In Asian trade finance, fortune favours the brave

Asian banks that step up to expand services to SMEs, embrace digitisation, and harness blockchain may find the risks well worth the rewards.

With surveys and experts proclaiming a continued global shortage of trade finance in 2017, Asian banks have two choices: Sit on the sidelines or take bold actions, with the latter seeming like a better move for those that want to grow their customer base and get ahead of the digitisation race. This year, banks that focus their efforts on SME expansion, digital transformation and blockchain utilisation can take advantage of unique opportunities amidst a trillion-dollar trade finance gap.

The global trade finance gap stood at $1.6 trillion in August 2016, and 43% or $692 billion is in developing Asia, which includes India and People’s Republic of China. Indicators like the International Chamber of Commerce 2016 Global Survey on Trade Finance suggest this trade finance gap may worsen, so some Asian banks are coping by ramping up services for the underserved small and medium-sized enterprise (SME) sector.

“For Asia and, especially Indonesia, domestic demand plays an important role in alleviating the effects of the global slowdown,” says Margaret Tjahjono, transaction banking services & implementation head at PT Bank Danamon Indonesia, Tbk. “Banks are focusing more to capture this market through extending financing and services for the SME segment and dealing with open account financing.”

The focus on SMEs will become an important theme in the near-term horizon given that more than 1 out of 2 (56%) of SME trade finance proposals are rejected compared to large corporates and multinational corporations that only face rejection rates of 34% and 10% of the time, respectively.

ASEAN surge
Experts also point to an excellent opportunity in the ASEAN, a fast-growing region whose gross domestic product is forecasted to grow by as much as 4-5% in 2017 and 2018, and which is expected to become a hotspot of increased trade flows in Asia.

“Despite the worsening global trade slowdown, in parts of Asia trade has continued to grow, and ASEAN is one of the bright spots in the world economy,” says Pornnit Dunnvatanachit, executive vice president at Bangkok Bank.

The ASEAN region is now the world’s third-largest market, after China and India, with a total population of more than 600 million. Four of the ASEAN countries – Cambodia, Laos, Myanmar, and Vietnam or collectively known as CLMV – are major growth drivers, and the average growth rate in these countries has been 6-8% during recent years.

“China has been increasing its investment in this region as an alternative production base, as have other Asian countries such as Japan and South Korea, and this will further boost the growing regional trade flows,” says Dunnvatanachit of CLMV.

ASEAN’s trade and investment outlook is further enhanced by recent developments that will improve integration and connectivity such as the establishment of the ASEAN Economic Community, under which barriers to trade and investment will be steadily removed.

Double-edged digitisation
In a landscape of a slower-growing China and declining regional commodity prices, Asian banks will also have to figure out how to leverage the digitisation trend or risk getting left behind. Digitisation is becoming a powerful tool to close market gaps, including those in trade finance.

“A push to adopt digital solutions would be a welcome move as this could revolutionise trade operations, enhance risk mitigation and raise process efficiencies for corporate banks and their clients,” says Jan Bellens, Asia-Pacific banking & capital markets leader and global emerging markets leader at EY.

In Indonesia, Tjahjono observes that most banks are trying to adopt digitisation through e-channel to improve the market penetration of trade finance and supply chain products, and provide easy and accessible solutions for clients. But while banks are starting to explore more digital solutions, the multi-party nature of trade transactions may complicate the implementation process.

“The level of digitisation in Indonesia is still very low, as many parties need to be involved for effective implementation, not only banks, but also regulators, port authority, shipping agents and customers. Most of them take a ‘wait-and-see’ stance to see the real case and learn more about the impact and benefit before deciding,” says Tjahjono.

Despite the execution challenges and substantial resources involved, the global push for digitisation is gaining steam as it can unlock higher trade flow transactions.

“Trading partners are easily matching their business around the globe through digitised commerce,” says Silawat Santivisat, executive vice president at KASIKORNBANK. “For example, an exporter in Thailand can find better source of supplier in Laos, they order from that supplier instead of domestic supplier, then produce and export again to other countries.”

Dunnvatanachit says digitisation also enables trade payments to flow easily and quickly under a secure and transparent process. In the case of Bangkok Bank, digitisation efforts have helped transform the bank’s services and increase capacity. Bangkok Bank has started to integrate their payment systems into the online platforms of export clients. But he warns about the dangers of complacency – banks must be both quick and discerning to lock onto the best digitisation partners and technologies as they become available.

“Although there are many new players and new technologies in the markets, only a few will achieve a commercial status and comply with rules and regulations, so digitisation will be an ongoing process as new technologies are adopted,” says Dunnvatanachit.

So Lay Hua, head of group transaction banking at UOB, acknowledges that technology and digitisation are quickly transforming many areas of the banking industry such as risk management, fraud prevention and transaction processing. But when it comes to full trade automation, banks could face a longer uphill battle.

“To enable fully automated trade, banks have to address various concerns, including the costs required to establish the necessary infrastructure and systems and the reconciliation of different processes adopted by different industries,” says So. “Further, banks would also need to agree on the legal terms used in relevant contracts, documents and for cross-border trade, especially for industries such as shipping and commodities, to enable smooth transactions.”

Further complicating the shift to fully automated trade is that banks are only one of the parties in the physical and financial supply chain. Rather than going at it alone, So advises banks to work closely with partners such as government agencies, corporates, as well as SWIFT to fast-track the automation of financial transaction processing.

Blockchain as a game-changer?
As digitisation gains a stronger momentum in banking, there has also been burgeoning interest in using blockchain technologies to digitise and authenticate records.

“Blockchain-type capabilities such as distributed ledger technology (DTL) could well be a game-changer for trade finance,” says Bellens. “International banks are already reviewing the use cases for blockchain in various lines of businesses and initiating adoptions in operational areas like trade finance.”

He explains that blockchain technologies provide workarounds to traditionally paper-intensive processes. As an example, Israeli supply chain startup Wave is collaborating with United Kingdom’s Barclays Corporate Bank to help business clients minimise expenses associated with supply chain management by incorporating industry standard workflows and replacing printed documents with electronic versions stored in blockchain transaction metadata.

In Singapore, DBS Bank along with Standard Chartered Bank and the Infocomm Development Authority of Singapore developed proof of concept for a blockchain-based invoice trading platform in late 2015. Bellens says this was probably one of the first few such applications within the trade finance space by financial institutions, using financial settlement solutions startup Ripple’s DTL for tracking invoices, backing loans to suppliers, and reducing risk of invoice duplication while using cryptographic identity to retain client confidentiality. The banks are looking to widen the project scope, and then eventually have it commercialised with more banks joining in the efforts. Regulatory support will be crucial to allow more of such blockchain applications to flourish in Asian trade finance.

“Blockchain will definitely revolutionize the trade finance world,” says Tjahjono. “Everyone is excited to participate, since it is in line with the global trend on trade finance, which is moving away from traditional trade to open account. But again, to make it happen, regulators play a very important role, as they will provide a legal umbrella and necessary regulations to cover the detail implementation.”

In photo (from left to right): Margaret Tjahjono, Pornnit Dunnvatanachit, Jan Bellens, Silawat Santivisat, So Lay Hua