While global trade presents tremendous growth opportunities, businesses of all sizes are none-the-less finding it difficult to access much needed credit, resulting in a global trade finance gap. According to an Asian Development Bank’s (ADB) 2017 Trade Finance Gaps, Growth, And Jobs Survey, that gap was $1.5 trillion in 2016.
Banks remain at the center of huge trade networks and are the key to the vast majority of trade finance transactions; however, their lock on this business is being eroded. Non-financial institution competitors are aggressively targeting this market, using innovations such as blockchain to develop products and tools that not only replace outdated paper and manual-based processes, but also deliver unprecedented levels of cybersecurity that are critical in today’s digital transaction space. The same ADB survey evealed more than $13 billion in venture capital was invested in FinTech trade finance in 2016 alone.
As FinTechs advance innovation and digitization of trade-based finance, banks run the risk of becoming marginalized in their relationships with corporates, relationships that are the lifeblood of their business. The recent Simmons & Simmons Hyperfinance study of the world’s leading trade banks found that only 7% believe they are at the forefront of digital innovation in spite of the fact that 80% of innovation leaders report digitally-driven products and services introduced over the past three years have expanded revenue growth. his illustrates the reality that financial institutions recognize the importance of developing a digital strategy, but few are moving aggressively enough to take advantage of these new technologies.
Deep Relationships: The Bank Advantage
As third-party providers encroach on the trade business, these non-bank businesses tend to treat trade more as a commodity and less as a part of a larger relationship with corporates. This presents an opportunity for banks to maintain their grip on trade by tying their trade offerings to treasury services solutions. The core lending function at banks has always had a synergy with payments and transaction banking. Financial institutions have been adept at developing sophisticated products to help companies more effectively manage the vital relationship between buyer and suppliers, something FinTechs have not been able to offer. It’s the distinctive understanding of the relationship buyers and suppliers have, coupled with the intimate partnership banks have with their clients that provides a rich opportunity for banks to grow their share of wallet. It’s an opportunity ripe for the taking.
For many banks, trade is core to the lending relationship. Banks typically see wallet share as a critical component in the lending equation, which is part of why strong relationships are fostered.
Letters of credit, invoice financing, dynamic discounting and extending days payables outstanding (DPO) for example, are an increasingly vital part of how banks strengthen the financial supply chain and bolster the relationship between buyers and suppliers.
Because of these trusted relationships, banks have a decided advantage over third-party providers — one that is mutually beneficial for corporates and financial institutions, and well worth preserving.
Leveraging Data to Deliver Greater Value to Treasury Clients
Today, data is king and banks are uniquely positioned to leverage data collected from client enterprise resource platform (ERP) systems, such as SAP, and sharing this vital information to facilitate better corporate decision making. With access to a wider range of data points, banks can enhance the relationship between buyers and suppliers, enabling them to work together, employing the bank’s capabilities around dynamic discounting, selling invoices through factoring, or allowing buyers to extend payments terms, thus selling the invoice to the bank.
As third-party providers flood into the marketplace, bringing tremendous innovation to the trade space, banks run the risk of being marginalized. Collaboration with FinTechs offers a viable approach to staving off disintermediation. The Simmons & Simmons Hyperfinance study showed that 48% of trade-based financial institutions queried where engaging with third-party providers to bolster innovative offerings. However, this approach can be fraught with challenges if the right partner isn’t chosen.
As financial institutions look to develop collaborative partnerships with FinTechs, an old axiom rings true — if it sounds too good to be true, it’s probably too good to be true. The right partnership will allow a bank to offer clients tools that facilitate better, more efficient offering that leverage data, helping to preserve and deepen the bank’s relationship with corporates. By providing corporate treasury with a deeper view of their supply chain finance transactions, banks can bring deeper value to the relationship with corporates, thus increasing share of wallet.
Ultimately, the right partnership can help banks maximize the wealth of data they possess, enabling corporate clients to accomplish critical goals such as strengthening vital supplier relationships and improving working capital management. Ultimately, the right partnership can help banks maximize the wealth of data they possess, enabling corporate clients to accomplish critical goals such as strengthening vital supplier relationships and improving working capital management. In this way, financial institutions can address today’s competitive environment, while building even stronger ties with clients in the process.
BY ALAN KOENIGSBERG
Alan Koenigsberg is a strategic advisor to Traxpay. A financial services innovator and entrepreneur, he has more than 20 years of experience leading payment initiatives for banks and startups.