Home Finance 2024 Supply-Chain Finance: Picking out Key Trends in Trade Finance Amid Global Economic Shifts

2024 Supply-Chain Finance: Picking out Key Trends in Trade Finance Amid Global Economic Shifts

by internationalbanker

By Maurice Benisty, Chief Commercial Officer (CCO), Demica

 

 

 

 

Amidst ongoing high interest rates and geopolitical flux, banks worldwide are building out evolving strategies in supply-chain finance as they play their parts in shaping a resilient global economy.

As we continue into 2024, I foresee continued growth as our industry adjusts to a structurally higher interest-rate environment. In this article, I’ll delve into five key predictions to keep track of and outline how they are poised to redefine the trade-finance landscape.

  1. Banks will invest in long-term customer relationships amid economic uncertainty.

In 2024, banks will continue to focus on building and maintaining their multi-product, long-term customer relationships. They will likely emphasise asset-backed structures in the mid-market, with the expected increase in corporate insolvencies and bankruptcies due to escalating borrowing costs. This will help position working-capital financing as their preferred alternative to traditional credit facilities for their customers.

This trend also signifies a deeper change in the banking sector’s philosophy. Moving away from transactional interactions, banks are looking to embed themselves integrally into their clients’ ongoing business processes. This involves not only financial support but also advisory services, helping clients navigate complex market dynamics. The goal is to become indispensable partners rather than mere service providers.

  1. The direct origination of supply-chain finance deals by banks and non-banks will increase.

This year will likely witness a strategic shift in how supply-chain finance is funded. Banks that previously grew their assets through sub-participations will increase directly originated deals. This change will be motivated by the requirement for banks to increase pricing in light of increased capital requirements across supply-chain finance products. Additionally, large private credit funds that have been building funding platforms are starting to reach scale and compete, notably in the United States, where pressures have been felt at the regional-bank level following the collapse of SVB (Silicon Valley Bank) and others. As pricing increases and greater capacity emerges, these products will become more attractive to private credit funds.

The move towards direct origination in supply-chain finance also indicates a broader trend in the financial sector, whereby institutions increasingly seek to diversify their revenue streams and reduce their reliance on traditional income sources. In this context, supply-chain finance presents an attractive opportunity, offering both stability and growth potential. 

  1. The shift of volumes into open-account trading will drive technology investments.

In 2024, banks are expected to increase their volumes of supply-chain finance assets significantly. This strategic shift will respond to the evolving global trade-finance landscape, which is moving away from traditional documentary credit methods towards greater reliance on open-account trading.

While traditional letters of credit (LCs) and guarantees have witnessed flat growth, the shift toward open-account trade and supply-chain finance is accelerating. Open-account trade accounts for approximately 80 percent of all international trade, according to the Wolfsberg Group, the International Chamber of Commerce (ICC) and BAFT (Bankers Association for Finance and Trade).

However, this shift also brings new challenges, particularly in operational efficiency and risk management. To address these, banks are investing in advanced technology platforms to enhance user experiences, enable new products and ultimately increase revenues.

Key developments in this area include the implementation of digital portals and onboarding platforms featuring straight-through processing. These technologies are vital for reducing the risks of fraud and errors inherent in open-account finance systems. By leveraging these technological advancements, banks aim to maintain profitability in trade finance and navigate the complex landscape of modern financial transactions.

  1. Fintech partnerships in trade finance will continue to expand.

The 2024 forecast anticipates a significant increase in partnerships between banks and fintech (financial technology) companies. These partnerships are crucial for replacing outdated legacy systems, improving customer experiences and speeding up new-product development. Global trade-bank leaders continue to emphasise “trade transformation” projects as integral elements of their future strategies. In India, innovative fintechs such as CashFlo, CredAble, FinAGG, Vayana and Veefin Solutions are revolutionising supply-chain financing. These companies are at the forefront of creating solutions in AP (accounts payable) automation, working-capital technology platforms and comprehensive supply-chain finance technologies.

Technology-enabled businesses are integrating financial services into their sales strategies and opening new financing avenues across different sectors. This innovation requires strong partnerships between fintechs and traditional banks and active involvement with the broader financial market to offer services effectively. Fintechs are already partnering with key players in the financial ecosystem, significantly contributing to the growing market demand. Their collaborative efforts are leading to the rapid adoption of new technologies in the financial sector, particularly in emerging markets (EMs) such as India, where the absence of legacy systems facilitates faster integration of innovative solutions. Beyond market expansion, these partnerships enhance businesses’ financial performances and stability, especially during economic uncertainty.

  1. The sustainability agenda for supply-chain finance will take shape.

In 2024, sustainable finance is set to take a significant leap forward, particularly in emerging markets. This year is expected to witness innovative approaches to extending supply-chain finance to smaller producers and suppliers in emerging economies. Partnerships with supranational institutions, such as Demica’s with Afreximbank (African Export-Import Bank), will play pivotal roles in bringing financing solutions to more businesses through shared banking infrastructures. Such efforts will be key to making working capital more accessible across developing continents like Africa, in line with the wider development aims of global financial bodies. In developed markets, lenders will continue to offer lower rates for initiatives that support supply chains in sectors promoting decarbonisation.

The last word

The banking sector will continue to face challenges from global volatility in 2024 and beyond. However, we expect a strong push towards innovation and adaptation, with banks and fintechs collaboratively shaping more flexible and efficient supply-chain finance programmes.

Overall, the industry consensus is that the underlying demand drivers ensuring continued expansion of the trade-finance market remain firmly in place. Growth in global trade volumes, rising interest rates, embedded-finance trends, sustainability mandates and the emergence of new geographies and product verticals all point to an ongoing white space in which new platform providers, banks and alternative funders can participate.

While budgets may tighten, the long-term commercial case for ongoing trade transformation through technology remains compelling.

 

 

ABOUT THE AUTHOR
Maurice Benisty joined Demica in October 2017 from Wells Fargo, where he was CEO of Commercial Distribution Finance, responsible for $3 billion of receivables assets and more than 400 people. Maurice joined Wells Fargo from GE Capital, where he had held several senior positions, including Chief Commercial Officer of GE Capital International. Before GE, Maurice was a senior investment banker at Lehman Brothers, Bankers Trust and BNP Paribas.

 

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