• The evolution of trade finance

     The financial crisis has been a pivotal moment in the evolution of trade finance. We examine some of the drivers behind those changes and investigate how the market may evolve in the coming years.

     
    Many doomsayers predicted the demise of traditional trade finance in the form of documentary letters of credit in the wake of the unstoppable march of Supply Chain Finance. However, as perception of risk increased, the availability of funding sources diminished along with credit insurance. As the preeminent trade finance specialist in the UK, we have witnessed increasing demand for documentary letters of credit.

     
    The reason Corporates have returned to documentary letters of credit is simple; the need for certainty of payment in volatile markets and, more importantly, an immediately accessible source of working capital where other sources are constrained.

     
    This coincides with the first indication of changes in recent trade flows with the emergence of material intra Asia flows. From a UK perspective, the growing importance of the Asian market is obvious. To support increasing requirements, as the UK increases the level of business transacted with Asia, we have built out our capability in the region, with a dedicated team in Hong Kong.

     
    As Patrick Furlong, Relationship Director, FI Hong Kong commented following a recent trip to the region “The message is clear. Our partners in Asia have 3 essential requirements -

     
    - A partner they can trust to deliver excellent execution, every time,
    - The ability to leverage complimentary franchises and leading local market proposition,
    - To someone who can provide that transformational industry insight.

    Our commitment is to continue to exceed these requirements to our partners in Asia and beyond.”

     
    Traditional trade finance has proved its value once again during the current downturn; proving to be the lifeline for many companies, an essential enabler of the global economy as recognised by the G20 and demonstrating that the effective risk mitigation inherent in trade finance structures minimises risk of non-payment.

     
    What our partners now ask us is; what is the future for trade finance?

     
    While liquidity and risk appetite remain at a premium, Corporate mindsets are shifting. Moving from strategies to protect individual balance sheets and cash flows, to a requirement for us to protect supply chains and improve efficiency through cost and timelines.

     
    With cost control being a priority for companies globally, this is a universal requirement. From a banking perspective, the imperative is to work with a partner who enables you to exceed your customer’s requirements.

     
    The secret to our success here is to provide flexible solutions to meet the specific requirements. This may be through something as simple as a tailored bill of exchange structure or a fully automated supply chain finance solution.

     
    The more traditional documentary letters of credit will remain a core element of global trade for some time to come. However, the drive for greater efficiency and the drive to secure supply chains is already creating requirements for us in the industry to innovate further and make increase accessibility of automates solutions.

    One positive consequence of the financial crisis is the increasing industry dialogue. It is widely accepted that across all aspects of the banking industry we will see new regulation. It is incumbent upon us at the heart of the industry to work together to ensure that such regulation not only ensures greater stability in the future but also supports the global recovery.

    As Mike Gilham, industry expert and Director, FI Trade highlights "What we must remember is that we are providing an essential service to the wider economy. We have an opportunity now to create a framework on which we can build a sustainable future.

    We are very pleased to be able to work with and be a key member of leading industry bodies such as the International Chamber of Commerce and BAFT-IFSA on matters of a technical nature through to policy and set the industry agenda for the future."

     
    What is certain is that trade finance, in its various forms, will be a core element of building a positive and sustainable global economy.

2/21/2018 1:38:16 AM