The role of LCs in trade, as well as banks’ diversified deposit bases and ability to raise funding cheaper than others, has cemented banks as the cross-border financiers of trade. But, while banks have sought to strengthen this position by expanding into financing pre-shipment and post-shipment periods, and discounting LCs, their dominance is being challenged by:
Institutional investors: While banks, post global financial crisis, have faced more restrictions, especially on capital requirements when extending trade financing, the buy-side, including asset managers, pension funds and insurance companies, have surplus liquidity and are looking for yield. These buyers are exploring trade finance as a new asset class to diversify portfolios.
Captive financing: As cash-rich corporates question the interest and other costs paid to banks, some have set-up or expanded their own captive finance organizations to self-fund global trade.
The global trade finance gap of US$1.60t2 , that banks are unable to meet, offers significant opportunities to non-banks. This may lead to new market disruptions, including the creation of a common digital infrastructure, connecting players across the trade ecosystem and shifting paper-based processing to an end-to-end digital interface. Some corporates are building their own networks – walled garden financing – that combine working capital financing solutions with payment gateways for their own ecosystems. For example, e-retail platforms directly finance users’ supply chains using data derived from a common infrastructure.
Ultimately, we may see banks circumvented altogether, where corporates link their end-to-end manufacturing supply chain through a technology platform to a parallel common infrastructure that includes digital processing and financing of trade transactions via institutional investors.