These past 5 years, banks have made great efforts to transform their Trade finance Business, investing on technology & reshaping operating models to reduce cost income ratio, streamlining processes to enhance client experiences, and strengthening compliance and regulatory requirements. They are preparing for next generation of technologies: First by expecting concrete results with OCR technologies, and secondly by investing in Blockchain, with results yet to be demonstrated, despite numerous initiatives.
But what if the landscape of the industry was on the edge of a more drastic change?
For now, the current transformation of the sector does not modify the balance between the actors of the industry: banks are still the cornerstone of the value chain, concentrating all the exchanges and having a view on all the actors of the value chain. This privileged situation may be reconsidered.
We have screened the Trade Finance industry through the Digital Transformation model proposed by the accelerator and venture capital firm The Family. A way to assess the maturity of an industry regarding digital transformation and to foresee potential changes that may disrupt the sector, and how to be prepared for it.
The Family Digital Transformation model
The Family defines an industry (a filière) as a group of actors sharing the same infrastructure and regulatory framework. In a mature industry, models and roles of existing actors are well known and stable and innovation levers are mostly related to cost optimization and enhancement of existing products.
On the other hand, Digital Transformation disruption redistributes the value between actors of the value chain. The transformation is coming from New Players (startups), who partner with the multitude and transform customer needs and expectations. The transformation is consolidated with the arrival of digital giants, acquiring startups to capture new area of growth.
At the end of the transformation, the intermediary links of the value chain are weakened or gone and the landscape downstream the value chain is reshaped: some practices and production processes are abandoned, market is dominated by new players, and historical actors are more concentrated, both trying to reposition themselves upstream the value chain by leveraging on their key competitive assets.
The Family identifies 5 steps of the Digital Transformation:
- Digital Rise : New players / startups appear on the market on niche businesses.
Customers are changing their behavior and refining their expectations. Think tank, consulting firms and opinion leaders are showing growing interest in the industry.
- Wake up of the multitude: New players succeed to create a partnership with a multitude of customers.
After a first phase of co-creation with a restricted scope of users, the startups extend the product or service to a larger scale.
The landscape of startups becomes more structured, and existing actors become aware of the new players. This emulates the competition to create innovative products.
- Rebalancing of power games: New players become essential in the value chain.
New players are growing, with valuation of some of them exceeding $1 Billion.
Existing actors are concentrating upstream the value chain.
- Arrival of Giants: the industry is identified as a growth lever
Digital giants become interested in the sector as a lever to diversify their growth area and to extend their knowledge of their customers. They acquire startups with dominant position on the value chain.
- Vertical Integration: new players move up on the value chain
Thanks to a better understanding of client expectations, and a greater ability to propose innovative products, startups move up on the value chain to accelerate the transformation.
The Family model applied to Trade Finance Industry
Trade finance is a mature industry with well-established relationships among numerous actors. Historically banks take a large place in the value chain:
- Upstream: they define and price Trade Finance products. Prices are defined based on their risk assessment (country risk, counterparty risk)
- Downstream: they initiate the relationship and distribute the products to customers (large corporates and SMEs), leveraging on their knowledge of clients business needs
In the middle of the value chain, freight and shipping companies, insurances, inspection companies are essential to complete the products
This state of affairs is going to shift.
- First, the Digital Rise: Customers expectations are changing, requiring more transparency, with pressure on turn around time and prices. Numerous publications and survey since 2015 show the growing interest of business influencers and consulting firms in the industry. But above all, new players are entering the market, trying to renew Trade Finance products with Supply Chain Finance (eg. PrimeRevenue or Orbian) or simplify traditional Trade products (Akirix or TradeCard for example)
- The second step, Wake up of the Multitude, seems to have been achieved as well: New players are starting to partner with the multitude, trying to answer unmet financing demand for SMEs (Ebury, TradeIX, Currenxie…). Landscape of new players is more structured with the emergence of MarketPlaces (Bolero, Elcy). Innovative products are emerging with a first generation coming from historical actors (Swift with BPO) and a second wave with new players such as EssDoc and its e-Bill of Lading CargoDocs or CargoIX with a recent launch of a bill of Lading based on Distributed Ledger Technology. Finally, some links of the value chain are starting to move, with shipping companies trying to distribute trade finance products (eg. Maersk Trade Finance)
- The third step, Rebalancing of Power, has already certainly started, with New Players becoming more and more essentials: Banks are plugging their client web portal to Marketplaces and are launching several initiatives in partnership with Fintechs: Barclays & Wave with the first blockchain transaction on a Letter of Credit in September 2016 for example, or Marco Polo with TradeIx, BNP Paribas, Natixis, ING and Commerzbank. If the concentration of existing actors is not clearly visible yet, the regulatory constraints and the current de-risking strategy of the correspondant banking business call for reduction of the number of banks able to maintain a profitable Trade Finance activity.
The transformation is not finalized, and even if some Digital Giant are showing interest in the industry (Alibaba has launched its Trade Finance Assurance service, Currenxie is partnering with Amazon to leverage on customers track records to propose Trade services), banks maintain for now their dominant position. But according to the model, next steps will clearly impose New Players as the dominant link of the value chain.
Banks should start to prepare to the next Digital Transformation steps. Enhancement of existing models is not sufficient anymore, and Banks have to accept that usage may change and pursue initiatives to better reconnect with client needs:
- Strengthen collaboration with new players / Fintech. The Hyperfinance report mentioned in the 2017 ICC Trade Finance Survey indicates that 55% of the respondent banks have already started collaboration initiatives with Fintechs and consider this approach as a long term strategy. 31% of the respondent banks are considering the option of acquiring a Fintech.
- Leverage on their key assets: Banks remain best positioned to assess country and counterparty risks, key components of Trade Finance business. A better usage of the large client data they store should help to explain and propose to them the relevant product. For example, HSBC has launched HSBC Connections Hub, a digital platform enabling customers to leverage the bank’s global network to connect with trusted buyers and sellers around the world. Finally, with the growing expectation towards transparency and traceability of the goods we are consuming, Banks privileged position in the value chain give them the ability to track the entire goods life cycle. Information that can be prized for the end users of the goods the buyer is purchasing.
- Partner with the multitude: the financing gap encounters by SMEs and the shift to open account are opportunities for banks to renew their value propostion. One example is the digital platform We.trade launched by Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale and Unicredit, to secure open account transactions.
The evolving landscape of the Trade Finance industry is an opportunity for the actors of the value chain to anticipate and better answer to client expectations. According to The Family model, the transformation journey of the industry.is not yet finished.