A more holistic, ecosystem view of trade is emerging – with supply chain finance and traditional trade finance coming closer together than ever before. As a result, trade finance will become more specialised and ‘integrative’. There will be a shift from the product view of financing and risk mitigation, to a solution view of this critical enabler of global commerce.
Financing trade will be less about products and techniques and more about solutions rooted in a deeper understanding of global supply chains – from the physical flow of goods and services, to the parallel flow of data – the ‘information supply chain’.
All solutions will be related to the various aspects of trade activity that can cross multiple borders, and may involve an ecosystem anchored by a global buyer, supported by dozens of service providers and engaging with many thousands of suppliers around the world.
This ecosystem view changes the character of trade financing from transactional and product-based to solution-focused, depending on a more holistic understanding of the business of trade. This shift is likely to encourage greater consolidation among trade finance banks, even as the focus on supply chain finance (SCF) enables alternative, non-bank providers of financing to enter the business of trade financing. At the same time, the ecosystem focus encourages providers to bring adequate risk mitigation to bear – an area that has always been central to traditional trade finance but that was less central to open account trade.
The blurring of lines between traditional trade finance and SCF is a natural and useful development, reflecting the convergence of propositions into a comprehensive global trade financing discipline, targeting the ecosystem view of trade. In addition to driving a convergence of trade financing capabilities and practice, the supply chain view of trade has arguably underpinned or facilitated other developments that will define the future of trade financing.
It is tempting to attribute transformative progress in international trade and trade financing to the innovative application of technology, to 3D printing, artificial intelligence (AI), distributed ledger technology and a host of other such developments. However, sometimes the innovations that have the most impact are strikingly simple. Arguably, one of the most impactful innovations in global trade was the invention of a large steel box: the standardised shipping container, now ubiquitous on ships, trucks and railway tracks around the globe.
Containers remain important, but, as local, additive, manufacturing grows, and physical shipments decrease, the future of trade financing may be in understanding how to finance intellectual property and design, or it may be in shaping commercial behaviour. The Banking Environment Initiative and organisations such as the International Chamber of Commerce Banking Commission have, for example, looked at the potential for rewarding desirable business practice, such as sustainable sourcing, with better access to financing. Similar initiatives could be designed to support fair trade flows, or trade activity that brings an isolationist state into the global community, increasing international security.
This is not as far-fetched as it may first appear: a combination of pressure from civil society organisations and public sector stakeholders advanced the development of the Equator Principles. This is a framework for managing environmental and social risks in project finance and has, to date, been adopted by 94 financial institutions in 37 countries. The principles were initially linked to various forms of project finance undertaken by export credit agencies and others in the market.
Once we get past the current shallow dialogue around trade that views international commerce as a zero-sum game, to one that reverts to a more holistic view of trade in an interconnected world, we will be able to shape the next chapter of global commerce. Just as financing periodically shifts from a ‘nice-to-have’ to being a differentiating competitive proposition, so the political and commercial discourse on trade will realign to a more thoughtful, informed view of international commerce as being rooted in an ecosystem view.
Trade financing is likely to become an element of international security. This will naturally be the case once the importance of equitable trade to global security is recognised and it becomes part of the public policy dialogue while also remaining central to the commercial discourse in international commerce.
Financing is the oil in the engine of global commerce: the critical enabler of trillions of dollars annually that flow through the arteries and corridors of trade. Just as ‘aid for trade’ and other linkages between trade and international development have evolved, so shall we see ‘trade for security’ become part of a more thoughtful dialogue on both subjects. Trade financing will be at the centre of such an evolution, not as an esoteric specialism, but as a widely recognised enabler of growth, prosperity and global inclusion within the ever-changing ecosystem of global commerce.
This is an edited extract from Banking on Change: The Development and Future of Financial Services. Published to mark the 140th anniversary of The London Institute of Banking & Finance in 2019, it provides insights by experts and influencers from across the financial services industry on this and other issues. All royalties from the book will go The Institute’s 140th appeal fund, which provides scholarships for students from diverse backgrounds and aims to extend the Institute’s financial capability work in communities around the country.
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