Innovating in trade finance

Trade finance has been a hot topic since the “great trade collapse” began in 2008. We’ve had job-market papers, numerous VoxEU columns, and an AEA session. At the Atlantic, Liam Casey, CEO of a supply-chain services provider, says that trade finance is overdue for innovation:

[M]ost banks still push antiquated trade finance products — most notably, letters of credit. This instrument is based on an old supply chain model that was risky and involved huge amounts of money and long delivery times. Financial institutions had to extend a line of credit against raw materials inventory or decide when to make payments to sellers on behalf of buyers.

Today’s supply chain transaction times are much shorter and transaction amounts are much smaller. Information, product and cash flows are all interconnected. Controlling the flow of information allows you to control the flow of products, which in turn leads to a controlled flow of cash. Such short supply chain cycles make financing much easier. It reduces the working capital required to make a product, and with no inventory stocks, fast transit times and the best inventory visibility in the industry, risk is dramatically reduced. The impact of this new model on global commerce is huge, facilitating more and more startups to get into business with less capital and less risk.

Adapting to change and staying flexible is how businesses stay relevant – especially in the supply chain and technology sector. Chinese mainland banks are well positioned to take advantage of opportunities in trade finance because they understand China, they understand commerce and the supply chain, and they know where to look for risk in the pre-shipment stage of the supply chain. With regards to the post-shipment side of the business, where the Western banks are comfortable, Chinese banks such as China Merchants Bank are rapidly learning global business systems and developing their expertise. Western banks need to move fast to catch up. They need to develop new trade finance products to stay relevant and adapt in today’s market.