From Bigger Yields To Better Yields: Lively competition from strong and agile smaller banks is driving big trade-finance providers to focus on profitability rather than market share.
The leading trade-finance banks are having second thoughts about competing aggressively for market share. Instead, they are thinking harder about the type of clients they wish to serve and the extent of their costly global operations.
“The biggest driver of change in trade finance currently is the shift in strategy on the part of the world’s largest banks,” says Greenwich Associates in Trade Finance: A Market Eager for Disruption, its October 2017 report on global large corporate trade finance. The collective market share of the largest banks has decreased over the last six years as they shifted from aggressive market-share strategies to a narrower focus on “specific clients, products and geographic regions that present the best profit potential,” according to the report. That has opened up opportunities for other providers, including smaller and regional banks as well as nonbank newcomers.
“[In] Europe, the diminished activity of global banks is opening the door for local banks that feel pressure to ‘internationalize’ service offerings in the home market to keep pace with the needs of clients,” Greenwich Associates says. “As in Europe, US companies are being solicited by up-and-coming smaller and regional banks that see an opportunity to generate revenue with trade finance and establish valuable relationships with large corporates.”
Meanwhile, “traditional trade finance remains important and relevant, despite the long- anticipated disappearance of the documentary letter of credit,” according to the Paris-based International Chamber of Commerce (ICC). However, the industry is likely to grow relatively slowly in the future, primarily because of compliance and regulatory requirements, but also due to capital constraints, the ICC said in its 2017 Rethinking Trade & Finance global survey based on 255 responses from banks in 98 countries. Fewer survey respondents expressed concern about the rise of fintechs (1.4%) or commodities volatility (7.6%) or even capital constraints (11%) than about compliance (29.7%) regulation (20.7%) or increasing protectionism (17.9%). “Trade finance … is not merely about a transfer of funds around the world,” the ICC survey says. “[The industry] is about enabling the secure and successful conduct of trade across a wide range of political, economic and security conditions.”
Greenwich Associates says that among large companies using trade finance, about half of those in the US and Europe and about 80% of large Asian companies will shift business among trade-finance providers in 2018. “This money in motion is providing fuel to a range of aggressive competitors, including both established, traditional banks and emerging nonbank firms,” says Don Raftery, managing director at Greenwich Associates.
The lack of automation in trade finance is mainly because the business involves a wide variety of companies of differing sizes—including banks, carriers, freight forwarders, port authorities and others—says Greenwich Associates principal Gaurav Arora. As a result, harmonizing rules and getting all parties on a single platform has proved difficult. Trade finance remains one of the most paper-intensive and manual functions in the financial-services industry. Because of this, Arora says, trade finance is “a market ripe for disruption.”
Global Finance editors selected the best trade-finance banks in 94 countries and nine regions. In addition, we selected the overall best bank for trade finance globally, as well as the best financial service providers in various service categories, such as document management and export finance.
Global Finance editors select the winners for both the Trade Finance Awards and Supply Chain Finance Awards with input from industry analysts, corporate executives and technology experts. The editors also use entries submitted by financial services providers, as well as independent research, to evaluate a series of objective and subjective factors. This year’s ratings were based on performance during the period from the fourth quarter of 2016 through the third quarter of 2017.
It is not necessary to enter in order to win, but experience shows that the additional information supplied in an entry can increase the chance of success. In many cases, entrants are able to present details and insights that may not be readily available to the editors of Global Finance.
Global Finance uses a proprietary algorithm with criteria—such as knowledge of local conditions and customer needs, financial strength and safety, strategic relationships and governance, competitive pricing, capital investment and innovation in products and services—weighted for relative importance. Each entity is rated on each separate criterion. The algorithm incorporates those ratings into a single numerical score, with 100 equivalent to perfection. In cases where more than one institution earns the same score, we favor local providers over global institutions, and privately owned banks over government-owned ones.
The winners are those banks and providers that best serve the specialized needs of corporations as they engage in cross-border trade. The winners are not always the biggest institutions, but rather the best—those with qualities that companies should look for when choosing a provider.
For the league tables, click here.
For more on the winners, click here.
For GF's interview with Dun & Bradstreet's Chris Laws, click here.
For GF's interview with RBC's Lisa Lansdowne-Higgins, click here.
For more on the awards ceremony, click here.