Transaction banks are responding to changes in the global trade environment by driving internal efficiencies, broadening their digital offerings, and reconfiguring their client service models. Amidst this change, the outlook for corporates is promising – increasingly digital and client-centric solutions, combined with fairer and more competitive pricing, say Raphael Barisaac and Adeline de Metz, Global Co-Heads of Trade Finance at UniCredit
In the face of a shifting global trade environment, the onus is on transaction banks to stay ahead of the curve. Documentary trade finance instruments such as letters of credit are diminishing in popularity in favour of open account trading, while regulatory and due diligence requirements are adding necessary, but significant, costs to banks’ books.
Indeed, the convergence of these trends has prompted many banks to rethink their operating models from the top down. Improving internal efficiency, streamlining client service models, and collaborating with fintechs to produce new, holistic and client-focused solutions are all emerging as ways to ensure future stability and continue to drive improved services.
For banks’ corporate clients, these are exciting changes – heralding faster, cheaper, and more tailored solutions, underpinned by improved bank-client relationships.
Regulations catalysing change
Regulations, of course, are one of the key factors sparking change in the industry. Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements have been frequently cited in this capacity, but there is another set of regulations having a significant impact on trade finance – the Basel Accords’ risk-weighted-asset (RWA) requirements. Under Basel III, banks are required to hold a minimum amount of capital in reserve to reduce risk of insolvency. This is determined by a bank’s RWAs, and – while trade finance is well known as a low risk-investment – most banks lack the historical and performance data to back this up. This has a knock-on effect on banks’ willingness to offer trade finance.
This is compounded by the fact that while capital requirements don’t factor in the low-risk nature of trade finance, market prices do. Trade finance is therefore a capital-intensive product, bearing relatively low returns. This puts it under intense pressure when assessed purely on a profitability basis – and some banks may choose to raise their prices, reallocate a part of their trade finance funds to other products or even cease trade lending altogether. Of course, not all banks view trade finance in this way – instead, some are less focused on returns and more on maintaining key client relationships, as well as forging new ones.
Either way, bank RWA modelling issues – along with other compliance costs – are acting as drivers of internal efficiency for the majority of transaction banks, with many looking to upgrade their IT and back-office systems.
A more focused approach
At the same time, many banks are rethinking how they serve their corporate clients– an initiative that has largely gone under the radar thus far. Increasing client segmentation – by geography or industry, for example, or into brackets such as “platinum” or “gold” – may enable banks to significantly improve their client service.
For corporates, this could mean a greater availability of services, greater choice, and more competitive pricing – but they should consider their bank relationships carefully. A good strategy would be to distribute trade finance requirements across a few banks, in order to hold the status of“platinum” client – securing a higher-quality service than would be received if spreading business across multiple banks as a “bronze” client.
Digital as standard
Many banks are achieving efficiency gains through other means, too – looking closely at new technologies, such as blockchain, as well as existing tools such as the Bank Payment Obligation (BPO). Corporates, again, stand to benefit –standardised, more efficient, and cheaper digital products will serve a greater variety of companies, from a wider spread of industries and geographies. In particular, offering digital services more widely will enable banks to establish a baseline service level, guaranteeing a high-quality service for all clients – and not just those in the “platinum” segment.
As part of this drive towards increasingly digital services, many banks are also looking to collaborate with fintechs. Indeed, the risk appetite and tailoring required for so many transactional products and services make it unlikely that fintechs will replace banks as trade finance providers – making collaboration the most promising avenue for all parties. Transaction banks can also draw on their extensive market knowledge to advise businesses on the most promising fintech opportunities.Certainly, at UniCredit we have seen increasing demand for this kind of support – with many clients keen to draw on our insight into the crowded fintech landscape. Our view is that there is plenty of scope for profitable, mutually beneficial partnerships.
Supply chain finance– opening up the options
Supply chain finance stands as a clear example of this potential. As corporates increasingly align the objectives of their procurement and treasury departments,they are becoming increasingly focused on strengthening their supply chains, in addition to habitual concerns such as DPO, DSO and other key performance indicators (KPIs). Supply chain finance is invariably part of the conversation.
Indeed, the growing use of supply chain finance runs in parallel with banks taking an increasingly holistic approach to their supply chain finance solutions. Rather than a siloed product offering within the bank, banks are adopting more open, collaborative models where fintechs can make significant contributions. Through bank-fintech collaboration, comprehensive, sophisticated solutions are being developed, and this is a model that banks are increasingly looking to employ – combining bank expertise and fintech innovation to create client-centric solutions beyond what either party could deliver alone.
Developments such as this give corporates every reason to be optimistic – despite the challenges of the current environment. Banks are finding ways to adapt – tightening their service models and developing streamlined, digital products for their clients. Corporates that take a careful approach and cultivate deep relationships with a few banks will be best placed to take advantage – enjoying the fruits of more digitalized, more convenient and more comprehensive services.