Banks, Regulators and Insurers: The Terrible Trio?
Technology and regulations are opening up new opportunities in partnerships, particularly in the new environment of disrupters, intermediaries and paperless trade. This article reviews some of the opportunities, challenges and risks in trade finance from three key parties in facilitating international trade.
The US $1.5tn trade finance gap has been building for the last 20 or so years, due to a whole host of reasons around limited liquidity provisions, AML, and protectionist policy. So what’s the role of banks in trade finance, and what are the key components of trade?
Banks versus non-banks
For non-banks, market opportunities are all around differentiation from banks. Banks have access to cheap capital and strong trade products. Banks, in particular, are strong on the receivables and payables side, with a lower amount of risk held on receivables and the desire optimise payables in the supply chain. If non-banks are to succeed, they should look at being collaborative counterparties to banks and will often look to provide services for where banks stop in terms of their product offering, particularly in terms of inventory and holding stock on their balance sheet. Non-banks will often focus on these gaps, in particular taking inventory off balance sheet.
Data and Technology
Data can be broken down into many aspects: how is it being exchanged, captured and used. Technology has certainly enchanted the exchange of data through APIs, DLT and cloud, which has enabled the seamless flow of data. But where it gets even more exciting, is the use of data to develop behavioural analysis and customer patterns across the end to end supply chain using AI.
It’s now possible to track goods and containers worldwide, therefore the financial flows associated, which is one use of how technology and data are coming together to facilitate trade through both the financial and physical supply chain. Bringing together customs authority, shipping companies and financiers can help establish new trade relationships through open accounts (rather than LCs or Bank Guarantees) from day 1, because the data is transparent, captured through easily accessible platforms such as distributed ledger technology and suddenly the world of trade changes.
Like the banking industry, insurance is often seen as a slow moving ship. But actually, insurance is becoming a key player in trade. Insurance is an enabler of trade finance, a huge shift from the traditional trade credit policies where insurance was a nice to have. The introduction of insurance through regulation however has changed the landscape as banks and funders look to protect, wrap and move quickly in terms of trade transactions.
Therefore the integration of technology into insurance to enable and transform trade has been critical. Using invoice data to algorithmically decide on limits. Good to look at companies you don’t have financial information for. This helps improve risk decisions, impact pricing and make decisions quickly.
Banks have huge liquidity that alternative financiers might not have, but banks are now often sitting behind alternative financiers to provide liquidity, and insurance companies are also being asked to come into the equation and provide liquidity to the pool and cover receivables participations.
In the wider legal industry, there’s a huge consultation going on looking at how electronic signatures could be enhanced. The outcome appears to be that e-signatures generally work. However, in the case of some laws, including executing deeds, bills of lading and bills of exchange, physical signatories are hard-wired into the legislation, which needs to change. Therefore trade law practitioners have got the toolbox to do a lot of the things that can be done to make the world of trade finance work.
Electronic Bills of Lading will require an international effort to bring into common law, an initiative that has been undergoing for around 30 years, and still unresolved.
UCP and other transnational codes and conventions have taken time to come to fruition, and continued effort needs to go into creating continued
What next for banks and trade finance?
Advanced technologies such as AI can certainly be resourced in banks, insurers and other funders to determine risk, optimise pricing and supply chain optimisation. As a result, many of these long-term investments are deemed to increase commercial outcomes of organisations such as profitability, customer lifetime value and top line growth.
Regulation also plays a huge role for both non bank and banks. Taking advantage of regulatory arbitrage, particularly around deposits, (I.e., accessing to capital and sources of funding,) can help rethink business models from scratch.