Trade Finance: Seasonal climate and survival tips

On the other hand, brave decisions to curb corruption by cancelling big currency notes –rather fashionably called demonetization-has had welcome side effect of boosting electronic payments. Don’t be surprised if the driver of the colorful taxi in India has more rupees in his cell-phone than in his wallet. While some other countries are paving ‘roads’ for regional political dominance using their economic clout, it is not for the first time that a problem of excess capacity, both in production and finances, is addressed by creating physical infrastructure. The west should know it’s only happening for the first time in the East. There have been remarkable improvements in regulatory climate: Singapore , UK, Hong Kong, and India are embracing digitization , fin-techs, and block-chain early on so that they are well prepared. Regulations around trade are easing except for compliance checks which were writing on the wall for some time.

Effect on global trade and trade finance

So what ? Does all of the above really affect global trade and thereby trade finance or these are convenient tools to explain changes in what used to be ‘bread and butter’, ‘run of the mill’ business which has essentially transformed into a cyclic business? This is my second point: demand in any country would eventually saturate until the ‘next wave’. Such next wave of demand will need to be shouldered by the next country in-line or ‘created’ inorganically (by war or peace or roads). Until then all businesses will go through a period of slow-down and cross-border trade and trade finance is not averse to it. Cross-border trade is perhaps affected by these cyclical demand forces more than geo-political forces or trade agreements. Such slow down in the trade is first observed in value followed by volume. It results in competition amongst banks including the local banks—newly armed with technology—eager to fight it out with big boys. Some of the banks would eventually find the trade finance not as profitable and divert their capital to elsewhere. The red ocean is then some-what cleared and banks which stayed put with their nets (i.e. right products) deep in the water will catch the next wave.

Keys to survive

If you are a strong investment grade corporate; try to remain as you are. If you are a SME, fully utilize your stronger partner in trade to arrange for your financing, explore all government credit programs, export credit agencies, and insurance companies either directly or through your bank.

If you are a bank, first carve out your target customer segment and focus on few if your strategy allows for it. Second, create sound credit and legal base for products. In spite of due hubris around technology, credit and legal aspects remain as crucial to banking as Newton’s laws to physics.

Second, change your operational mindset; make operation departments your first grade citizens. Only then embark on digitization journey. Do not hope that processes will adjust themselves after technology is in place. Try manual handling products for testing business process change.

Digitize first what regulator requires (KYC/AML automation, duplicate financing checks using distributed ledger, automated dual usage goods checks, sanctions checks etc.) this will save the cost of compliance in medium to long term. Digitize second what brings revenue. Make it easier for customers to deal with you. Think omnichannel. Use standard based interfaces to increase ‘customer retention’ rather than proprietary interfaces hoping for ‘customer stickiness’. Then digitize good to have items (OCRs, full blown block-chain usage, API economy etc.). If you are doing these digitization items in parallel and without coherence you are already bleeding money or will bleed money sooner or later.

And finally, if you are a regulator, you don’t need a bankers’ advice or a country’s president’s advice for that matter.