FinTechs involved in trade finance are cropping up wherever goods flow, serving SMEs faster and easier than big banks can or want to. Banks are struggling to compete with these new non-bank providers and the way they provide the quick, secure financial help that customers require.
Banks are Facing Trade Finance Competition
International trade has doubled since 2000 and banks have done well from it, raking in almost $50 billion (USD) in trade finance fees last year.* However, as global economic growth cools, so does the trade that comes with it.
Banks now have to deal with digitisation and the rise of FinTech companies that can offer trade finance solutions much faster and easier. So it is no surprise that these new firms are attracting customers that are underserved by banks. FinTechs are also serving new market segments like SMEs which banks are now less inclined to do.
In short, the banks have fallen behind.
Old tools like letters of credit are steadily being replaced by open-account trade, improved global communication, increased legal protection, and much more information about trading partners. This means that Importers and Exporters are increasingly trading without relying on the financial clout of banks.
The 2008 financial crisis brought new regulations to make the financial system safer. Banks now try to keep 'high-risk' customers to a minimum. According to the World Economic Forum, the crisis led to the withdrawal of global banks from secondary markets such as those in developing countries.
This is a major reason for the rise of the trade finance gap estimated by the Asian Development Bank to be $1.5 trillion (USD) in 2018. According to World Trade Organisation estimates, 80% of global trade is enabled by trade finance. Banks are not winning many new customers due to rejecting approximately 50% of trade finance requests from SMEs.
FinTechs Provide Answers that Banks Cannot
FinTechs are maximising the promise of so-called disruptive technologies to drive down costs and serve clients better. This transformation is happening in all areas of financial services.
On the consumer banking side, companies like Revolut and Monzo are shaking up mobile digital banking, Robinhood delivers no-fee stock trading, and SoFi provides consumer lending. These are just a few of the many FinTechs jockeying for market share and unseating traditional banks.
In trade finance, FinTechs are moving the market and attracting SMEs with promises of innovative, time-saving, secure and automated solutions. These include:
- eB/Ls (electronic bills of lading) that shorten the payment cycle and improve the working capital of Exporters;
- cheaper-to-process digitised documentation; and
- emerging blockchain tools that confirm ownership, certify transactions, make payments as well as reduce duplicate and fraudulent documentation.
Traditional banks are also trying to stay competitive through partnerships and multi-bank consortiums. Several bank/FinTech partnerships have formed but have found limited success. Bank culture leans more towards bureaucracy than innovation, exacerbated by many banks failing to realise the real value of the 'digital promise'. It's no wonder that a recent study of bank/FinTech collaborations by Bank Innovation concluded: 'When it comes to bank-FinTech collaborations, banks are finding more failure than success.'
Furthermore, it will only get more challenging for those that do not embrace the digital revolution and become more agile. Today's trade finance client wants a faster, secure, less expensive and more accessible service, and the non-banks are providing it.
Trade finance FinTechs have the potential to drive economic development by welcoming smaller clients and building relationships far and wide, in places where banks lack a presence due to regulatory or geographical restrictions. It's expected that their 'disruption' will chip away at the trade finance gap and provide working capital relief in markets where it's most needed.
*Boston Consulting Group - The Digital Revolution in Trade Finance, 2018
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