Significant value in the global supply chain finance market remains untapped
According to the World Economic Forum, trade finance is one of the top three export obstacles for half of the world’s countries.
When it comes to international cross-border trading, entrepreneurs know just how important trade finance is to their success. Sellers want to be paid upon shipment, while buyers want to pay when they receive goods.
Banks are positioned between the sellers and buyers and they play a crucial role within the global supply chain. In fact, for centuries, bankers have been the bridge – providing trade finance or credit. It is regarded as a low-cost source of implied working capital funding.
The trade finance ecosystem includes the global trade market, which encompasses every invoice and receipt issued by corporates—up to US$17 trillion globally on an annual basis. Then, within the global trade market, is the potential market for supply chain finance (SCF), which is about US$5 trillion of the US$17 trillion.
[box type=”info” align=”” class=”” width=””]What’s interesting is that an estimated 80% of global trade is covered by credit or short-term payment guarantees, according to the Bank of International Settlements, but that leaves about 20% or US$3.2 trillion that would not be financed for one reason or another. Some buyers and sellers choose to work only within cash and barter arrangements and may refuse financing, so – in theory – it cuts the remaining balance to about 10%, or about US$1.7 trillion.[/box]
The trade finance “gap”
This estimate aligns with the Asian Development Bank report from 2019 and that the trade finance “gap” was estimated at US$1.5 trillion globally. Then, in early 2020, prior to the COVID-19 pandemic, the World Economic Forum issued a forecast that the gap may rise to US$2.5 trillion by 2025. Now, given the impacts and uncertainty caused by the pandemic, the gap is only growing larger and accelerating as trade conflicts prompt even further reshuffling and nearshoring.
More recent estimates suggest that the trade finance gap could grow to US$5 trillion by 2025. This is a huge opportunity and an imperative for banks because of the critical role they play with the larger supply chain ecosystem.
Key drivers
Post-COVID-19, we now see change accelerating in the SCF marketplace in response to a convergence of factors, including:
- Increased focus on working capital and digital adoption
- Potential geographic relocation of US$2.9-$4.6 trillion in spending on cross-border supply chains (from 16-26% of global goods exports) over the next 5 years
- Banks considering potential finance policy and structural changes for small and medium-size enterprises (in remote areas and developing countries around the world
Root cause analysis
In developing countries, bank financing may not be available or applicants are more likely to be rejected because they lack the technology, the skills, or sophistication to submit required data and information related to trade finance applications and instruments.
[box type=”success” align=”” class=”” width=””]The path forward
The good news is that World Trade Organization is already working with partners to help solve the trade finance gap, with a more systematic approach in terms of diagnostics, recommendations and increasing capacity. They are working to clear obstacles between global markets and SMEs. Over the next few years, their efforts will benefit individual sellers and enable less developed countries to gain the financial services offerings and the support that many desperately need.[/box]
Fluidity and transformation
Now in mid-2021, the impact of COVID-19 has contributed to accelerating digital adoption and the reconfiguration of trade and supply chains—for example, to improve resilience and diversify sourcing.
Global supply chains are being reshaped by cross-border data flows and new technologies, including digital platforms, the internet of things, automation, and artificial intelligence. Their features and benefits could drive new levels of network connections (aka “the network effect”) and stimulate cheaper and more accessible SCF offerings.
What is on the horizon?
- “Just In time” (JIT) financing
- “Green” supply chain financing
- “Green” scoring
- Networking innovations
People who work in logistics and supply chain management are keen to better understand the concept of JIT financing. Many of the drivers of SCF growth are signaling a structural shift in the larger ecosystem. Corporates, both small and large, have increased their use of SCF and are considering how to support smaller suppliers’ and buyer’s financing needs in terms of sustainability. In fact, “green” SCF and “green” scoring methodologies – in combination with other efforts – could double historically low SCF eligibility and boost levels from below 40% to as much as 80%.
So, yes, we are on the right path, and we still have a long road to travel, but let us also not forget that a massive, multi-trillion-dollar financing opportunity is there for the taking.
You can find my recent blogs related to sustainable or “green” SCF in greater detail at www.cgi.com.
