Bank-intermediated trade finance has been the preferred instrument to offset the risks inherent to cross-border trade for a number of years—for good reasons. Trade finance is an important catalyst of cross-border trade and a solid source of revenues for banks. Times are changing though, but before we get into that, let’s look at why trade finance is an interesting business to look at.
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Global trade of goods has been growing at double-digit rates since the early 2000s, outpacing the growth in nominal world Gross Domestic Product. This growth is even stronger in emerging markets, particularly in Asia. Banks discovered long ago the attractiveness of trade finance as a recurrent and interest rate independent source of revenues, with the added benefit of default rates which have proven to be up to 10 times lower than for traditional corporate lending.
The importance of trade finance for banks in building lasting and profitable relationships with their corporate clients is undeniable, but here’s where the plot thickens. Technological innovation, switches in corporate behavior, regulatory changes and increasing market competition are fundamentally changing the story line. No longer can banks play a central role in this attractive business by just doing what they’re doing. They’ll need to look for ways to be competitive and emerge a leading character.
How can they do that? Join me next week when I look at the options for banks wanting to continue a future in trade finance.
Until then, to learn more, read: “Trade finance: The landscape is changing—are you?”