The leading trade finance banks are on the verge of transforming their industry from a paper-based system to a more efficient and transparent digitized model. This could help bankers amass the necessary resources to bridge the trade finance gap in emerging markets and, armed with transaction data, customize their trade offerings to better meet each customer’s individual needs.
“Data-led processing and technology will drive efficiencies and put more credit on the table,” says Samuel Mathew, managing director and global head of documentary trade-product management, transaction banking, at Standard Chartered Bank, in an essay on the bank’s website. Recent geopolitical developments are changing the landscape for lenders as well, he adds: “With trade finance linked to protectionism, the rise in nationalism and populism will drive a greater domestic and regional trade element in trade finance.”
The current trade spat between the US and China needs to be put into context, Mathew says. Global trade is currently worth about $16 trillion; trade between the US and China accounts for only 2% to 3% of the total, he points out. “The impact of protectionist tariffs, therefore, will be contained and relatively minor, unless an entity has a concentrated exposure to this corridor,” he says.
The Washington-Beijing standoff on trade finance volumes is likely to be minor as well, he argues. He advises banks to concentrate on harnessing the benefits of digitization. Just as the introduction of containerization lowered shipping costs and spurred a global boom in trade growth in the 1960s, “more effective and transparent use of technology and data [would] allow banks to tap into new flows,” Mathew says. “Armed with transactional data, banks can predict the trade-facilitation requirement of their clients and provide them with hyperpersonalized financing and risk mitigation on demand,” he says.
Along with Standard Chartered, seven other trade finance banks—Bangkok Bank, BNP Paribas, CTBC Holding, HSBC, ING, NatWest and SEB Group—have created a blockchain-based network, Voltron, for automating letters of credit and trade finance documents. Operating over R3’s Corda platform, Voltron is an open platform for documentary trade and is accepting additional banks and corporations. A transaction with Cargill last year involving a shipment of soybeans from Argentina to Malaysia demonstrated the viability of the platform.
“Today’s trade finance solutions were built in silos, adding significant risk, operational inefficiencies and costs into the process,” says David Rutter, CEO of R3, in a company press release. “Previous trades conducted on Voltron have demonstrated banks can offer a commercially and operationally viable blockchain solution with significant customer benefit.”
Global trade volumes have grown steadily since 2016; but some leading indicators are starting to point to a gradual “softening” of growth, according to Greenwich Associates. If that occurs, plenty of customers will still have a strong need for trade finance, says Gaurav Arora, head of corporate and institutional banking at the firm, in a company press release. “From the perspective of banks, a slowdown in global trade caused by geopolitical events would be at least partially offset by a growing need among large companies in Asia, Europe and the US for trade finance products and services that help mitigate mounting levels of sovereign and counterparty risks,” he says.