Trade finance is an expansive industry, touching all corners of the globe, and used in every industry. 

Because it is so prevalent, it would be easy to continue with the status quo and let the market play itself out. 

However, the reality is that dynamics are constantly changing, and require collaboration and guidance from all to ensure prosperity across the board.

How do we achieve this and how do we build these processes into the industry?

To talk about some of these points, Deepesh Patel spoke with Kai Fehr, Global Head of Trade and Working Capital at Standard Chartered Bank at FCI’s 56th Annual Meeting in Seoul.

The role of trade finance in global prosperity

The potential of trade finance to act as a catalyst for economic growth and stability is immense. 

Standard Chartered reviewed the pools of revenue wallets for trade finance overall, and found an estimated $50 billion revenue wallet globally. These numbers suggest significant opportunities across diverse regions. 

The major revenue shares lie within Europe ($25 billion), Asia ($16 billion), and the US ($8 billion), with Asia, in particular, presenting robust growth opportunities especially in open account transactions.

But these numbers are changing, and so are the dynamics of trade finance. 

Fehr said, “When we look into the development in the world with changing supply chain, you need to have a proposition how you tap into these wallets because around two-thirds of them sit in the open account space.” 

This represents roughly only $18 billion of revenue from the traditional trade finance instruments, such as letters of credit and guarantees, and these numbers have been consistent for many years.

This trend is particularly noticeable in Asia, where open accounts are growing at around 15% rate. 

If you want to take advantage of the growth, companies need to rethink their trade finance strategies.

Trade finance instruments are not the only aspects of the industry undergoing major changes. The locations of physical supply chains are changing. Fehr said, “Almost 70% of our clients are telling us that they are changing their sourcing and supply chains.”

According to Fehr, countries like Poland, Mexico, Malaysia and Thailand are poised to benefit from this restructuring.

Developing products to support growing markets

The development of import factors was a popular topic at FCI’s conference. Despite the prominence of major players like BNP, Wells Fargo, and others in the import factor market, there exists a notable disparity in active engagement across the region.

Fehr said, “Interestingly, out of 109 import factors, only 19 are active in Asia, which significantly narrows down to about 5% of the total import factoring activities happening in the continent.”

Though this number is quite low and currently represents a challenge, it also provides an opportunity for growth. 

And there are ways to utilise existing strengths and resources to grow the import factor framework. 

Fehr said, “There is an opportunity to use your credit strengths, to use your understanding of the local credit market. Use available headroom, work with the insurer to build a proposition around import factors.”

The hamster wheel: The problem that keeps trade heads up at night

Sustainability is increasingly integral to trade finance, necessitating the incorporation of environmentally sound practices into core operations. 

A business cannot take into account all sustainability considerations in a short time frame during a deal.

Instead, Fehr said, “ You need to lobby third-party certification, third-party data, and build it into your hamster wheel.” 

Additionally, the push towards digital transformation is reshaping how trade finance operations are conducted. 

This transformation is yet another example of ‘the hamster wheel’, where processes need to be built into banks. Fehr said, “The hamster wheel only works if the client assesses your bank and the transaction flows through like a clockwork.”

As banks start to build these processes into their system, the industry can continue to thrive in the face of changing dynamics.

The post VIDEO | Unlocking global prosperity whilst running the ‘hamster wheel’ for trade finance appeared first on Trade Finance Global.

Over the last two years, supply chains have been discussed more widely than ever before.

People hardly put any thought into the long and arduous journey taken by produce on grocery store shelves. 

At least not until the COVID-19 pandemic started to disrupt that seemingly reliable facet of modern society.

As store shelves lay bare and toilet paper was nowhere to be found, many people began to hear much more about the supply chains that power our lives in the background.

While the world has largely emerged from the grips of pandemic lockdowns, several other macroeconomic and geopolitical factors have taken the role of supply chain disruptors.

To learn more about the changing nature of global supply chains, Trade Finance Global (TFG) spoke with Standard Chartered Bank’s Kai Fehr, global head of trade and working capital, and Samuel Mathew, global head of flow and financial institution trade, at Sibos, held in Amsterdam this October.

Supply chains are becoming redundant—and that’s a good thing

The landscape is currently very complex coming out of the COVID-19 pandemic. Factoring in additional challenges such as geopolitical tensions, inflation, and energy prices, it can be particularly difficult for some businesses to navigate. 

The amalgamation of all these factors has led to large delays in the market for nearly everything. People building houses are struggling to get their hands on supplies and appliances to get the job done.

For many companies, overcoming these hurdles means building resilience in their supply chains.

Fehr said, “You must have contingencies so that you can be certain that departments within your supply chain are still able to provide in a number of scenarios.”

Geopolitical tension has the capacity to divide the world, with the pandemic putting cities in lockdown. These are all events that can happen, and supply chains need to be ready to address them.

One of the main themes coming out of global supply chains today is a growing amount of friendshoring, which is when companies bring their supply chain closer to a friendly nation.

This is becoming particularly prevalent in the energy and technology industries, given a lot of the geopolitical tensions that are disrupting these markets globally.

While friendshoring is becoming more popular, firms still struggle to escape China’s massive gravitational pull.

It is becoming more and more apparent with Standard Chartered clientele that the global market is important for them, but the Chinese market is critical. 

With this in mind, businesses are increasingly building two independent supply chains, one catering to the domestic Chinese market and the other using friendshoring processes throughout the rest of the supply chain.

While this phenomenon is occurring, it is unlikely to manifest itself in the short term.

This is because changing supply chains is a considerable process requiring supplier and environmental due diligence. This is expected in addition to the actual moving of products and setting up the manufacturing facilities.

Fehr added, “That is a multi-year project, not a multi-month project. 

“Therefore, if we are reviewing this in a year’s time, I predict we will see some change, but the real permanent change will not be visible for another three to four years.”

Digitalisation to help deep-tier financing

Digitalisation is often widely hyped as a tool that will solve countless problems within the trade and supply chain finance spaces.

In some instances, however, this buzz comes about without a clear and tangible understanding of what is actually happening behind the scenes. 

Often, technology is only providing visibility into the transactions at hand without actually being in a position to change the underlying reality. 

While visibility is a key first step, these solutions don’t solve many of the end-to-end problems in the supply chain.  

On a different note—although still within the realm of digitalisation—is the idea of deep-tier financing, which has tremendous potential to help solve the trade finance gap.

Often in large multinational supply chains, the tier-one suppliers are generally already quite financially strong and could achieve financing from any number of sources. 

Advancements in digital technologies, however, can allow the financial strength of the corporation to travel further down the chain.

Standard Chartered is able to use technology to tokenise trade assets and let the token travel deep into the supply chain. 

Fehr and Mathews noted how in one scenario, the bank had reached level eleven, while the normal depth is level three to four.

Fehr said, “I’m not talking about digitalisation as a theoretical idea—this is a reality for us.”

This happens because the technology allows tokens to be fractionalised at each level of the chain and portions of the whole passed on to each supplier level in a manner that represents the physical reality of the supply chain. 

By layering on pricing components, these tokens can allow the financial prowess of large multinationals to trickle down many tiers to a small local farmer who otherwise may struggle to get financing despite the fact that their products are ultimately sold to a financially stable firm.

By easing the barriers to small business financing, more of them will receive financing, reducing the trade finance gap in the process.

The post Double redundant—Standard Chartered discusses supply chain duplication and deep-tier financing appeared first on Trade Finance Global.