Pricing is still key
Despite the push for digitalization pricing still plays a role in trade finance
While blockchain-based solutions and electronic trade documentation are useful functions, cost of financing is still of utmost importance for CFOs and treasurers when selecting a trade finance bank to work with.
This is according to Asset Benchmark Research's (ABR) 2019 Treasury Review survey of close to 800 participants, which revealed that pricing along with credit limits were key considerations in choosing a service provider. China-based participants were slightly more interested in the credit limits being offered by banks compared to other participants who expressed a demand for more bank balance sheet support with their respective projects.
“When I am choosing a banking partner, I focus on the credit facilities being offered because we have undergone major CAPEX investments,” says a South Korean-based CFO of a consumer goods company.
Despite the demand for better pricing and flexibility in trade finance facilities, ABR survey participants were quite comfortable working with their current panel of banks with 60% of them indicating that they had no change in their trade finance providers in the past 12 months. In terms of satisfaction with trade finance banks, Singapore-based participants led all other markets with 80%, indicating that they had not changed their trade finance service providers recently.
“I feel more comfortable working with a bank that knows us and is doing whatever is possible to get things done rather than with a bank where I don’t have a close relationship,” shares a China-based treasurer of a European multinational.
The loyalty of CFOs and treasurers represents a key opportunity for service providers to deepen the relationship with an existing set of clients. While financing cost appears to be top of mind for most clients, technology in the form of improved process efficiency and certainty can benefit client stickiness.
Already, several firms have started revaluating their trade finance processes to address this prospect. For instance, Standard Chartered partnered up with financial technology firm TradeIX in using distributed ledger technology to allow for the electronic initiation of bank guarantees through a web portal, thereby enabling transparent digital interaction between the applicant, issuing bank and beneficiary.
Other upgrades for the bank include its work with technology giant IBM in deploying a trade AI engine to help in the conversion of non-digital shipping documents into a machine-readable format using optical character recognition. It also identifies and classifies document types from a pre-defined database.
Participants are well informed of the trade financing options available to them. According to ABR data, trade finance facilities were cited as one of the main sources of funding along with bank loans and retained earnings. Newer avenues of funding such as P2P lending were at the bottom of the list for companies, indicating that there is lingering unease over using these platforms for general financing.
About Asset Benchmark Research’s annual Treasury Review
Conducted since 2013, Asset Benchmark Research surveys corporates across Asia on an annual basis to understand the challenges faced by corporate treasurers and CFOs and the solutions they consider best suited to navigate financial markets. In 2019, almost 800 corporate finance representatives participated in the survey, led by decision-makers in Greater China, India and Indonesia. Based on annual turnover, 54% of respondents are small and medium-sized enterprises, 27% are mid-caps and 19% large corporations (>US$1bn turnover per annum).
View from Standard Chartered
Banking services, including credit limits and funding are enablers for business to address working capital gaps and help to facilitate growth. It is therefore no surprise that a key theme for CFOs and treasurers relates to the cost of securing these enablers (trade and working capital services, limits, funding etc). It also therefore follows that the more a banking provider understands its client’s organisation ̶ its processes and underlying businesses ̶ the better the banking provider is able to manage risk appetite and financing terms.
It also stands to reason then that price (and to a lesser extent available credit limits) would be the key factors determining the choice of partner, particularly for run-of-the-mill trade and working capital finance facilities. It is however also important to consider the all-in value proposition offered by banks. For example, in addition to providing support Letter of Credit Advising, Confirmation Negotiation and Discounting, banks can also offer discrepancy analysis and training services to enhance document risk mitigation, and in doing so improve Turn Around Times.
While pricing and cost of services are a key priority for clients, it’s a symbiotic relationship, whereby the length of relationship and understanding of the clients’ underlying businesses enables a bank to provide more generous conditions and pricing, especially if there are multiple products from across various banking divisions in use by that client.
Technology is another consideration for businesses and their banks. As the International Chamber of Commerce (ICC) Banking Commission’s annual report on global trade revealed, an estimated four billion documentary pages are floating in the trade finance space resulting in inefficient processing and additional costs for businesses and their banks.
A bank’s digital trade capabilities could create even more potential value, well in excess of any minor pricing variations, when they deliver an enhanced level of standardisation, automation and control. Solutions such as blockchain, open APIs, OCR/NLP are helping to drive operational efficiencies in trade, and possibly differentiate costs while also opening up new revenue streams. While it is often difficult to quantify, it is widely recognised that efficiency is gained through process digitalisation/automation, which in turn drives significant operational cost savings. Banks, including Standard Chartered, are developing API strategies, deploying OCR/NLP and forming collaborations, such as the one we recently announced with SAP Ariba or becoming part of trade finance consortiums such as Voltron.
Another big lever is data – data has been referred to as the new oil of banking. Data models and the use of Artificial Intelligence (AI) are just about starting to be explored by banks both for risk mitigation (fraud and AML) and deciding credit risk appetite/limits etc. Creative use of data and AI will be a key enabler especially in the SME or mid-cap space where automation of both service delivery, risk decisions and post sales service will be key to building and sustaining scale.
30 Sep 2019