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Mind The (Trade Finance) Gap

Trade finance around the globe is on the rise, with businesses overall reporting increased access to the working capital they need to buy goods, supplies and services. But the latest report from the International Chamber of Commerce Banking Commission reveals a troubling gap: Since the economic downturn began, the gap between small and large corporations’ access to trade finance has widened.

ICC analysts published the results of their annual survey only days ago, and the 2015 report, “Rethinking Trade & Finance,” uncovered more evidence of this financing gap among the businesses across 112 nations that participated in the survey.

In a statement announcing the results of the study, ICC Banking Commission Market Intelligence Chair Vincent O’Brien said the analysis will be key for banks and businesses to recognize the impact of trade financing availability on the world’s smaller companies.

“This is crucial given SMEs constitute over 95 percent of all firms and account for approximately 60 percent of employment worldwide,” O’Brien said.

Mind The Gap

Overall, the data is promising. The ICC found that the majority of businesses (63 percent) are reporting an increase in trade finance activity, while the majority of banks (61 percent) report an increase in their trade financing capacity to meet demand.

Analysis also found that 79 percent of export finance players find the business to be a profitable one, and, according to the ICC, the last year has seen a decrease in export financing fees.

Demand for factoring has also been climbing, with researchers calculating that the industry grew by 6.3 percent last year, now worth $2.64 trillion. But researchers highlighted that small- and medium-sized enterprises are struggling to access trade financing services and products more than their larger peers. SMEs accounted for nearly half of all trade financing applications last year, the research showed.

The demographic, however, makes up more than half (53 percent) of rejections by banks for trade financing applications. To compare, researchers found that 79 percent of large corporations have their applications for such products approved. 

[bctt tweet=”SMEs make up more than half of rejections by banks for trade financing applications. “]

The Compliance Factor

The ICC noted that while trade finance is generally considered a low-risk business by banks, regulatory compliance is becoming a rising obstacle, especially for SMEs, when it comes to accessing this type of funding.

“It is of concern to see that 70 percent of this year’s respondents report declined transactions due to Know Your Customer (KYC)/Anti-money-laundering (AML) regulations,” the report concluded, “with 46 percent of respondents reporting experiencing termination of correspondent relationships due to related costs and complexities.”

Analysis also revealed that nearly all – 91 percent – of survey respondents said they anticipate compliance requirements to rise within the next year, compared with 81 percent who said the same in last year’s survey.

A key source of friction is the high variability of rules across jurisdictions – more than half of survey respondents cited this challenge as one of the largest to the trade finance sector.

International Bridges

The gap in SMEs’ access to trade finances comes at a time when businesses are more global than ever.

For example, the ICC found that while domestic factoring is on the rise, it’s cross-border factoring that has experienced the greatest expansion, growing 22 percent last year – a sign as to the level of international activity among firms.

The ICC report declared this year to be “a mission critical point” for the international trade and finance market. Analysts pointed to the shuttering of the U.S. Export Import Bank and impending interest rate hikes, along with the Chinese yuan devaluation and pressure being placed on other currencies across Asia, as all factors that will reverberate across their domestic borders and impact both international trade and the international trade finance sector.

[bctt tweet=”The ICC declared this year to be “a mission critical point” for the international trade and finance market.”]

Plus, the ICC noted, a lack in trade finance could stunt the development and innovation of the global market. “The International Trade Centre reports that a lack of financing for SMEs impedes their ability to access information, skilled labor and technology, all of which are vital for innovation to create new exporters around the world,” the report said.

Still, O’Brien points to the optimistic findings of the ICC’s latest research.

“While the trade finance industry is certainly facing challenges, and the trade finance gap is a clear issue, the results from the Global Survey on trade finance show that it is not all doom and gloom,” he said in a statement. “The financial landscape is recognizing the importance of trade and, in addition to banks stating they have increased capacity to meet trade finance, we have an array of alternative lenders – such as specialist financiers, export credit agencies, and multilateral development banks – stepping up to fill the trade finance gap.”

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