reject firms with limited or no credit history. Instead, they are prioritising deals with established firms because they are less risky.

This explains the estimated $1.5 trillion (USD) financing gap that is particularly damaging to SMEs in developing economies.[1]

Why does this trade financing gap persist?

A 2018 ICC survey found that over half of banks rejected SME trade finance requests because of internal or external policies. Also, $500 million (USD) is being spent each year on KYC (Know Your Customer) regulations and this highlights potential problems that banks cannot ignore. According to this survey, 29% of the rejected trade finance requests were due to KYC concerns.[2]

New Basel III guidelines were introduced in January 2013 to improve capital adequacy and liquidity while reducing lending risks. The aim was to prevent a repeat of the difficulties companies had during the last global financial crisis.

In principle, the Basel III guidelines supported short-term trade finance. Fewer liquid assets were required against contingent liabilities, which increased trade funding availability.[3] But many banks believe trade finance to be too risky and won't consider it for 'high-risk' customers. This suggests that trade finance might not be as accessible as Basel III intended.

Banks also have to navigate compliance between jurisdictions, which requires continual adjustments. This is expensive and time-consuming for banks and it's no surprise that they prefer to avoid it.

In summary, the above constraints are preventing banks from capitalising on the new guidelines.

FinTechs Offer a Different Solution

The regulations shown above are often cited as the reason why many banks have reduced their trade financing activities, but they are also responsible for the recent emergence of non-banks and FinTechs.

These non-banks know that trade finance products in general have lower risk profiles and smaller default and loss rates than other forms of lending. For them, Basel III liquidity requirements make it easier to hold trade finance assets. 

These new players are making trade - and trade finance - easier and quicker. These non-banks are creating a niche for themselves thanks to:

  • Online documentation
  • Innovative technology
  • Fast financing
  • eBLs (electronic bills of lading)
  • Blockchain and cloud-based formats

Tools like letters of credit are being replaced by open-account trade, improved global communication, increased legal protection and better information on trading partners.

FinTechs are developing solutions with more transparency that reach customers online and bypass traditional distribution channels. For instance, accounts receivable (AR) finance is used by non-banks to stabilise the supply chain, improve Buyer/Supplier relationships and make working capital more efficient - all without disrupting the global flow of goods.

FinTechs are using cloud-based storage of accounts receivable data, making it easier for Suppliers and SMEs worldwide to:

  • Access proprietary information
  • Track the supply chain's financial flow
  • Identify credit and non-creditworthy customers
  • Verify transactions
  • Ensure that receivables can indeed be financed

Working Around the Regulations or Risk Losing Business

Banks and regulators are struggling against the blossoming alternative trade financing platforms. This is made more difficult because regulatory needs differ across countries and regions, which means that some authorities act within existing frameworks while others establish specific rules for FinTechs/non-banks.

For example, in Germany, the Netherlands and Singapore, FinTech lending platforms must adhere to the same rules for investor protection, risk management and capital or liquidity requirements as other financial service intermediaries.[4]

Putting aside regulatory issues and government rules, FinTechs are more agile in serving more customers that require working capital. They are becoming key to the financial supply chain. This means banks could struggle to stay competitive in the future.

Banks must ask themselves whether Basel III adds enough value to justify the difficulties it causes. If banks continue to experience issues that hold back productivity, FinTechs will take over a bigger slice of the trade finance pie.


[1] Asian Development Bank Report, 2019

[2] Global Trade - Securing Future Growth: 2018 ICC Global Survey on Trade Finance

[3] Bank for International Settlements: FinTech Credit: Market structure, business models and financial stability, 2017

[4] Bank for International Settlements: FinTech Credit: Market structure, business models and financial stability, 2017

If you are interested in learning more about how a FinTech such as Stenn can help you unfreeze working capital, our FAQ section can give you more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.


About the Authors

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.


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