By David Bischof, Deputy Director, Finance for Development, International Chamber of Commerce (ICC)
Since the turn of the millennium, global trade flows trebled from US$6.2 trillion to a near-record high of $18.1 trillion in 2019. Such growth would not have been possible without trade finance: bank-offered liquidity and risk-mitigation instruments for importers and exporters, allowing counterparties to transact across borders with confidence.
As we enter a new decade, the strong growth in trade finance looks set to continue. The ICC’s 2020 Global Survey—which gathered responses from 346 banks in 85 countries—highlights respondents’ ambitions to expand their trade-finance arrangements to new clients, products and geographies as well as increase their digital offerings.
Notably, some 77 percent of respondents acknowledged that they are considering the transition to digital for their trade-finance models, while 61 percent indicated that they are planning to grow their product offerings and 54 percent to expand their market participation. In turn, only 3 percent of respondents answered that their banks were planning to reduce either their product offerings or market participation—demonstrating the optimism of many banks in their trade-finance businesses and their scope for development.
New challenges
Notwithstanding the positivity, the rapid spread of COVID-19 has challenged assumptions about the resilience of the global economy and has put tremendous strain on all aspects of life—with trade being no exception. Indeed, the positive growth trajectory in global trade over the past decade will undoubtedly be disrupted—with the ultimate impact of COVID-19 depending on the scale and duration of the pandemic itself as well as the various governmental and policy interventions intended to mitigate the economic crisis.
As such, a supplementary survey was conducted to begin understanding the impacts of the pandemic on trade finance, with findings reflecting market views as early as April 2020. The COVID-19 survey gathered the insights from 233 respondents, composed of 49 percent local banks, 27 percent regional banks and 23 percent global banks.
Overall, banks from across the world are already noticing the impact of the pandemic on trade flows, with 34 percent experiencing a 0-to-10-percent drop in trade flows compared to expectations in the first quarter. What’s more, a further 37 percent indicated that their trade flows declined from 10-to-30 percent for the same period. More positively, only 16 percent of banks suffered a greater than 30-percent decrease—yet, this may be due to the subtler impacts on trade in most markets towards the end of the quarter.
Certainly, looking ahead to the rest of the year, banks expect a more significant influence on trade flows as COVID-19 continues to shut down economies, reduce consumer spending and bring businesses of all sizes to the brink. Indeed, for this year, 28 percent of banks expect a 20-to-30-percent hit to the trade flows that they support, a further 25 percent anticipate a 10-to-20-percent reduction, and 15 percent predict a 30-to-40-percent decrease.
Given the sharp decline in trade flows anticipated by the responding banks and the scale of financing required to support a rapid rebound in global trade flows—potentially as much as $5 trillion—it is more important than ever that both financial institutions and public bodies think creatively to help facilitate global trade and mitigate any barriers created by COVID-19. In turn, the survey reveals mixed perceptions in this area. While some banks are taking the lead in implementing new measures and solutions to support their customers, other key stakeholders must do more to support the post-COVID-19 recovery.
Concerns around the impact of the pandemic are widespread, including but not limited to credit risk and operational feasibility, such as the transfer of critical legal documents. For instance, there have been cases in which goods were ready to export, but securing a letter of credit had not been possible due to lockdown restrictions impacting carriers or bank branches. In light of this, 54 percent of respondents said that their banks have introduced new digital solutions to mitigate any disruption caused by COVID-19.
The road to digitisation
In the past, there have been a relatively limited number of cases in which operational and transactional challenges in trade finance have impeded the flow of trade– illustrating the ability of trade-finance providers to respond relatively well in times of crisis. Whether this remains the case as COVID-19 evolves is to be determined, but what is clear is that technology and digitisation will play a crucial part during this time in ensuring access to timely and sufficient trade finance.
While digitisation is widely seen as one of the most important and promising developments to shape the trade-finance industry in the coming years, the survey shows a clear divide between banks that have the vision, capacity and commitment to advance digital capabilities and those that currently do not. Overall, 64 percent of bank respondents indicated that they have a digital strategy in place for trade finance. However, the number differs significantly by bank type. While 83 percent of global banks have a digital strategy, only 46 percent of local banks have one. These figures confirm that the effort and expense of upgrading bank technology continue to be hurdles in digitising trade.
What’s more, results show that only 17 percent of respondents have successfully implemented digital solutions, with a surprising one in five not seeing any tangible benefits. Meanwhile, 22 percent of banks said they have tried to implement technology solutions but that they have been imperfect, while a further 19 percent are still struggling even to match that—highlighting the amount of work still needed to digitise the sector successfully.
When accomplished, the benefits of digitisation are numerous. Going forward, 66 percent of respondents expect at least 10 percent in cost savings from digitisation over the next five years. Yet again, this differs by bank type, with 91 percent of global banks expecting a meaningful reduction to their cost bases from digital solutions, but only 55 percent of non-global banks expecting the same.
In addition, digitisation can also help improve product proposition, enhance customer experience and provide superior risk mitigation—benefits that could shape the future of trade finance, with banks that can implement digital solutions taking greater market share and banks that are unable to do so entering partnerships or withdrawing from the market.
Growth on the horizon
Trade works, and it will continue to work despite ongoing and worsening geopolitical tensions and a worldwide pandemic. Encouragingly, survey respondents overwhelmingly predicted growth over the next two years. Whether COVID-19 will impact these predictions remains to be seen, but what is certain is that, as the pandemic continues to evolve, trade finance can act as a critical driver in the recovery process—itself undergoing significant transformation to ensure continued access to vital financing, supporting global growth and prosperity.