Capital Markets | Rethinking Investment Banking

Trade finance: The landscape is changing

are you?

Doing business means taking

risks. Doing business crossborder increases those risks:
Will my buyer pay me, and
pay me on time? Will the
goods I ordered be delivered
as agreed? What are the
chances of future limitations
on foreign currency
conversion or transfer
limitations? Is there a risk of
political instability disrupting
the trade relations? How will
I finance these transactions
and avoid liquidity risks and
cash flow shortages?
Bank-intermediated trade
finance has been the preferred
instrument to offset these
risks for years, hence making
trade finance an important
catalyst of cross-border
trade and a solid source of
revenues for banks. However,
technological innovation,
switches in corporate behavior,
regulatory changes and
increasing market competition
are fundamentally changing
the rules of the game.

Trade finance an attractive business

Global trade of goods has been growing at double-digit rates since the
early 2000s, outpacing the growth in nominal world Gross Domestic
Product. The only time when trade volumes declined was in 2008 at the
beginning of the financial crisis.1

Global imports growth by region

Global exports growth by region

200

200

180

180

160

160

140

140

120

120

100

100

80

80
05

06

07

08

Emerging economies
World imports
Source: CPB, Accenture
Advanced economies

09

10

12

13

14

05

Emerging Asia
World imports
Emerging economies

This growth is even stronger in emerging

markets, particularly in Asia. In 2013,
Emerging Asia represented around onefourth of the value of global exports.2 And
according to the Asian Development Bank,
this areas role in global trade will continue
to grow with a 40 percent share of total
exports forecasted by 2030.3
Banks play a fundamental role in the
enablement of these cross-border trade
flows through the payment execution, risk
mitigation and financing.

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Emerging Asia

06

07

08

09

10

11

12

13

14

Advanced economies
World imports

Emerging economies

Advanced economies

Emerging Asia

They 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.
More recent evidence highlights the
extensive cross-selling potential of trade
finance by providing corporates with
a complete and integrated transaction
banking offering: $1 in trade finance fees

can bring additional $1.70 in FX and cross

border payment fees, and another $2.25 in
other transactional banking revenue.4
The importance of trade finance for
banks in building lasting and profitable
relationships with their corporate clients is
undeniable.

Forecast growth in trade flows between ASEAN and its major trading partners

Global Trade with ASEAN

2020: ~US$4.4T(F)
2013: ~US$2.5T(A)
China
$746B

Europe
$472B
North America
$349B

11.4%

6.5%

6.8%

$351B

MENA
$292B

$304B

$220B

8.8%
$162B

India
$145B

Extra-ASEAN
Imports 2013:
$962B

11.5%
$68B
Legend:
Country/Region
2020 Total Trade
Forecasted
2013-2020
7y CAGR

9.0%

Korea
$270B
10.4%
$135B
Extra-ASEAN
Exports 2013:
$941B

$609B

Latin and
Central America
$121B

7.6%
$73B

8%
$39B
Sub-Saharan Africa
$66B

2013 Total
Trade Actual

Intra-ASEAN
$1,12B

5%
$78B
Oceania
$110B

Source: Trade data from ASEAN stats as of December 2014; Accenture Estimates

Trade finance transaction default rates by product

Trade Finance Productsa

Export L/C 0.016%

Performance Guarantees 0.034%

Loans for Import/Export 0.021%

Import L/C 0.020%
All Corporate productsb 1.380%
Source: ICC Rethinking Trade & Finance 2014
a
Default rates in the Trade Register (2013 report)
b
Default rates for all corporate products in 2012 from Moodys

The world is changing rapidly

Technological innovation in the form of digitization of channels and
products, switches in corporate behavior and expectations, regulatory
changes and increasing market competition are today fundamentally
changing the trade finance market space.

Switches in corporate
behavior and expectations

difficulties in accessing bank financing,

with supply chain failures as ultimate
consequence.

With corporates gaining maturity in

cross-border trade and getting more
familiar with their trading partners and the
countries they are located in, the need for
risk hedging is decreasing. Corporates are
getting more selective in the use of trade
finance instruments due to the relatively
high fees of trade finance instruments and
the complexity and time delays connected
to their reliance on paper documents.

Large corporates are therefore shifting

their focus from meeting their own
financing needs to ensuring the health
of the entire supply chain. As a result,
corporates are in search of new financial
products that address their supply chain
finance and payment needs in an open
account set-up, and span across the
company, its suppliers and its buyers,
creating a clear challenge and opportunity
for banks who want to continue to play a
role in the trade finance space.

This switch in corporate buying behavior

is reflected in the growing importance
of open account transactions, where the
exporter delivers goods and the importer
pays on reception or under agreed
payment conditions. It is estimated
that open account currently represents
around 80 percent of trade transactions
by volume and 35-45 percent of the
value of all traded goods,5 percentages
which are expected to grow further in
the coming years.
This move away from bank intermediated
trade finance instruments is posing a real
threat to the trade finance revenues of
banks, while at the same time leaving
corporates with reduced access to
financing options.
The growing maturity of cross-border trade
is not only luring corporates away from
bank intermediated trade finance products,
it is also leading to a further globalization
and hence lengthening of the trade cycles,
raising the need for working capital of
the different players in the supply chain.
The financial crisis has demonstrated
the vulnerability of global supply chains
to smaller corporates who often face
6

Digitization
Corporates increasingly rely on electronic
channels to interact with their banks.
This is also the case for trade finance.
Those corporates are expecting electronic
channels to become more and more
sophisticated, not only providing basic
transaction services, but also providing
them with access to advanced reporting,
forecasting and simulation services for
trade finance, even more so integrated
with different transaction banking
products like payments, foreign exchange,
liquidity and cash management.
Meeting the increased expectations of
online channel sophistication is still done
by a lot of banks through proprietary
solutions. However bank independent
platforms portals and many-to-many
host-to-host connections offered by
software vendors are gaining importance.
These solutions are increasing the ease of
use and transparency for corporate clients
while fueling competition between banks.

An even more fundamental change

is coming with the emergence of
market standards for the electronic
exchange of open account transaction
data between banks and between
corporates and their banks.
SWIFT, as one of the driving forces behind
these data protocols, has launched the
Trade Services Utility (TSU), a centralized
matching and workflow engine which
provides the timely and accurate
comparison of data taken from underlying
corporate purchase agreements and related
documents, such as commercial invoices,
transport and insurance documents.6
By replacing paper document flows with
digital data flows, this trend provides
banks with the fundamentals to radically
reduce the cost and time needed to handle
traditional trade finance products. Digital
data flows also allow banks to develop new
value added services like purchase order
and invoice matching, liquidity analysis
and forecasting.

Possible key benefits of supply

chain products:

For the anchor or principal:

increased supply chain stability, better
predictability of financial flows, greater
visibility and control across the financial
supply chain and payment process.

For the up and downstream

participants:

Increasing competition
Given the cross-border nature of trade
finance, the need for solid content
expertise and the required balance sheet
strength, large global banks continue
to play an important role, accounting
for a quarter to a third of global bankintermediated trade finance.
There is evidence that European banks,
which lost ground in 2011 and 2012
because of stricter regulations and dry
global funding markets, are making a
comeback. Together with American banks,
they are looking at emerging markets for
growth by following the global expansion
of their clients.
However, local and regional banks in
those emerging markets continue to stand
strong. They are defending their historical
majority market shares by leveraging
their deep local relationships and their
understanding of local markets, while
investing in getting their offerings up to
global standards.

trade finance companies focusing on

commodity trade finance or SME trade
finance. Alibaba is already picking up on
this trend, entering into a partnership
with two UK start-ups to provide
financing to small British businesses
looking to buy from Chinese suppliers.7

improved payment terms, easier access

to credit at better conditions, reduced
complexity of following up payments.

It is likely that the nimble start-ups will be

the first to leverage blockchain technology
for trade finance, further adding to the
threat for traditional banks.

Regulation
One of the most important regulatory
responses to the financial crisis was Basel
III, which triggered the deleveraging of
banking balance sheets and constrained
the availability of credit. Since then
the apparent adverse economic effects
of the new regulations have led to the
relaxation of capital requirements for
trade finance assets. This is paving the way
for a renewed interest in trade finance,
especially in those regions with high Basel
III compliance.

While non-bank players only take a

modest part of the total market, recent
years have shown the emergence
and success of logistics companies,
supplier networks and specialized niche

What to do to stay in the game?

Extending the traditional trade finance products with sophisticated, online
access and with supply chain offerings will be key for banks to safeguard
their position and continue to drive growth.

Building a supply chain

offering
Innovating trade finance products and
channels by enabling sophisticated, online
access, replacing paper document flows
by data flows and building a supply chain
offering will be key for banks to safeguard
their position and continue to drive growth.
The supply chain offering spans a vast
range of financing, payment and liquidity
management services, and is still in full
development with product characteristics
varying between banks and geographies.
However, a number of generic trends in the
development of product characteristics can
be highlighted:

Anchor centered
Programs are typically set up with a large,
often multi-national anchor or principal,
building on its credit rating to finance
players up and down stream in the supply
chain; often SMEs with little access to
traditional bank financing.

Multiple participants

Trade-related revenues for banks

Deals cover a set of transactions or a

cluster of supply chain participants, with
numbers ranging from a couple of hundred
to a hundred thousand.

100%

Web-enabled

40%

15%

The cross-border character and sheer

size of some of the programs in terms
of participants make online channels an
indispensable part of the offering.

20%

33%

Customization
Given the recent emergence of these
products, standardization is still low, with
large corporate anchors expecting the bank
to be flexible to tailor to their needs.

Syndication and securitization

Deals are often too large for one single bank
and banks are hence turning more and more
to syndications and securitization.

80%
60%

0%

36%

52%

19%
45%

2014

Traditional TF

Payments

2020
SCF

Source: CEB TowerGroup analysis,

Accenture estimates

Digitizing traditional
trade finance products
Bank Payment Obligation (BPO) is the
other new kid on the block. It represents an
irrevocable undertaking on the part of an
importers bank to pay (or incur a deferred
payment obligation) at maturity a specified
amount to an exporters bank. Although
the BPO product is not different from
traditional trade finance products in its
intent to mitigate the risks of international
trade, it does so in a fully digital way, thus
offering significant advantages in speed,
flexibility and reduced complexity.

Bank Payment Obligation

Benefits for the importer

Benefits for the exporter

Better payment terms and conditions

Assurance of payment

Mitigation of goods delivery risk

Access to flexible pre- and postshipment finance

Increased convenience and

reduced cost

FX risk elimination by BPO in home

country currency

Source: International Chamber of Commerce Bank Payment Obligation.

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Benefits for the bank

Automated, low cost, high accuracy
solution
Upfront definition of matching rules
eliminates subjectivity
New value-added services
opportunities

The race for efficiency

and scale in traditional
products
While new products and channels are
emerging, traditional trade finance is
becoming more and more commoditized,
leading to growing pressure on the
need for efficiency in delivery. Banks
are therefore modernizing their trade
finance platforms, opting for field tested
technology solutions and maximum
simplification and automation of
processes. Outsourcing and offshoring
strategies are imminent as the next step in
the pursuit of cost savings.

A broad range of mature trade finance

software solutions is available on the
market. These solutions differ in product
and functional scope as well as regional
focus because of remaining local market
specificities:
Trade finance-focused packages: in most
cases combining front- and back-end
solutions with deep functional coverage
Transaction banking packages with
trade finance functionality: covering all
transaction banking products, including
trade finance, enabling a full and
integrated transaction banking offering
Universal banking packages with trade
finance functionality: universal banking
solutions with often somewhat more
basic trade finance functionalities

Conclusion
Trade finance is an attractive business for banks. Global trade continues to
be on the rise and banks play an important role in facilitating the financing,
payment execution and risk mitigation through the sales of trade finance
instruments. The significant cross-sell potential, ability to build lasting and
sticky client relations and the low loss ratios of the instruments make for an
attractive business for banks.

However, the trade finance market is

changing drastically. Digitization is one
of the key drivers: interaction between
corporates and their banks happens more
and more through online channels, and
technical solutions to fundamentally
replace paper document flows by
electronic data flows are becoming
readily available.
At the same time, large corporates are
changing their expectations on the trade
finance solutions provided by their banks.

10

They are looking for the means to play an

active role in the stabilization of the supply
chains to which they belong, while at the
same time being able to benefit from the
advantages of open account transactions
where possible.
Banks need to step up their game. They
need to innovate their trade finance client
offerings to include supply chain solutions,
apparent adverse economic Bank Payment
Obligation products and sophisticated
online channels to access traditional and

new products. At the same time, they need

to invest in the efficiency of their process
and technology capabilities to ensure an
offering that is competitive both in terms
of price and quality.
And they need to do it fast, since
competition from global and local player is
getting fierce.

References
1

ICC 2014 ICC Trade Register Report

International Trade Statistics 2014

World Trade Organisation, 2014
2

Anderson, Kym; Strutt, Anna. 2011.

Asias Changing Role in World Trade:
Prospects for South-South Trade Growth
to 2030. Asian Development Bank;
Accenture Analysis.

East & Partners Trade Finance Program

January 2014

CEB TowerGroup Trade Finance

Applications

Trade Services Utility SWIFT

http://www.reuters.com/
article/2015/03/11/us-alibaba-groupbritain-idUSKBN0M70HW20150311

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Contacts

About Accenture

Edle Everaert

Accenture is a global management

consulting, technology services and
outsourcing company, with more than
336,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business functions,
and extensive research on the worlds
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses and
governments. The company generated net
revenues of US$30.0 billion for the fiscal
year ended Aug. 31, 2014. Its home page is
www.accenture.com.

Managing Director,
Accenture Banking
Edle is a managing director in Accentures
Banking practice, and is the global lead for
transaction banking and trade finance. She
has 15 years of experience in management
consulting in different domains, including
growth strategy, online and mobile strategy,
product innovation, cost reduction, process
and organization redesign, with a strong
focus on corporate banking.
edle.everaert@accenture.com

Diane Nolan

Managing Director,
Accenture Capital Markets
Diane is a managing director in Accentures
Capital Markets practice. She leads
Accenture Management Consulting Capital
Markets globally, driving a number of
business transformation offerings, including
Trade Finance, Post-Trade Services and
Wealth & Asset Management. With 20
years experience in capital markets, Diane
is also responsible regionally for Accenture
Trading Services in Belgium, France,
Luxembourg and the Netherlands (Gallia).
diane.nolan@accenture.com

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Research Manager,
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Tomasz is a member of the Accenture
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Prior to joining Accenture, Tomasz spent
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tomasz.m.walkowicz@accenture.com

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