Global Supply Chains, New Directions, & Trade Finance

Standard Chartered recently produced a very good report titled Global supply chains: New directions. There is some good stuff in here and if you have the time definitely worth the read.

In it, they talked about some of the manufacturing changes that will impact supply chains, such as:

  • Robotics could challenge the low-wage model while 3D printing could bring a shift to customized products, made locally.
  • The centre of gravity of low-cost manufacturing looks set to trend west from coastal China, inland and to ASEAN, India and eventually Africa.
  • Services trade is likely to grow fast as digital technology advances.

But I found the trade finance section the most interesting and relevant.   This section focused on three areas:

Market Share of financing arrangements

From the USD 15.9 trillion in global merchandise trade (2008 IMF estimate), Standard Chartered estimated around 80-90% of all merchandise trade flows are supported by some form of trade finance (see chart below).

Open account finance

Think about that for a minute. What StanChart is saying is that in some indirect form, when buyers push terms out to 45 or 60 days or longer to buy merchandise, that suppliers are funding that on some type of bank credit and not equity or cash flows. I assume StanChart means cross border merchandise and not domestic. Does that pass the smell test? Maybe, but I don't think so for SMEs. Perhaps if they are throwing factoring solutions in there, but cross border factoring is still rather small compared to its domestic cousin.

‘Gaps’ in trade finance

StanChart believes most of the drop in trade and trade finance during the Great Recession of 2008 was probably due to the massive manufacturing inventory correction and not an inability to access credit. I believe that as well. One only has to look at the massive inventory write-downs of some of the technology companies back then.

They did point out that a recent ICC Survey suggests that while trade finance availability has risen, there is still a shortage for SMEs.

But many of us know new paradigms are changing the way SMEs access term loans and transactional finance, and this is moving fast. In fact, some banks are either white labeling these platforms or participating as funders, ie, using these platforms as user interfaces to get the data to run their own underwriting.

I do believe there are deep concerns about a possible trade credit squeeze in the Emerging Markets. The OECD banks have shrunk their Correspondent bank network due to compliance costs. This has the consequence of limiting credit in those markets.

Three new trends

Here, Standard Chartered talks about platform-based e-invoicing, mobile payment technology and the Bank Payment Obligation as three new trends.  From the little they touched on these subjects, particularly platform based e-invoicing, I can tell this is an area banks need to get much smarter about. There is much happening here, and it does not pay to have a superficial understanding.

As to the BPO, I would not call this a new trend, but something that has been in development for a long time  and got a recent lift off with the ratification by the International Chamber of Commerce (ICC), of the Uniformed Rules for Bank Payment Obligation (URBPO) on July 1, 2013.  The verdict is still out, and there is a divide between those that think this is the future of trade finance and those that see it as a waste of time.  I have written extensively about about this new instrument here, here and here.

Download Standard Chartered's report here.



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