Our first blog examined why commercial banks should introduce cash flow management tools for small- and medium-sized enterprises (SMEs) as part of an overdue drive towards fully digital banking. Our second blog looked at the impact of COVID-19, while our third and fourth blogs assessed how data-driven banking can help relationship managers. Our fifth blog explored how commercial banks in APAC can automate trade finance, while our sixth examines supply chain finance (SCF) – why this area of commercial banking is changing fast, and what banks should do to emerge ahead of their peers.

A Fast-Changing Landscape

In recent years, supply chain financing (SCF) has become an increasingly important topic. It’s easy to see why: with trillions of dollars of working capital trapped in trade financing, SCF lets suppliers sell receivables to banks, so they get paid faster and cut their working capital needs. Buyers, meantime, can benefit by paying later.

Most global trade is conducted on open account, in which orders aren’t paid for in advance and aren’t supported by banking instruments like letters of credit (LCs).[1] Instead, the seller invoices the buyer, who contracts to pay what’s owed by an agreed date.

Open account trading dominates trade settlement, comprising about 80 percent of a market worth US$18trn in 2019;[2] however, it constitutes just 15 percent of banks’ trade portfolios.[3] By contrast, traditional trade finance solutions account for about 20 percent of trade settlement, yet make up 85 percent of banks’ portfolios – a significant mismatch.[4]

Compounding this is the COVID-19 pandemic, though it remains to be seen just how it will affect global trade going forward. This will depend in large part on whether the recovery follows a V-shaped, U-shaped or L-shaped curve, according to a report from the International Chamber of Commerce (ICC), with estimates that global trade flows by 2028 could range as low as $15 trillion and as high as $27 trillion.[5]

What is likely, the ICC says, is that LCs and bank guarantees will become more popular due to their risk-mitigation reputation, resulting in increased demand for documentary trade for each scenario, “with the shift increasing as the scenarios worsen”.[6]

“The devastating demand-side and supply-side impacts of COVID-19 build upon each other and reinforce a cycle of crisis as each side of the market wrestles with existential risk in an environment with perhaps no parallel.”

– International Chamber of Commerce

COVID-19 is far from the only issue for banks. Another is the US$1.5trn global trade finance gap – US$600bn of which is in APAC – and which largely affects mid-cap firms and small- and medium-sized enterprises (SMEs).[8] That represents a significant opportunity for banks, and is increasingly being targeted by platforms like Amazon, Alibaba and Tencent whose advanced systems are far better than banks’ at gauging risk.

Other factors affecting how banks provide services include:

  • Trade tensions between the U.S. and China – the world’s largest manufacturer – are the most visible aspect of a pushback against globalisation, and have seen companies counter risk by reshoring their supply chain model (moving part or all of their manufacturing home), near-shoring (bringing operations closer to their primary consumer market) or applying a hybrid model (China plus reshoring or near-shoring).
  • China’s One Belt, One Road (OBOR) initiative is creating new supply routes and forcing banks to respond to shifts in their customers’ focus as new markets open up.
  • Brexit has brought major uncertainties to supply chains between the EU and the UK that could last years.

It’s worth noting that China’s dominance isn’t likely to change, as even a group of countries would struggle to absorb a small fraction of its manufacturing output (see chart).

If 1% of Chinese Exports Moved To This Country, How Much Would Domestic Manufacturing Have to Increase By? (%) Average 3 Year Growth Rate of Manufacturing %
India 6.4 6.9
Indonesia 11.7 4.3
Mexico 11.8 2.1
Thailand 17.2 2.7
Poland 25.5 4.1
Malaysia 33.3 5.1
Philippines 35 6.8
South Africa 57.7 0.5
Vietnam 58.7 13.1
Egypt 61.2 2.5
Hungary 84.9 1.8
Morocco 135 2.1
Myanmar 135.1 9.9
Cambodia 631.1 7.6

Source: Local sources, Fitch Solutions

What is likely is that automation, artificial intelligence and additive manufacturing technologies like 3D printing will cut the future global trade in manufactured goods.

Meantime, bank-specific challenges include: clients expect more from banks, including a more tailored digital experience; banks have been inundated with applications for working capital financing, cash financing and invoice financing; banks will need to deal with rising credit risk as liquidity starts to dry up; they will need to securitise supply chain loans to create monetizable assets, moving credit risk off the balance sheet; and they face operational challenges with staff working from home on processes that are not end-to-end digitised.

Dealing with this array of external and internal challenges requires that banks become more digital, more innovative and more agile in creating new back-office processes that can meet client demand.

Strategies That Banks Can Consider

These challenges offer banks the chance to build trust with clients by extending credit support, and to enhance their operating model. Much of what’s required involves technological advances as they move from their role as a utility provider to one of banking as a living business,[9] bringing them closer to BigTech firms in their position on the value chain, and towards a place of relevance beyond banking.

The leading banks are part-way along this process. Typically, they work with fintechs to build interbank ecosystem connects, cross-border marketplace connects, cross-entity connects and cross-industry connects. HSBC and Tradeshift, for example, partnered to digitise and integrate the bank’s SCF operations, allowing it to digitise paper-heavy supply chain processes.[10] Bank of America partnered with nCino[11] and cloud software firm Pega[12] to digitise its end-to-end wholesale credit operations from inception to disbursement.

Such approaches bring digital efficiency, greater transparency for all players and improved risk-balancing. Yet while it makes sense to pursue a digitised, ecosystem-driven future, banks should pursue other paths, too, as they seek to improve SCF, manage supply chain disruption and deliver value to clients:

  • Prioritise ecosystem collaboration models: this includes determining how to work with partners, industry and banks; developing a customer-centric minimum viable ecosystem (MVE) to connect various industry segments; and optimising emerging technologies to develop intra-bank, inter-bank and trade-as-a-service networks.
  • Digitalisation efforts: create digital documents and reengineer processing models to use them; integrate better with client ERP systems; and work with governments, agencies and regulators to help drive cross-border technological interoperability, standards and processes.
  • Offload risk: based on the bank’s trade finance originate-distribute models, move credit risk off the balance sheet by developing newer asset models based on principles like assets-as-a-service and service-as-a-service.
  • Redefine operational and business continuity planning (BCP) models: the rise in working from home means newer BCP locations might not be needed. However, a process revamp is necessary. Banks should review processes and retain those they have modified, and should develop methods to operate in a hybrid model until there is consistent cross-border regulation.
  • Adopt environmental, social and governance (ESG) initiatives and funding: ESG has strong resiliency and brings significant business opportunities. Banks should develop appropriate assessment and funding capabilities in this area.

In following the path laid out in this blog and those preceding it, commercial banks can overcome the challenges of the present – including higher third-party risk and lower prices for commodities and oil, affecting firms’ balance sheets – while setting themselves up for success in meeting the array of changes that global trade is likely to see in the future.

Explore the whole series:

We are here to answer your questions. Reach out to me on LinkedIn any time.

Disclaimer: This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

 


[1] See, for instance: http://supplychainfinanceforum.org/
[2] 2018 Global Trade – Securing Future Growth, International Chamber of Commerce (2018). See: https://iccwbo.org/content/uploads/sites/3/2018/05/icc-2018-global-trade-securing-future-growth.pdf
[3] Ibid.
[4] Ibid.
[5] 2020 ICC Global Survey on Trade Finance, International Chamber of Commerce (2020). See: https://iccwbo.org/publication/global-survey/
[6] Ibid.
[7] Ibid.
[8] 2019 Trade Finance Gaps, Growth, and Jobs Survey, ADB (September 2019). See: https://www.adb.org/sites/default/files/publication/521096/adb-brief-113-2019-trade-finance-survey.pdf
[9] Banking as a Living Business, Accenture (2017). See: https://www.accenture.com/us-en/insights/banking/living-business-banking-customer-experience
[10] HSBC and Tradeshift join forces to revolutionise working capital financing, HSBC (March 30, 2017). See: https://www.hsbc.com/media/media-releases/2017/hsbc-tradeshift-announcement-final
[11] NCino, Cloud-Based Financial Services Firm, Aims To Raise $100 Million In IPO, Forbes (June 22, 2020). See: https://www.forbes.com/sites/davidjeans/2020/06/22/ncino-cloud-based-ipo/
[12] Source: Accenture Research

Submit a Comment

Your email address will not be published. Required fields are marked *