The paper is responding to a convergence of crises: Russia’s war on Ukraine has upended the post-WWII European peace order, the US is reconsidering its commitments (with recent US policy signals suggesting Europe must be prepared to shoulder more of its defence burden​), and rising powers like China are challenging the rules-based order and arming rivals​.

Within this context, Europe urgently needs to strengthen its defence capabilities and resilience, which means the Bloc’s leaders must find innovative ways to finance a defence build-up, bolster the continent’s defence industrial base, and recalibrate geopolitical relationships – all without undermining fiscal stability or the broader economy.

No small task.

An €800 billion challenge

Europe’s defence ambitions require massive investment. Estimates put the additional funding need in the range of €500–800 billion, a level European states cannot simply reallocate from existing budgets or raise through conventional debt without sacrifice. High public debt levels after recent crises mean many governments are fiscally constrained, unwilling or unable to borrow large sums on the market for defence.

In short, traditional funding approaches are insufficient.

Rob Murray, former Head of Innovation at NATO and founder of the DSR Bank, said, “The DSR Bank is a strategic, credible, and market-based solution to the grave security challenges facing Europe which ensures we can defend democracy without undermining economic stability. The DSR Bank is a key weapon in the armoury of European governments who want to strengthen their defence capabilities but are held back by debt limits and fiscal constraints. It is welcome that the DSR Bank has won the support of the European Parliament.”

The new paper urges member states to support establishing a DSRB as a multilateral lending institution to provide low-interest, long-term loans for critical security priorities and effectively act as a dedicated development bank for European defence and security needs.

As a multilateral bank capitalised by its member governments, a DSRB would likely enjoy a AAA credit rating, which would allow it to issue debt and lend to governments for defence projects on very favourable terms​.

More important, however, is the notion that borrowing from such an institution would be treated as “contingent liabilities” on national balance sheets. Effectively, it is off-balance-sheet financing that does not add to a government’s official debt stock​, allowing nations to maintain fiscal discipline on paper while actually deploying fresh capital into defence.

As a result, a multilateral defence bank can dramatically increase the money available for defence without increasing the risks associated with greater national debt or the political and market backlash that might accompany a massive debt-funded military buildup.

Considering the supply chain

A key challenge in rapidly expanding defence production is ensuring that all suppliers, even those deep down the chain, have the liquidity to fulfil larger orders.

Defence supply chains are complex.

A prime contractor (say, an aerospace giant) relies on hundreds of smaller suppliers for components, materials, and services. If those tier-2 and tier-3 suppliers cannot access working capital to buy raw materials or ramp up capacity, they become bottlenecks, no matter how much money governments throw at the primes.

Currently, many smaller firms in critical defence supply chains are cash-constrained. They often face lengthy payment cycles on government contracts (where payment may come only upon delivery or milestone) and struggle to get affordable bank financing in the interim. Traditional lenders have been reluctant to support defence-sector SMEs, citing compliance burdens and reputational risk, especially when contracts are unpredictable or classified​.

This creates a dangerous vulnerability: without liquidity, smaller suppliers cannot quickly scale up production, directly limiting Europe’s capacity to arm itself in an emergency​. Thankfully, deep-tier supply chain finance may be able to help.

Rebecca Harding, CEO of the newly created Centre for Economic Security, said, “The DSRB is an attractive way for governments to increase their defence to critical national infrastructure starting with defence and security. It provides a solution that will work, via Guarantees, to get to where support is really needed – in deep tier supply chains – to make them more effective through efficient supply chain finance. We live in challenging times and this is exactly the right institutional response.”

Deep-tier supply chain finance is an innovative model that unlocks financing for lower-tier suppliers (often SMEs) by leveraging the credit strength of larger, creditworthy anchor buyers​. In practice, this means a small subcontractor can borrow against the payment approval of a major defence contractor or government, receiving immediate cash at the more favourable rates tied to the anchor’s stronger credit, pushing liquidity down the chain to where it’s needed most.

Where does a DSRB come in?

The proposed DSRB can play a catalysing role here. By providing risk guarantees or insurance to commercial banks for defence-related loans (akin to how the European Bank for Reconstruction and Development operates), the DSRB would make it much more palatable for banks to extend credit to defence suppliers​.

With a DSRB guarantee in hand, banks can finance an SME subcontractor’s purchase of, say, specialised machine tools or materials for missile production, confident that even if something goes awry (cancellation, geopolitical issues), their loan is protected.

Many private banks have indicated that they would be keen to lend to defence companies if a multilateral institution stands behind the deal​. We can expect the DSRB to issue such guarantees and perhaps work with export credit agencies to funnel capital into the defence supply chain​.

Sean Edwards, Chairman of ITFA, pointed to the statement released by ITFA, which said, “Paragraph 80 of the White Paper rightly calls for the establishment of a dedicated Defence, Security, and Resilience Bank (DSRB). This institution will not only provide vital financing for Europe’s security needs but will also employ supply chain finance techniques, particularly deep-tier finance, to reinforce the resilience of military supply chains, which are often more fragile than they appear. Ensuring liquidity at every level is critical. This represents a strategic opportunity for the trade finance community—not only to enhance security and stability in Europe but also to develop an underbanked asset class with significant potential. ITFA encourages its members to explore these opportunities.”

Investment in defence supply chains will also have positive spillover effects beyond military might. Such spending will stimulate other high-value industries, such as aerospace, electronics, cybersecurity, shipbuilding, and more. In the long run, this can lead to less reliance on foreign suppliers, more intra-European trade, and potentially export opportunities if European defence firms become more competitive globally.

But these hypothetical benefits will remain hypothetical without a seamless execution.

Money must flow to the right places quickly, which is why supply-chain financing tools and the DSRB’s agile funding are so crucial. If Europe succeeds, its defence renaissance could become a driver of economic renewal, especially in regions with defence industries.

Geopolitical shifts creating the need for strategic autonomy

For decades, Europe’s defence posture has been sheltered under the US umbrella via NATO. Now, with uncertainty about US engagement (exacerbated by the possibility of US policy retrenchment​), European leaders are seeking strategic autonomy and the ability to deter threats and act in crises with less dependence on Washington.

This is one of the reasons why the very nature of the proposed DSRB is multilateral. The bank is envisioned to include EU members and willing non-EU states (the UK is a prime candidate), leveraging London’s unique strengths in finance and defence​. Similarly, other NATO allies or partner nations (Norway, possibly Canada, etc.) might participate, pooling resources for collective security.

Geopolitically, the establishment of a defence bank and common funding tools shows that Europe is backing its strategic commitments with concrete financial power, effectively securitising its security needs. The implication is that Europe’s defence is becoming entwined with global finance.

In modern geopolitics, fiscal capacity and financial engineering can be as vital as troop counts and tanks. A credible financial commitment to collective defence can deter adversaries by showing that Europe can and will spend what it takes to prevail in a protracted conflict.

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At the beginning of this year, we looked ahead and made a series of predictions for what we thought would be the biggest trends in trade, treasury, and payments throughout 2024. 

As the year winds to a close we’re revisiting our predictions to see how well they measured up to reality. Let’s dive in!

Prediction #1: Uncertainty will underpin the macroeconomic landscape (again)

We started our prediction list with a bit of a lob ball – but we sure hit it out of the park. Our prediction that uncertainty would dominate the global macroeconomic landscape in 2024 was spot on. 

The year was marked by slowing global growth, persistent inflationary pressures, and geopolitical disruptions. Central banks maintained cautious monetary policies, and China’s continued economic slowdown weighed heavily on global trade. Energy markets also faced volatility due to fluctuating oil prices amidst geopolitical tensions, including ongoing conflicts in Ukraine and the Middle East. Extreme weather and strike action around the world also disrupted global supply chains this year.

Adding to the complexity, elections in more than 60 countries helped to change the faces of leadership around the globe. Some of these, like Donald Trump’s re-election in the USA and the ensuing tariff threats and protectionist rhetoric, leave the world on edge leading into the new year.  

Overall, 2024 helped reaffirm that uncertainty is the only certainty in the world. 

Prediction #2: Supply chain finance expects lacklustre growth

Our prediction of sluggish growth in supply chain finance (SCF) during 2024 ended up being broadly accurate. The trade finance gap expanded and market conditions remained challenging, with tightened liquidity, cautious lending, and ongoing derisking by banks.

Geopolitical tensions, higher borrowing costs, and reduced risk appetite created a challenging environment for SCF in 2024, which strained access for some but created opportunities for non-traditional financiers to have an increasingly prominent role, with fintechs and alternative lenders stepping in to meet demand.

The broader SCF ecosystem saw slow but strategic innovation, with players focusing on simplifying processes and expanding coverage into underserved markets. While the sector didn’t experience transformative growth, it continued to evolve, positioning itself for a more robust recovery in the years ahead.

Prediction #3: Standards and frameworks will take centre stage

At the beginning of the year we predicted that developing standards and frameworks for digitalisation and ESG would be the emphasis in 2024. We got that one right. 

In November, COP29 opened with an agreement on standards for the creation of carbon credits, and tradeable permits tied to greenhouse gas emissions used by governments to measure and limit emissions. 

On the digitalisation side, the adoption of the UNCITRAL Model Law on Electronic Transferable Records (MLETR) gained momentum. Notably, France joined the cohort of countries recognising electronic transferable records, marking a significant step towards global digital trade harmonisation.

Work also continues at UNCITRAL on developing a comprehensive international convention to standardise negotiable cargo documents across multiple transportation modes. The group expects to complete this in late 2025.

These developments show an acceptance of the need for collaborative progress, focusing on establishing adaptable and technology-agnostic solutions to meet evolving digital and sustainability challenges.

Prediction #4: Increased demand will drive growth in trade credit insurance

Our prediction that demand for trade credit insurance (TCI) would grow in 2024 was well-supported by market developments. The ICISA industry report published this year (albeit reporting on FY 2023) showed that trade credit insurance has seen steady demand, bolstered by evolving global trade dynamics and rising counterparty risks.

According to the report, throughout the year insured exposure grew by 4.5%, totalling €3.2 trillion; premiums written increased by 5%, amounting to €8.2 billion; and claims paid rose by 11.4%, reaching €3.2 billion. Penetration rate also increased to 15.07% for 2023, up from 13.16% one year earlier, with currency exchange rates playing a role.

This increase was largely driven by the role that these products play in protecting businesses from the risk of non-payment, which became increasingly prevalent given the economic uncertainties in the market.

Prediction #5: Solving complex issues will be key to fintech survival

Our prediction that fintechs would face a make-or-break year in 2024 was well-founded. The reality of the fintech landscape this year has highlighted both the promise and perils of the sector, with advancements in artificial intelligence (AI), instant payment systems, and blockchain juxtaposed against the financial struggles of some once-promising companies.

Blockchain, once the trendy new technology that everyone hyped, is finally starting to become more mainstream. After what felt like endless white papers and Proofs of Concept (POC), the technology has started being applied to real-world problems to reduce costs, increase efficiency, and improve customer experience. 

Replacing Blockchain as the hot new tech in town is AI. AI is impacting trade finance and payments by promising to automate risk assessments, fraud detection, and personalisation, particularly in supply chain resilience and operational efficiency. The adoption of AI in the financial sector has surged, with global AI spending expected to exceed $300 billion by 2026, according to industry reports.

Unfortunately, the year ended with news on several bank and non-bank lenders collapsing, notably, ABN Amro’s receivables finance team, Stenn and Kimura Capital. This will likely have compounding effects on appetite to lend to SMEs in 2025.

Prediction #6: An infrastructure revolution for payments

Our prediction that 2024 would mark a transformative year for payments infrastructure was accurate in part, though the anticipated revolution was more evolutionary than revolutionary. 

The adoption of ISO 20022, while significant, has been slower than expected in transforming cross-border payments, and the promise of central bank digital currencies (CBDCs) and distributed ledger technology (DLT) for payments remains largely unrealised.

ISO 20022 adoption expanded globally, especially among larger banks, leveraging the data-rich messaging standard for competitive advantage. However, smaller institutions and developing markets have lagged behind. While some progress was made in using ISO 20022 to improve payment transparency and speed, its broader benefits have yet to be fully realised.

Despite these challenges, the payments industry did make strides in cloud integration and real-time solutions, fostering incremental improvements rather than wholesale transformation.

Prediction #7: Technology will aid decision-making in treasury

Our prediction that technology would transform treasury operations and decision-making in 2024 was largely accurate. Tools like APIs and AI are increasingly becoming mainstays for the contemporary treasury leader, though challenges such as privacy concerns and inconsistent liquidity management adoption remain. By identifying patterns, forecasting cash flow, and simulating liquidity scenarios, AI has begun to enable treasury teams to make faster, more informed decisions. 

However, widespread adoption of real-time liquidity management tools has been slower than anticipated. While these systems can be powerful tools amidst changing market conditions, smaller firms tend to struggle with the cost and complexity of their implementation. Additionally, privacy and data security concerns continue to stand in the way of a deeper integration, as companies weigh the risks of exposing sensitive financial data to digital platforms.

The treasury transformation is ongoing, with many organisations leveraging APIs and AI for operational efficiency, but broader challenges suggest that the evolution will continue well beyond 2024.

Prediction #8: ESG is here to stay

At the beginning of the year, we predicted that ESG would remain central to business strategies in 2024. While this has largely remained the case, the conversation around sustainability took an unexpected turn over the course of the year. While progress was made in areas like harmonised reporting standards and carbon credit frameworks, a quieter, more cautious tone has emerged in corporate ESG efforts.

The enthusiasm that once surrounded ESG has faded. Concerns about greenwashing have given rise to “green hushing,” where companies downplay or stay silent on their sustainability efforts, either as a defensive move or due to diminished prioritisation. This trend has seeped into treasury functions, making the integration of ESG into financial strategies more subdued.

Despite this dip, the outlook for ESG remains promising. The regulatory environment, especially in Europe, is forcing companies to rethink sustainability as a strategic imperative rather than a checkbox exercise. Treasurers, in particular, are realising the potential of ESG investments to drive long-term growth and resilience without compromising profitability.

COP29, branded the “Finance COP,” was a milestone event, resulting in a global framework for tradeable carbon credits and substantial commitments by developed economies to finance green transitions in developing nations. These advances reflect growing regulatory and financial pressure to align global trade with sustainability goals.

The hope is that 2025 will reignite corporate enthusiasm for ESG, with treasury teams leading the charge towards sustainable finance, influencing supply chain practices, and embedding ESG into core business operations.

So, how’d we do?

Looking back at our predictions from the start of the year and comparing them to how events across the trade, treasury, and payments industries played out, we’re pretty happy with our predictions!

Of course, we can’t take all the credit. To make these predictions to spoke with some pretty smart experts across the industry and, well… stole a lot of their ideas, because they are the experts after all!

These trends reaffirmed the importance of staying informed, collaborative, and flexible. As we prepare for 2025, our new year’s resolution is to remain committed to tracking these developments, engaging with industry experts, and sharing insights to help our readers stay informed.

Here’s to another year of making bold predictions – and seeing how they stack up!

The post 2024 predictions vs reality: 8 trends we predicted for 2024, and how reality measured up appeared first on Trade Finance Global.

Our data team poured through the analytics of hundreds of podcasts, videos and stories published on Trade Finance Global in 2024, to bring you most loved podcasts, videos and stories of the year.

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At the 2024 Trade Finance Investor Day (TFDI) conference in London, TFG’s editor Deepesh Patel spoke with Nick Stainthorpe, Partner at Reed Smith, on ways to unlock capital investment into the trade finance and receivables world. As banks’ distribution capabilities plateau, the trade and receivables finance industry is constantly on the lookout for alternative sources of investment capital but often faces challenges due to its perceived complexity compared to traditional asset classes. 

Compared with other asset classes—mortgages and bonds, credit cards, student loans, collateralised loan organisations (CLOs), and so on—trade finance assets are unusual for their lack of consistency. These assets vary significantly in risk and tenor.

Securitising trade finance assets could fulfil the unmet demands of the trade finance gap, lowering barriers to entry for prospective investors (including funds, capital markets, etc.). The risks and complexities of trade finance securities, though real, can be overcome and are often outweighed by the benefits for both investors and originators.

From receivables to securities

In traditional asset-backed securitisation, securities are sold on the public capital markets or privately placed to a smaller group of investors. Private securitisation, however, offers a tailored approach compatible with the unique needs of the trade finance industry.

By creating entities to buy receivables and separate these assets from sellers, investors can buy exposure to a firm’s debtors in the form of tradeable security, letting them access less easily traded assets than traditional methods. Private securitisation structures are handled as off-market transactions and are not listed on a stock exchange, unlike public securitisation structures. In both structures, the receivables are shielded from a seller’s potential bankruptcy by being transferred to a special purpose vehicle (SPV). This ensures that investors face lower risk exposure related to the seller’s financial stability. 

This is especially attractive for those wanting to invest in trade and receivables finance but who are deterred by the risks of instability and insolvency. Through securitisation, investors can obtain credit ratings.

Securities in non-traditional sectors can be attractive to diversify investors’ portfolios, said Nick Stainthorpe, Partner at Reed Smith. “Trade and receivables finance securities are uncorrelated to things like real estate values or equities; their underlying assets are relatively short-dated, which allows structures to be wound down quickly where there are signs of trouble, making for a great asset class”. 

Security provides protection by ring-fencing specific assets from other creditors, while securitisation goes further by removing those assets from the company’s balance sheet entirely, offering additional protection from the company’s potential bankruptcy.

Unique risks in trade finance securitisation: credit, fraud, and dilution

All securities involve some risk, but investing in the trade finance asset class presents unique challenges. Investors must consider both general risks, like credit exposure to underlying debtors, and specific risks, like dilution and fraud. The latter is a particularly tricky aspect of trade finance securities, as fraud is inherently difficult to detect and mitigate.

Double invoicing, misinvoicing, and carousel fraud (operations involving nonexistent goods) are all risks unique to trade finance and can seem difficult for investors to protect themselves against. Because insurance against fraud can be hard to get, and getting full coverage is almost impossible, investors and lenders must focus on prevention instead: background checks on exporters and importers, KYC checks, and increased awareness of the risks all protect investors against potential losses due to criminal activity. Companies such as MonetaGo are addressing these challenges by developing solutions like a Secure Financing platform, which prevents duplicate financing fraud by creating unique digital fingerprints of trade documents.

Credit risk

Beyond the risks of fraud, trade finance securities are vulnerable to non-payment because of the inherent complexity of trade transactions. This would generally be non-payment by the underlying debtor, who might pay late or default entirely, but could also arise at the level of the originator if the originator becomes insolvent while holding collections or fails to properly transfer/assign the receivables. 

In addition, businesses must consider exposure to insurers and account banks, rethinking their approaches to adapt. Long approval timelines further hinder efforts to streamline processes.

Luckily, this is a much easier risk to protect against. Some mitigants include:

• Due diligence and monitoring, such as reviewing a supplier’s financial health and performance.
• Credit ratings to evaluate how likely a company or entity is to repay their debts.
• Financial instruments like letters of credit, bank guarantees, and so on.
• First loss pieces, in which one party agrees to take the first set of losses before others are affected.
• Over-collaterisation, providing more collateral than the value of the loan/obligation for extra security.
• Recourse to legally claim or demand compensation.
• Assets pledged as security.
• And, of course, credit insurance to protect against non-payment.

Taking out credit insurance cannot completely offset the various vulnerabilities within trade finance-backed securities but is a useful buffer to help manage non-payment risk. 

Credit insurance contracts can be intricate and require buyers to understand the terms necessary to avoid claim disputes. Most insurers will not cover the entire risk, requiring investors to have some “skin in the game” to incentivise them to have high levels of oversight and diligence. 

Securitisation: a bridge over the trade finance gap?

By unlocking sources of funding that have remained inaccessible until now, securitisation could play an important part in narrowing the estimated $2.5 trillion global trade finance gap, which disproportionately affects small and medium enterprises (SMEs). Financing SMEs through securitisation offers the potential for high returns with relatively low risk. 

“In some cases, you’re getting, for example, SMEs who are prepared to pay the financing cost that an SME will pay, but whose credit risk is much more creditworthy than that cost of finance would imply,” said Stainthorpe. 

However, this is not easy – particularly given the unique challenges of SME financing. Large portfolios of small, diverse businesses and the relatively higher default rates among SMEs lead many lenders to be wary of financing this sector. Though automated systems have emerged to handle the large volumes of data processing needed for SME financing, portfolio management and information sharing between stakeholders remain key obstacles. A promising approach is to focus on SME suppliers to larger corporations, provided the debtor’s credit risk and structure are carefully assessed.

The learning curve is steep but worthwhile for investors considering entry into this space. Before taking on these assets, investors should “take time to educate themselves about the product, look at different partners and investors who are operating the market already, and compare and contrast the ways they do it,” said Stainthorpe.

—

For those investors who do their homework, trade and receivables finance offers an emerging avenue for capital deployment in the sector—a market where the promise of high risk-adjusted returns and unique diversification benefits awaits. 

Securitisation could also be a powerful tool in trade finance, providing much-needed funding to close the trade finance gap. With proper education and resources, securitisation has the potential to transform the trade finance market, providing new opportunities for funding and reducing the global trade finance gap.

The post PODCAST | Securitising trade finance: Unlocking hidden potential appeared first on Trade Finance Global.

6 December 2024: The ‘Exploring Receivables and Payable Finance’ conference, jointly hosted by FCI, IFC – International Finance Corporation, and the Central Bank of Uzbekistan, took place in Tashkent on Thursday 5 December.

Trade Finance Global (TFG) served as the media partner for the event, supporting knowledge sharing in the global financial community.

In Central Asia’s most populous city, industry leaders tackled the fundamentals of factoring and supply chain finance. They also discussed topics that will undoubtedly guide the industry in 2025, including regulatory frameworks and technological advancements.

Case studies provided tangible evidence as to how these financial solutions can create value. Notable speakers included:

• Çağatay Baydar, FCI Chairman, on the success story of Turkey’s factoring industry
• John Beany, Director Global Product – Global Trade & Receivables Finance, HSBC, presenting on factoring risk management.
• Monica Martin Blanco, SCF Consultant, Key Asset Consulting, offering a deep dive into supply chain finance legal and regulatory considerations.

These practical strategies for leveraging factoring and supply chain finance, were particularly relevant in the context of emerging market finance, emphasising how to drive growth and improve profitability for banks and non-bank financial institutions.

Representing a global perspective, the event was simultaneously translated into Russian and brought together experts from all corners of the world. 

The receivables and payables finance industry has been through step-by-step developments which are beginning to see fruition. This conference was timely in recapping and recognising what has been brewing over the past year, and highlighting what to look forward to in the new year.

The post TFG media partner of FCI, IFC, and the Central Bank of Uzbekistan’s receivables and payables finance appeared first on Trade Finance Global.

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The Mesopotamians were factoring in 1700 BC. But they didn’t have to contend with changing regulation, increased cybercrime, and geopolitical challenges – all which have made the recent period a particularly turbulent one for the industry. However, new technology and untapped markets in emerging economies provide exciting opportunities for growth.

Resilient but stagnant

Trade, factoring, and receivables have proven themselves resilient industries, growing by 3.1% in 2023 despite macroeconomic and political challenges that threw many other industries off course. Despite relatively slow growth, factoring is attractive to investors due to its countercyclical nature: in times of crisis, organisations want to secure their cash flow positions, and receivables are a safe way to do that. “We’re in an industry that actually grows when there is trouble happening around – organisations feel safer in moving into receivables finance during that time,” said Borgmeyer. 

However, there are signs of a slowdown: the German factoring market, which has seen years of constant growth and reached almost €400 billion in size, is forecasted to stop growing in 2024 for the first time ever. This might be a sign of a mature market, although Germany’s 9% factoring ratio sits well below its neighbours’ (21% in Belgium, 16% in France). Germany’s lacklustre GDP growth, the lowest in the EU at a forecasted 0.1% in 2024, could be another reason for the decline. 

This continues a pattern of modest growth in the factoring industry in the EU as a whole, with especially Western Europe experiencing low or negative growth in the last few years.  Developing economies might be the ticket to more impressive numbers: factoring companies are eyeing Africa, India, and the Middle East, whose small- and medium-sized enterprises (SMEs)  are in dire need of financing lifelines, as opportunities for expansion. 

Untapped emerging markets can benefit most from new technologies in the factoring and receivables sector, especially digital solutions that expand access to financing. These markets can be important drivers of growth when the European market is stagnant.

Digitisation for growth

The single biggest enabler of growth in the factoring and receivables business in the next few years will be digitisation, which will make producing the documents necessary for trade much easier and faster. Even though the underlying document is basically the same, moving from paper to digital trade documents will enable larger volumes of documents to be moved around the world at unprecedented speeds, representing the biggest change in the factoring industry since the shift from stone tablets to paper thousands of years ago. 

While the technology is there, and some countries have been proactive in passing legislation that promotes the use of digital trade documents, as the UK did with the Electronic Trade Documents Act (ETDA) in 2023, adoption has often been sluggish. As more countries adopt legal standards for electronic documents and more firms start using them, the factoring industry could see widespread growth and increased efficiency in the next few years.

Challenges ahead

While legislation can enable growth, like ETDA, there are fears it can also stifle it—as upcoming regulation on new technologies might. “AI regulation will most likely prevent the development of tools that are relevant and important to manage millions of receivables that are out there, to reduce risk and fraud,” said Borgmeyer. 

New regulation proposed by the EU intended to address the problem of late invoice payments would mandate payments within 30 days without any exceptions. If passed, this would significantly reduce the European market for trade and receivables financing. The EU has also been worrying the industry by imposing heavy tariffs on electric cars from China, sparking fears of a trade war that would further stifle the market; the upcoming US election and the Republican plan of increasing tariffs on many foreign goods have made the landscape even more uncertain. 

Some risks, on the other hand, are more theoretical than real for now, like cybercrime. Digital trade documents are seen as more vulnerable to cloning or manipulation than paper documents, leading many in the industry to cite cyber security as the biggest risk in the coming year. 

However, for now, this has not been a significant concern, said Borgmeyer. “Cybercrime is something that we have been registering, not because of attacks on our systems or on the systems of our clients, but rather because of the requirements that are being placed to us. It’s not that we’re seeing it happening, but we’re seeing that people are becoming more and more concerned.”

Cybercrime is bound to rise as the trade and factoring industry becomes more and more digital – but firms are prepared. A joint initiative by efcom and other tech firms in the industry being launched in 2025 will focus on fighting back against fraud and preventing cybersecurity risks to promote digital expansion without compromising security.

The factoring and receivables industry is looking strong despite regulatory, macroeconomic, and political challenges. New technologies and emerging economies are important opportunities for growth, especially as companies work together to mitigate the risks involved.  

The post PODCAST | Factoring and receivables: What’s in store for 2025? appeared first on Trade Finance Global.

• 2024 ICC Trade Register report reaffirms low risk nature of trade finance assets, despite a slowdown of global trade volumes in 2023.
• Receivables finance is outpacing traditional documentary trade products, marking a shift towards open account trade and flexible working capital solutions.
• The report highlights a notable shift towards trade in regional blocs, particularly growth in non-USD settlements.

The annual Trade Register from the International Chamber of Commerce (ICC) in collaboration with Boston Consulting Group (BCG) and Global Credit Data (GCD) has been released, analysing the landscape for trade, supply chain finance, credit risk, and proprietary trade finance risks for 2023. 

The report surveys partner banks of the ICC Banking Commission, representing 5% of global trade flows and 18% of financed trade flows. The conclusions are indicative of the industry’s trajectory and highlight opportunities down the road.

2023 was mired by ongoing geopolitical tension, stilted market demand, corporate deleveraging, and high interest rates, transforming the industry. Overall, though, indicators for 2024 are positive, while the low-risk nature of trade finance remains a pillar of stability.

Trade: 2023, 2024 forecast, beyond

Global goods trade saw a year-on-year decrease in both real terms (-0.7%) and nominal terms (-4.8%): a slowdown from growth post-pandemic in 2021 and 2022.

The variance of this by sector is interesting in defining the future of commodity demand. The energy sector fell by 19% in nominal terms (while demand remained steady, increasing by 1% in real terms). Modest downturns were seen in metals and mining (-7% and -9%), semifinished intermediate good such as chemicals (-10%), semiconductors (-10%), and agribusiness (-4%).

On the other hand, automotive trade increased by 12% in nominal terms while the aerospace sector saw a 16% increase. 

This was offset by an 8% increase in services trade, now making up one-third of all trade. In nominal terms, this constituted $7.9 trillion, with Middle-Eastern countries (Saudi Arabia, UAE, Qatar), India, and Ireland witnessing the fastest growth.

Sectorally within services, the travel industry rebounded strongly, returning to approximately 25% of the global services trade. Financial services and information and communications technology (ICT) also saw steady annual growth. Conversely, construction services reported slower growth.

Global inflation fell from 8.0% in 2022 to 6.5% in 2023. But despite the moderation of inflation, consumers continued to suffer expensive essentials like energy bills.

In terms of trade currency, while the US dollar is likely to retain its dominance in the short term, non-US dollar trade is on the rise. This is driven by increased use of Chinese currency in cross-border payments; and by US foreign policy affecting specific sectors, with around 20% of the global oil trade settled in non-USD currencies.

Having said this, the USD’s dominance is still decisive, with 55% of international payments and 83% of trade finance market payments made in the American currency.

Looking forward, as central banks have reduced interest rates in response to waning inflation, 2024 should theoretically be reviewed as a year of relative normalisation. Yet the year has been defined by shifting geopolitics, the result of elections for more than half the world’s population and conflict.

Supply chains have seen monumental rerouting. The drop in trade between the US and China has pushed both parties closer to their allies. Similarly, the EU has been seeking to diversify from Russia and China.

But surprisingly, the strongest growth has come from the ‘Global South’, which largely consists of emerging economies. India’s trade growth is expected only to accelerate, at 9% CAGR over the next decade. The benefits of campaigns like ‘Make in India’, as well as continued growth in projected trade with China, reinforce India as a rapidly emerging platform.

Trade and supply chain finance

Slowing trade volumes, compounded by higher interest rates, posed challenges for trade and supply chain finance. Banks reported the following as the greatest threats to their businesses:

• Disrupted trade flows from ongoing geopolitical conflict (40% responded this to be a high or severe threat)
• Margin erosion (36%)0
• New regulation on capital treatment (30%)
• Increased competition amongst financial institutions (25%)
• Increased fraud risk (21%)

Trade and SCF revenues declined overall, with the most notable contraction in the Asia-Pacific region. But the only modest reduction in the EU, which accounts for one-fifth of global trade finance revenues, lessened the severity of this decline.

While some expect receivables finance and payables finance to accelerate faster than the growth of documentary trade and trade loans, the proportions within overall trade and SCF revenue growth remain steady. 

In fact, documentary trade products are projected to have a below-average growth at 3.7% CAGR, and reduced demand for payables finance comes as a result of disclosure rules and Basel III capital treatment regulation.

Nonetheless, the wider picture is positive for trade finance. Much optimism comes from the modernisation of platforms, the result of the rapid evolution of technological solutions. As many as 90% of banks are investing in digital customer experience initiatives to meet client expectations.

Artificial intelligence (AI) and generative-AI have huge potential regarding data extraction, fraud prevention, document checking, and creating data model language universality. This technology can also improve accessibility for smaller, less technologically-literate parties by providing validation and assistance in contracts, and by using chatbots to simplify customer service.

In this regard, momentum picking up around digital trade and related regulation, such as the Model Law on Electronic Transferable Records (MLETR), is likely to have informed positive projections. However, 80% of survey respondents believe the digitalisation of trade is dependent on collaboration throughout the ecosystem – corporates, shipping companies, banks, insurance brokers, as well as regulatory bodies. 

Climate and sustainability remain important, with a notable change from banks. Over 90% of those already engaging in sustainable finance report positive growth. In Western Europe, regulations like the EU’s Carbon Border Adjustment Mechanism mandate this transition, but creating profit incentives around sustainability mean its significance will only grow.

Credit risk, proprietary trade finance risk

The report proposes that trade finance, SCF, and export finance have proven resilient from a credit risk perspective because they involve low-risk transactions, which constitute the bulk of global trade. 

These instruments represent a low-risk asset class, even during times of uncertainty: as elucidated by Figure 4. On an exposure-weighted basis:

• Global default rates for import letters of credit (LoCs) decreased from 2022 to 2023.
• Default rates for export LoCs are significantly lower than for other trade finance products, and defaults increased negligibly between 2022 and 2023.
• For loans for import/export, 2022 to 2023 saw a slight decrease.
• Default rates for performance guarantees decreased in 2023 (this was on an obligor-weighted basis too).

For export finance, most transactions are guaranteed by export credit agencies at up to 100% of their value. In the sample surveyed, the average was 94%. This grants banks the capacity to be indemnified by an export credit agency (ECA) up to the level specified, meaning export finance has a particularly low loss given default (LGD) levels.

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The findings of the 2024 ICC Trade Register Report are consistent with commentary throughout the year, regarding the significant disruptions posed by geopolitical uncertainty as well as the opportunity provided by technology. It is in this opportunity that positive forecasts seem to stem.

Importantly, however, the findings in this year’s report align with previous reports: that trade finance, SCF, and export finance present a low risk for banks. These trade finance instruments appear, in their nature, to be insulated from inevitable disruptions.

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The study examined the working capital performance of 947 publicly listed firms across 12 APAC countries and territories and 21 industry groups, over the last five years.

Days receivable, a key component of the cash conversion cycle, measures the average time it takes a company to receive payment after delivering goods or services. A lower figure indicates improved liquidity and working capital management.

Regional overview

In 2023, the average days receivable for companies across Asia Pacific was 71 days, showing minimal change from 2022. However, significant variations were observed across different countries:

• Japan and South Korea both reduced their days receivable by five days, with Japan overtaking Indonesia as the regional leader at 42 days.
• Hong Kong, Vietnam, and India saw notable increases in days receivable, with India falling further behind at 100 days.
• Despite improvements, Australia remained above the regional average at 86 days.

Industry trends

Over the last three years, almost all 21 industries have been able to reduce their average days receivable. However, the past year gives a different impression: only in retail, automotive, autoparts, telecommunications, IT, and engineering and construction did the average days receivable fall.  

The biggest increase in average days receivable – by 9 in the past year – was in the chemicals industry. Regionally, Taiwan led the chemicals industry at 62 days, slightly ahead of South Korea (63 days) and Japan (73 days).

In electrical products, Japan lagged behind the industry average at 99 days, 27 days more than its regional competitor, South Korea.

Australia led the metals industry at 28 days, significantly outperforming the industry average of 59 days.

To improve working capital performance, the report suggests offering early payment discounts to key customers, potentially through dynamic discounting programmes. It also proposes that firms explore credit insurance-backed receivables financing to improve lending terms and broaden eligibility criteria for receivables.

As the cost of capital reaches levels not seen for 15 years, Ankit Tambe, regional director, credit solutions in Asia for Aon, emphasised the need for organisations to benchmark against their peers when assessing financial health and evaluating working capital performance. 

He said, “By reviewing credit solutions strategies to shorten the cash conversion cycle and unlock trapped capital, organisations can drive greater value creation and enable business growth.”

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Credit insurance and factoring work together to mitigate risks and enhance business liquidity, making them vital tools for navigating international trade. Factoring converts receivables into immediate cash, while credit insurance protects against buyer non-payment, providing businesses with the confidence to enter new markets. 

The mini magazine outlines some challenges with integrating credit insurance and factoring and posits as to how technology can be leveraged to streamline processes, enhance decision-making, and improve transparency in credit insurance and factoring. It also turns to the future, considering how regulatory changes – particularly Basel III and IV – will impact the factoring and credit insurance industry.

The panel consisted of Shan Aboo, Chief Commercial Officer for Asia Pacific, Allianz Trade; Neil Shonhard, Chief Executive Officer, MonetaGo; Dorota Szcześniak, Member of FCI Executive Committee and Supply Chain Finance Committee; and Karol Leszczynski, Product Manager, Comarch. The breadth and depth of their collective expertise ensures that the topic is done justice when translated into a magazine format.

Deepesh Patel, Editor-in-Chief at TFG, said, “This publication comes at a crucial time. Businesses worldwide are seeking ways to navigate uncertain markets, placing factoring and credit insurance at the forefront of the discussion. I had a fascinating discussion with the panel in Seoul, and I’m confident that this resource will prove invaluable for factors, insurers, businesses, and anyone interested in the future of trade.”

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The Court of Appeal has reversed a decision regarding an offer under a Bankers Association for Finance and Trade (BAFT) Master Risk Participation Agreement (MRPA), in a case between Kimura Commodity Trade Finance Fund Limited and Yieldpoint Stable Value Fund, LP.

Explaining the BAFT MRPA

The BAFT MRPA – the most recent version of which was released in 2018 with a few updates since – has been regarded as a market standard document by which holders of trade assets such as loans, receivables and contingent payments (e.g. letters of credit) can act as sellers of participations in the risk in those assets to a counterparty, the participant.

The sale can either be funded, where the seller receives payment upfront from the participant, or unfunded, where the participant only pays if there is a default.

The purpose of such an arrangement is to transfer the credit risk of default in the underlying transaction from seller to participant. The seller sells ‘without recourse’ to itself and leaves the participant to take the risk of non-payment in the underlying transaction by obtaining recourse against the obligor in that transaction – the recourse party.

The parties enter into the BAFT MRPA which, as its description implies, is a master agreement so either party can be a seller or participant in a specific transaction. The mechanism is to document the participation by an Offer under which the seller offers to sell and the participant agrees to purchase a participation. So far so good?

The current case

In this case, Kimura was the seller and Yieldpoint was the participant. The parties had a BAFT MRPA and the specific transaction was documented by way of an Offer and Acceptance – and this is where the problem emerged.

The parties appear to have discussed the fact that Kimura wanted to have a funded participation and so transfer the risk of non-payment to Yieldpoint. Yieldpoint wanted to participate for only a limited period even though the underlying transaction might not have the same maturity.

In an attempt to reflect what Yieldpoint wanted, a maturity date was inserted into the Offer without any further qualifications or provisions.

By the time of the maturity date of the participation, the obligor had not repaid the underlying transaction. Yieldpoint claimed its funding back. Kimura resisted, arguing that that Yieldpoint had recourse only to the obligor and it had not paid.

The decision

The exact terms of what the parties intended were the subject of the court decision. The court at first instance accepted Yieldpoint’s argument that, because of the maturity date provision in the Offer, the participation was to be repaid on its maturity date without regard to the position in the underlying transaction. 

That drove a coach and horses through the without-recourse structure of the BAFT MRPA. However, the document does say that in case of conflict, the terms of the Offer prevail.

Now, the question is whether a simple change – like inserting a maturity date – was sufficient to turn the participation into one of full recourse or not.

Fortunately for Kimura, the Court of Appeal reversed the decision and held that participations under a BAFT MRPA, including this specific Offer, were indeed without recourse to the seller. Notwithstanding the insertion of a maturity date, that was not sufficient to make Kimura liable. So Yieldpoint was only entitled to repayment of its participation if the obligor had repaid.

Outcomes

People will argue whether the case was rightly decided or not. 

The fact that the parties litigated is a stark reminder of what can happen if a transaction does not go how the parties envisaged. Simply put, Kimura wanted funding and would have regarded their document as achieving funding on a without-recourse basis. 

Yieldpoint appeared to believe that they were funding Kimura but without concern for what might happen in the underlying transaction.

At first glance, this seemingly strange conclusion turned on whether inserting a maturity date achieved the complete reversal of what a BAFT MRPA is normally used for. In other words, ignoring all the provisions about an obligor being a Recourse Party and the seller’s obligation being limited to paying over Recoveries – these being defined terms in the BAFT MRPA.

The fact that Yieldpoint convinced a judge of their argument is a lesson in itself, but the reversal by the Court of Appeal would appear to restore reason and reflect the support of the BAFT MRPA structure of a without-recourse sale by the seller with recourse limited to the Recourse Party.

How will the BAFT MRPA be used in the future?

If funding is to be by way of full recourse then perhaps using the BAFT MRPA is not the best way of proceeding. Or, if it is to be used, then it would be beneficial to include far more detail on what exactly is being agreed upon.

Maturity dates per se may work to this end, but where they do not exactly reflect the repayment date of the underlying transaction, care must be taken to reflect whether or not repayment of the participation is contingent or not.

Perhaps the main conclusion to draw is that careful drafting is needed when reflecting whatever is the subject of an Offer. The BAFT MRPA form of Offer is but a list of headings to be completed correctly to reflect what is offered and on what terms. 

Failure to be specific can result in potentially costly litigation and an unpredictable result.

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