The Asian Development Bank's estimates that the global trade finance gap has reached $1.5 trillion has jumpstarted a new wave of competition between banks and FinTechs working to address the biggest challenges to landing capital in the hands of global traders.
FinTech has identified a particularly large opportunity in the trade finance market, pegging traditional banks as too slow to innovate, without the agility to manage the complex processes often linked with financing trade with smaller businesses. Banks' massive compliance burdens cannot be ignored, either.
However, analysts also note that FinTechs have their own regulatory requirements as well (albeit, often much lower than those of banks), and because they aim to address the financing gap for smaller businesses seen as less lucrative by banks, the due diligence burden is lofty as well. A 2017 report by the Asian Development Bank found that, despite its efforts, FinTech had not yet made a dent on that global trade finance gap.
Two years later, Kyriba and Strategic Treasurer have drawn a different conclusions. The pair's latest Supply Chain Finance Survey, released last week, suggests that FinTechs are indeed making headway in trade finance — however, rather than competing with banks, they have found a prominent role in FIs' back offices to facilitate trade finance.
"The data shows FinTech continuing to drive change, with banks working hard to match the pace of innovation," said Strategic Treasurer Founder and Managing Partner Craig Jeffery in a statement announcing the report.
However, with FinTechs finding themselves imbedded with the banks, they are now exposed to the same regulatory demands as their FI partners. Indeed, the survey revealed the extent of compliance pressure on the trade finance space — as well as the challenge of addressing more lofty demands from corporate recipients of trade finance. Below, PYMNTS breaks down the key data from the report.
Nearly half of banks surveyed use a third-party FinTech to facilitate supply chain finance to their corporate customers, though researchers found bank-FinTech competition remains strong. Though banks' biggest focus for investing in supply chain finance solutions will be to partner with FinTechs, half of the banks surveyed noted that maintaining a competitive edge against FinTechs is also a top challenge. Corporates still prefer to work with banks to access supply chain finance, but FinTech providers are close behind (34 percent use banks, while 29 percent use a FinTech solution).
Seventy-seven percent of banks say know your customer (KYC) regulations are the biggest hindrance to their supply chain finance operations. According to the report, this is a key area in which banks struggle to compete: analysis has shown that it takes longer to onboard a client with KYC due diligence when using a bank solution than with a FinTech. That's a big deal for B2B suppliers, most of which note that KYC delays are the largest hurdle to on-boarding onto a SCF solution.
Fifty-two percent of businesses say they want a flexible supply chain finance program that can change as their cash positions do. About one-third of businesses say their cash position fluctuates from cash deficit to cash excess. At times of cash excess, they prefer to leverage an internal supply chain financing strategy via dynamic discounting with their vendors. At times of a deficit, however, they want to draw on their SCF offering. Researchers noted that this finding represents the demand for a flexible supply chain finance solution, particularly as 45 percent of vendors say they would be willing to adjust their SCF strategy based on the fluctuations of cash positions of their customers.