Trade Finance Awaits A Boost From FinTech

Lenders in the U.S. overwhelmingly plan to expand financing activity this year. According to new research from Magilla Loans, which offers an anonymous search engine data for both home and business loans, a survey of mortgage and business lenders found plans to originate more than half a trillion dollars’ worth of loans in 2018.

According to the report, 88 percent of lenders plan to lend more in 2018 than they did in 2017, and more than a third (36 percent) said they plan to lessen requirements for loan approval.

While the data included business loans, Magilla noted that mortgages are the main driver behind this trend. So while lending volume in the U.S. might be expanding, gaps in business finance – especially among SMBs – remain.

Among the biggest gap in the world right now is trade finance. The latest figures from the Asian Development Bank recently pegged the gap at $1.5 trillion globally, a shortcoming that disproportionately impacted SMBs, analysts noted.

“While digitization may lead to more inclusion, its potential impact on the gap is not yet realized,” ADP said in its Trade Finance Gaps, Growth and Jobs report, released last September. The report noted no correlation between banks’ implantation of digitized solutions in their trade finance operations and rejection rates of providing trade finance to businesses.

Even more recent analysis from Euromoney in its Trade Finance 2018 report highlighted the struggling trade finance space. Euromoney described the problem as “disconcerting,” citing data from the World Trade Organization that found merchandise exports fell by 3.3 percent in 2016.

That means a slowdown in trade finance operations – and economic struggles aren’t the only factor behind this trend. Protectionism, Euromoney pointed out, has become a key factor in reducing trade finance demand.

Citing research from U.K. law firm Gowling WLG, there have been more than 7,000 measures implemented in markets across the globe “believed to be injurious to global trade.”

“The U.S. alone has passed almost 1,300 of these,” Euromoney said in its report, adding that Argentina and India are among the “biggest proponents” of protectionism, according to Gowling.

That protectionism mindset is often attributed to the U.K.’s Brexit vote, and analysts have recorded negative impacts on businesses that trade across borders linked to the decision of the U.K. to leave the EU.

According to Bibby Financial Services data released last week, both importing and exporting SMBs in the country have seen negative implications of Brexit, with two-thirds saying they have been adversely impacted by currency volatility.

“While there is a common perception that a weaker pound benefits exporters, our findings challenge this binary narrative,” said BFS managing director for foreign exchange, Michael McGowan. “Importing and exporting are not mutually exclusive, and more than a quarter of SMEs that import sell finished goods or component parts overseas. As such, often importers and exporters are equally exposed to currency volatility and wider economic uncertainty.”

Even as banks (at least, in the U.S.) plan to expand lending activity, and even as they collaborate with FinTechs, analysts warn that FIs haven’t yet been able to address the $1.5 trillion trade finance gap, which may be both a cause and effect of weakening trade activity across the globe.

Experts note that the trade finance gap is concentrated in Asia, and that other markets, like Europe, aren’t feeling drastic effects.

“Banks are happy to buy trade finance debt [in Europe] and aren’t that interested in selling it,” said UniCredit global co-head of global transaction banking, Luca Corsini, in an interview with Euromoney. “This is reflected in the margin pressure that continues to push down the price of trade finance. If a trade finance gap were creating serious bottlenecks, banks would be able to command higher fees.”

But more stringent regulations surrounding Know Your Customer (KYC) and Anti-Money Laundering (AML) have hindered banks’ ability to strike correspondent partnerships.

“That is adding to the trade finance gap, because if banks can’t access international networks, then neither can their clients,” said John Ahearn, global head of trade at Citi’s Treasury and Trade Solutions unit, in an interview with Euromoney.

There is reason to be optimistic, however.

While ADP found no correlation (so far) between banks’ FinTech collaborations and expansion in trade finance operations, UniCredit’s Corsini told Euromoney that FinTech is helping to make trade finance “simpler.”

“New blockchain solutions, such as, for example, drastically simplify the process for all involved, using smart contracts and transparent tracking to ensure processes are fast, clear and efficient,” the executive stated. “Common concerns, such as KYC, are also being allayed by technology.”