Insights and trends for Banks in Trade Finance in 2022

Banks and funders in trade finance have been keeping track of three key themes over the course of 2022: digital transformation, the role of ESG and FinTech collaboration. We share our thoughts on what these mean for the industry.

Digital Transformation in Supply Chain Finance

A prominent theme at both the ITFA summer party and the annual conference was how the digital transformation of trade finance has been increasing focus for years, and the need for it has increased massively since March 2020. As Shannon Manders of GTR said; “the uptake of digital solutions is now a necessity, rather than a nice to have.”

The industry has gone from seeing the early adopters driving digital transformation, to digitisation being a necessity due to the impact of coronavirus and changes in compliance measures. There is a groundswell of interest coming from the corporate end user that means the banks and funders must keep up.  Treasurers at corporates are increasingly fed up with traditional ways of working, and as their workforces are in multiple countries and time zones, digitisation is increasingly important.

Banks are getting to the end-of-life on their own systems and are looking for client-centric solutions to reach the end customer. Fintechs are finding that reasons previously given by banks and funders for not adopting a more digital or cloud-based way of working, are now reasons to do it. For example, carrying our due diligence and KYC processes are now paperless and easier to do digitally.

There is a growing feeling that technology shouldn’t be a unique selling point of a supply chain finance product, but rather the standard, allowing the collaboration and customer experience to differentiate funders from each other in this space. As such, there should be more cooperation between fintechs and banks, as they continue to support each other. A good example of this is the recent partnership between Demica and Mastercard, where Demica’s technology is embedded within Mastercard’s innovative Track BPS product. Going digital is rapidly accepted as standard, even expected by end-users, who are surprised when this sort of work is paper based.

Another driver of digital transformation in the trade finance space is access to funding. Significant government lending has provided corporates with liquidity during the coronavirus pandemic so far, but this is going to scale back so banks, NBFIs and asset managers are potentially able to fill that gap in the SME space.  The resilience of supply chains has attracted significant attention and companies are focusing on ensuring that suppliers can access funding through various methods, including supply chain finance, increasing demand. This presents an opportunity for funders to acquire new customers by widening their appetite and pursuing these businesses.

ESG in Supply Chain Finance

A repeated subject of discussion on multiple panels at several industry conferences this year is the importance of ESG being built in to supply chain finance functions and programmes, as well as the challenges and barriers to entry facing financial institutions who want to implement an ESG initiative into their programmes.

An appealing prospect for funders is using their supply chain finance function to offer more favourable rates to suppliers who meet certain ESG scoring criteria, and there is a lot of tech to help service these transactions, but one difficulty is maintaining timely turnaround due to a lack of standardisation in ESG scoring.

Generally, suppliers will bear the brunt of the work in submitting their ESG scores to access supply chain finance solutions, and it’s important to make sure that the SMEs aren’t being asked to devote time and energy to acquiring ESG scores from multiple parties with differing criteria, which is lengthy, resource intensive and serves as a barrier to entry for these companies. Suppliers shouldn’t have to spend more resources depleting the value of their transaction, so industry-wide standardisation of scoring is crucial.

One consideration put forward at ITFA’s annual conference by guest speaker, philosopher Dr Joanna Burch-Brown, was that it’s important to ensure that there is diversification in organisational ESG measures- if every business focuses on replanting trees, for example, but ignores reduction in pollution, then the efforts at sustainability are unbalanced and it exposes an organisation to allegations of greenwashing (the practice of pretending an organisation is more sustainable than it is, while ignoring areas in which it’s not meeting ESG targets).

Standardisation and Collaboration in the FinTech space

Just as there is demand for ESG scoring to be standardised., there are also calls for the fintechs serving the trade finance space to collaborate and standardise practices more to make the end user experience for funders, buyers, and suppliers more seamless. The benefits for end users are fairly obvious, although set-up of the systems might take longer as contracts are drawn up between several different parties to ensure the systems work together as needed.

There have been preliminary talks between some fintechs about how this could work, although most businesses struggle to move from a competitive mindset to a collaborative one. Using APIs and integrations, it could be possible, however few fintechs are confident enough in the security of sharing processes to commit to integrating with other businesses so easily and are hesitant in taking the first steps to partner with each other.

ITFA’s fintech committee has been forged to find a way to bridge those divides, and there is optimism within the industry that things will slowly move in this direction.