Banks have facilitated global trade through trade finance for at least several hundred years. While global trade has increased dramatically in this period, technology has been slow to keep pace. Only recently have we seen stronger adoption of paperless and electronic/digital solutions. Concurrently, open account terms are becoming the preferred method of settlement, which is leading banks to rethink the overall value proposition from both the supplier and customer perspective.
In this area, we have seen an evolution toward repackaging well-known banking products into supply trade finance solutions. As part of this process, the value proposition has become more holistic, capitalizing on the desire of corporate executives to reduces costs and complexity while increasing efficiency. Due to the nature of trade finance as a generally low-risk form of credit (albeit with high collateral demands), banks have utilized transaction banking units to provide standard packaged solutions and increased revenues in the process. While the cost to deliver complex customized solutions is high and increasing, new regulations are also affecting the cost of service.
To look at one such example, the capital adequacy ratios of Basel III, means assigning a 100% leverage ratio to off-balance sheet trade, which directly increases the opportunity cost of financing. One recent market participant noted that:
Banks will either have to reconstruct their business models, or some of the costs will be passed on to businesses, especially small and medium-sized enterprises (SMEs), and emerging market financial institutions – “the parts of the market that depend most heavily on trade finance and also the ones driving economic growth,” ¹
Flexible and exception-based pricing will be a key requirement in order to profitably increase business in a regulatory trade finance environment.
The combination of evolving market conditions and customer appetites has made Product and Pricing Lifecycle Management (PPLM), with its flexible pricing, custom bundling and relationship view, so attractive to trade finance banking.
miRevenue for Corporate Banking: Trade Finance
There are four basic elements to any trade finance transaction:
- Secure and timely settlement across jurisdictions
- The provision of financing to transacting partners
- The mitigation of risk
- The flow of information across the process
In the current value proposition, a bank’s trade services system (in conjunction with the risk and default loss estimation system) can come up with the basic building blocks of price for any standard product and pricing level. Moving forward, banks are looking at how to support the holistic requirements of trade finance consumers and calculate the premia and discounts inherent in flexible pricing.