The massive global trade finance gap is the topic of conversation for many banks and FinTech firms looking to strengthen their position in the market. Banks have the customer and financial institution (FI) relationships needed to facilitate trade finance, while FinTech firms have the technology to digitize and accelerate the process for participating parties. However, both sides struggle with making trade finance profitable, and maintaining compliance.
Know Your Customer (KYC) and anti-money laundering (AML) regulatory demands are a particularly large burden on the global trade finance landscape, analysts noted. A recent survey from Strategic Treasurer found that 77 percent of banks point to KYC as the biggest hindrance to supply chain finance operations.
Experts have agreed that, despite the size of the challenge, the financial services space must be able to expand trade finance availability.
"Critically, the size of the [trade finance] gap is affecting development and investment flows and financial inclusion, which in turn is impacting business and economic growth," wrote BNY Mellon Treasury Services CEO Paul Camp in the introduction to the FI's latest report on the topic, "Overcoming the Trade Finance Gap: Root Causes and Remedies."
BNY Mellon's report came to several conclusions that align with previous analysis: Access to trade credit is a struggle, and compliance requirements, like KYC, are a top burden for financiers. Yet, perhaps the most concerning conclusion the report came to was the finding that trade finance rejection rates are on the rise at many FIs.
"Our survey has shown that a significant proportion of institutions are increasingly unable to provide trade finance, due to heightened regulatory requirements, as well as several other trends," said Joon Kim, head of global trade product and portfolio management for BNY Mellon Treasury Services, in a statement announcing the report. "This could have serious implications, such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets and impacting the strength of global trade."
Below, PYMNTS looks at some of the data points behind these conclusions.
Thirty-three percent of FIs said trade finance rejection rates accelerated in the last year. More than half acknowledged that they have seen an acceleration in rejection rates in the last year at other institutions, findings that researchers said "underscore the challenge many businesses face when it comes to accessing funding for trade. The problems persist, and appear to be increasing."
Fifty-three percent of regional and domestic banks said they've noticed an increase in trade rejection rates, compared to 24 percent of global banks and 32 percent of specialist trade providers. Nearly two-thirds of regional and domestic FIs said they have seen increases in trade finance rejection rates at other institutions, suggesting that this trend is more acute at regional institutions, compared to larger global ones. "If increases in rejection rates from regional and domestic banks are occurring, this could compound the issues experienced by these businesses — further impacting financial inclusion, business growth and the robustness of global trade," the BNY Mellon report stated.
Thirty-four percent of survey respondents said compliance constraints are the biggest contributors to trade finance rejections, revealing another way that compliance requirements complicate the financial services industry's efforts to address the trade finance gap. Other top factors behind rejections include an applicant's poor credit profile, limited institutional ability to underwrite financing, a decline in correspondent banking relationships, and geopolitical and economic risk factors.
Thirty percent of respondents said enhanced technology solutions and a revised regulatory environment are key to addressing the trade finance gap. While the current regulatory climate is not so easily changed, the increased focus on technology supports a heightened focus on banks collaborating with FinTech firms to address the trade finance gap, allowing players to combine market expertise and technological capacity to facilitate access to capital.
Sixty-one percent of respondents said centralizing KYC databases would be the most effective technology solution to address compliance issues, a finding that signals how, short of changing the regulatory climate, financial services providers can turn to technology to mitigate some of the complexities of compliance that continue to hamper the trade finance industry.