The Trade Revolution

Article excerpt

Trade finance is in the midst of wrenching changes, and banks must keep pace with them or face loss of market share and a deterioration of their client base. By Denise Bedell.

The demands of traders, from small outfits to the largest multinationals, are increasing. They want moresophisticated and automated solutions, white still needing or desiring access to traditional trade finance instruments. Plus, a new breed of multinational is developing in the emerging markets, and their trade finance needs can be quite different from those of their compatriots in more-developed markets.

Trade banks must not only address the expectations of such a diverse client base but also prepare for the effects of new regulations on their trade finance activities-not least Basel III, which promises much-increased costs and complexity for trade finance operations. The new regulations are prompting concern over how banks' leverage ratios will reflect their trade finance activities and whether trade finance will be affected by Basel Ill's treatment of offbalance-sheet instruments.

If trade finance activities end up being 100% risk-weighted and treated in the same manner as other off-balance-sheet instruments under the new regulations, it will drastically increase costs for banks, which will trickle down to company costs for financing global trade. It will also likely lead to further consolidation in the trade finance sector.

Increasingly Sophisticated Demands

In the developed world, the global financial crisis triggered a spike in the use of traditional trade finance instruments, in part because multilateral agencies relied upon letters of credit as their primary mechanism to provide financing support. In many cases, transactions in the emerging markets that were previously on open account terms reverted to letters of credit to gain the benefit of the advantageous financing.

That trend has since tailed off to some extent, and the trend toward open account is resuming. Multinationals still want banks to support traditional instruments, but they also want their trade finance banks to provide much more sophisticated solutions to support increasingly sophisticated supply chains.

Michael Quinn, managing director at JP. Morgan Treasury Services, says that companies now have much more information about counterparties that, coupled with moreadvanced technology, means they have less need for traditional paper-based documentary instruments that often cause as much disruption as facilitation. Quinn notes: "At times, companies need risk mitigation, and more frequently, they need access to financing for themselves or their counterparties, but they won't sacrifice efficiency in supply chains to get it."

In addition, banks are working on adding services relating to trade finance management, for example by connecting supplychain finance programs to trade finance solutions. They are also offering to outsource non-core processes such as document preparation, electronificatjon and transmission.

A New Breed of Multinational

Meanwhile, there is a whole subgroup of multinationals coming from emerging markets with different trade finance needs than traditional multinationals from developed markets. Global trade banks must not only support the requirements of their developedworld clients but also adapt to the unique needs of this new client base.

Craig Weeks, head of trade product sales for global transaction services at Citi, says: 'They require a different infrastructure from their banks. They have different local requirements for export processes and importing needs and expect their bank to understand how complex trade transactions must be structured in their market. Banks must understand their needs and how to service them."

They are also dealing with high costs for trade finance instruments, costs that are hampering growth. The International Chamber of Commerce's (ICC's) Trade and Finance Global Survey 201 1 found that in many lowincome countries, traders still have considerable difficulty accessing affordable trade finance, particularly for import finance. …