BY SAMUEL MATHEW – MANAGING DIRECTOR & GLOBAL HEAD, DOCUMENTARY TRADE, PRODUCT MANAGEMENT, TRANSACTION BANKING
The world of foreign trade and economic growth is currently at an inflection point and entering a new age. This is primarily being driven by a complex interplay of various macro trends in the world – specifically, the backlash against globalisation and the associated rise of trade protectionism – against the backdrop of a renewed euphoria of digitisation.
Such issues are not new, however, and history bears testimony to the fact that eventually prudence prevails. The current context is further compounded by the rise of technology and alternative trade finance providers entering the fray – posing both threats and partnership opportunities.
Trade wars – nothing new
Despite the current dialogue, trade wars such as these are not necessarily a new phenomenon. We have seen scenarios in the past where countries, institutions and trading blocs have used trade strategy to achieve policy objectives (for example, voluntary export restraints on Japanese auto exports to the United States, or European tariffs on banana imports from Latin America), and ultimately the world order has not only survived but thrived in the wake.
The difference now is that such protectionist rhetoric, supercharged by digital media, is now more prominent in an increasingly polarised world. Populist nationalist agendas are driving the increases in trade-related tariffs, as centre-left and centre-right politics move to the extremes.
But this needs to be put into context. First, global trade is currently worth around USD16 trillion. Second, trade between the United States and China – the world’s two largest economies and the protagonists in the latest trade war – accounts for between just 2 and 3 per cent of those trade flows. The impact of protectionist tariffs, therefore, will be contained and relatively minor, unless an entity has a concentrated exposure to this corridor/flows. But while the direct trade impact will be minimal, the impact on investor sentiment is proving substantial, with uncertainty undermining confidence and delaying business investment.
Lessons from the past
In the 1960s, a global boom in foreign trade and economic growth occurred following the modularisation of container ships and international agreements which helped to reduce shipping costs of cargo from USD6 per tonne to 16 cents per tonne.
Indeed, in the current environment, the key to mitigating the immediate risks posed to trade facilitation and finance will similarly be more effective and transparent use of technology (and data) by trade banks. This will allow banks to tap into new flows and address the existing finance gap – which for small and medium-sized enterprises in particular is a major issue, estimated by the Asian Development Bank as USD1.5trillion per year.
The difference this time, however, is that the adoption of technologies or standards is unlikely to be driven by a single, global event. With the increasing importance of intraregional and domestic trade, driven by regional economic integration and emergent consumption trends, these corridors will now become the hotbeds of technology adoption. The current protectionist context will provide a further boost to this long-term trend, as countries trade more with their regional blocs and source alternate markets and suppliers in response.
This implies that future foreign trade and economic growth will come predominantly from south-south flows led by large consumption economies such as India and China and prevalence of domestic and regional trading blocs. These have already become stronger and more important to trade – as have bilateral trade deals such as the United States-Mexico-Canada Agreement (USMCA), the EU and Japan partnership, etc., which have become more typical in recent years.
The opportunities for trade banks therefore, lies in understanding these trends, positioning and adapting their models to benefit, adopting new technologies to manage trade policy measures, automating internal process, leveraging data for insights and risk modelling, and forming partnerships with financial technology firms (fintechs).
Trade finance’s new era
Trade finance remains largely paper-based, manual and inefficient. To put this in context, there are an estimated four billion pages of credit documentation in trade finance in the world today; the venerable rubber stamp is still very much part of the reality.
This model simply will not work in this new era – and trade finance needs to evolve to survive the disruptive trends. Trade banks must embed themselves within the trading cycles of their clients such that we have a true convergence of physical and financial supply chains.
Standard Chartered is focusing on maximising the number of external touchpoints to clients. Most banks have relied on their own proprietary systems for the last 20 years, but these are limited in scope and adaptability. We believe the future of trade finance lies in a digital marketplace based on common platforms.
We envisage that trade finance will become embedded in these market places within underlying commercial agreements, with the contract becoming part of the flow. In other words, risk mitigation and financing will be bought at point of sale. That could have a major positive impact on reducing the amount of untapped trade, especially in the SME space.
To further accelerate this transformation, banks will need to increasingly collaborate with fintechs – with the latter taking the lead in technology and user experience journey, and banks bringing business knowledge, client base and data into play. In one sense, banks are one of the largest spenders on tech, and it could be argued they are well placed to morph into some of the largest fintechs.
The support of regulatory bodies will also be critical to help drive a successful transformation. Increased and simpler access to finance is a key regulatory priority: this has resulted in the emergence of new regulatory networks – such as the Networked Trade Platform (Singapore) and eTradeConnect (Hong Kong), which will further boost the digitisation of trade.
All these digital developments will pump out volumes of data – the new oil of trade, which will further revolutionise traditional banking. Balance sheet-based lending decisions will no longer remain the be-all of credit assessments – instead, data-based risk models and transaction-based credit scoring and financing decisions will reign supreme. Armed with transactional data, banks can predict the trade facilitation requirement of their clients and provide them with hyper-personalised financing and risk mitigation on demand.
The trade finance transformation we’re now facing will happen much faster than it has in the past. Digital platforms and marketplaces will become a much larger part of the space, although we concede that a portion of the process may still remain paper-based. We envisage that trade finance will be embedded as part of the commercial buying and selling trade cycles in the future.
In addition, data-led processing and technology will drive efficiencies and put more credit on the table. And finally, with trade finance linked to protectionism, the rise in nationalism and populism will drive a greater domestic and regional trade element in trade finance.