The pandemic has transformed the world around us, but what does it mean for the trade and supply chain industry and financial institutions?
An unfamiliar world
The world is going through a peculiar situation owing to the COVID-19 pandemic, with many regions in full or partial lockdown as a result. While businesses have quickly moved to home working to keep services running where possible, it is clear that no one is running ‘business as usual.’ This, of course, has had a significant impact on the economy and global trade; the World Trade Organization (WTO) has predicted a 13-32% fall in world trade during 2020.
This state of affairs may force many countries, corporates, and financial institutions to change their strategy in efforts to revive the economy in the shortest possible timeframe. It’s clear that the trade industry will undergo significant change in the coming months, as banks, companies, and software vendors look for increased automation and digitisation, and reassess business-critical implementations. New supply chain and continuity models may emerge, as frictionless trade comes closer to reality. What’s more, we may see the growth of more localised markets – for example, the existing dependency on China as a world factory could be reviewed – and the instigation of newer regional or even local models to mitigate any perceived risks from operating globally.
The MSME lever
According to ICC analysis, 90% of world business comprises micro-, small-, and medium enterprises (MSMEs), in which 50% of the global workforce is employed. Also, there are approximately 400-500 million formal and non-formal MSMEs operating across the world. It is, therefore, essential that governments and financial institutions nurture this segment to ensure the supply chain is uninterrupted during and after the pandemic.
As referenced above, an early study by the WTO suggests that world trade may fall by between 13% and 32% in 2020. The survey also predicts that the slump could be more profound than the 2008 / 2009 recession. As a lifeline for millions of people across the world, Governments, Central Banks, and other financial institutions must provide support to keep this ‘giant wheel’ moving.
Approximate number of Micro, Small and Medium Enterprises by Region (extracted from a world bank study on MSME, values are in millions)
The local voice
To explain the influence of this sector on our day-to-day lives, I’ll use the example of India. In India, the vast majority of the population are middle and lower-income. The shopping complexes, superstores, malls, and large shops have been completely closed due to the pandemic. And yet, these citizens have been encouraging the relief efforts from different government agencies by lighting diyas (lamp) and drumbeating during their evenings. While I am writing this blog, India has completed more than 50 days in lockdown. So how did people keep fed and watered during this period? The answer is simple. The nearest small shops (‘kiranas’ in Hindi) have managed to keep their grocery and food supply chains intact. They could quickly source items from their local neighbourhoods, safeguarding the supply of essentials and groceries to this segment of society. They did not have to navigate a complex, extended supply chain but could safely rely on their friendly neighbourhood merchants. I am sure this principle applies to many other countries too.
What does it mean for banks and fintechs?
Banks, fintechs, and other vendors have a pivotal role to play in this situation to support communities and try to help the economy moving in the short and long term. Immediate responses are needed to revive the economy through emergency funding. However, the industry also requires long-term strategic support, which demands structural changes or new models to evolve. As an old proverb suggests:
“Give me a fish, I eat for a day. Teach me to fish, and I eat for a lifetime.”
The cashflow must be ensured at the grass-root level through multiple working capital solutions. Instruments such as Export Credit Agency (ECA) funding and risk distribution are considered as a lifeline at this juncture; meanwhile, fintechs are already accelerating digitization initiatives, serving a catalyst effect.
VIDEO: Rethinking the customer journey for trade finance – fintech and bank collaboration
ECA Funding – a safety net for the MSME segment
ECA Funding applies when an export credit agency lodges funds with your bank to provide short-term loans to the suppliers who are customers of your bank. This funding is helpful to ensure working capital support, especially to the MSME sector, which, during the pandemic, is likely to be finding it challenging to mitigate funding requirements based on its receivables. With exporters challenged amid lockdowns, this funding can act as a safety net. Several EXIM banks (Export-Import banks) across the world have already released ECA funding as an emergency response to guarantee adequate working capital and thereby ensure business continuity while international trade is disrupted.
Trade as an asset class – more risk distribution
Traditionally, trade assets/finances carry low risk and experience low default rates. According to a 2018 study by the ICC, the default rate across trade products is quite low, averaging 0.1%-0.8% for all trade products in the last ten years. The business model and associated instruments, such as letters of credit, guarantees, bills and drafts offer enough protection from default risk. The lifecycle is also often short to medium term, other than a few exceptions such as perpetual guarantees or revolving credits. However, in a pandemic situation where the risk of uncertainty and unknowns is high, you would expect higher default rates. If this is the case, banks will need to think about more distribution opportunities to mitigate the risk of non-performance of their assets.
VIDEO: Development Finance – The Role of Export Credit Agencies, Trade Credit Insurers and Development Banks
Technology as a lifeline – push for digitisation
Before lockdown, the trade industry – which is infamous for its paper trails – had been experiencing a fourth industrial revolution, where digitisation and digitalisation were showing traction. The new situation accelerates this trend, enabling banks to reduce manual processes and improving efficiency through automation.
Fintechs such as Conpend TradeAI, Pelican AI, eSSDOCS, Traydstream, and Enigio can provide sought-after support to banks as part of a refreshed digital trade ecosystem model. Open APIs, in particular, could enable significant transformation for trade finance, acting as a catalyst for platformification and a faster, flexible integration journey.
Banks and fintechs must continue to invest in improving the digital infrastructure to enrich the frictionless trade flows through STP and automation. Technologies that will play a formative role include electronic documentation and digital compliance, plus analytics and IoT (Internet of Things) alongside distributed ledgers to ensure and regain trust and risk-free trade transactions.
Finastra Exclusive: Innovating to close the trade finance gap
Transformation of messages – the SWIFT saga
SWIFT has initiated structural changes to letters of credit and guarantees, and previously unstructured data is now becoming more structured. The new messaging structure promises to improve efficiency, reduce human error, and even transform the business model. SWIFT encourages electronic presentation by leveraging eUCP provisions, and MT798 promotes straight-through processing (STP) with less human touchpoints between Corporates and Banks.
What’s next
While I am writing this article, I feel positive about the world ‘beyond COVID-19’. The shape and behaviour of that future world may be challenging to predict, but it is also accelerating some trends which will remain relevant in the long term, including:
- Enabling frictionless financial supply chains
- Creating new supply chain models across the globe
- Embedding a local voice
- Promoting innovation through fintech collaboration
- Improving efficiency and scale
This article was written by a member of TFG’s 2020 International Trade Professionals Programme. Find out more here.
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Disclaimer: The views that have been expressed on this page are that of the author, which may or may not be in line with their company, Trade Finance Global or London Institute of Banking and Finance’s view.
