Can your bank profit from the international trade boom in Asia?

Trade flows are shifting east. International trade to and from Asia has shown spectacular growth in recent years, a trend that is set to continue for the next decade.

To take one metric, the Boston Consulting Group predicts that cross-border payments in Asia-Pacific will rise from 4.1bn transactions in 2012 to 11bn by 2022, with total transaction value rising from $6.7bn to $21.9bn. This explosion in international trade will subsequently be accompanied by an increased demand from businesses for sophisticated trade services, from B2B payments to factoring to e-invoicing.

For banks to profit from the upcoming trade boom, they must look to optimise their international trade technology for corporate customers, particularly when it comes to payments. Key to this is to understand some of the major trends in the evolution of international trade in Asia.

First of all, we should note that SMEs (small and medium-sized enterprises) are now taking a much larger share of exports in many Asian countries than they used to. In China, for example, SMEs now account for nearly 90% of total exports.

A lot of banks are very good at servicing large corporates, but not so great at servicing smaller businesses. If they are to take a share of the growing revenue that SMEs provide, banks will need to implement technology which is more tailored to the SME’s needs.

Secondly, supply chains are becoming much more complex. Many Asian businesses that trade abroad now have to deal with tens, if not hundreds, of suppliers and buyers.

Compounding this issue is the fact that the regulatory and trading environment in Asia is extremely heterogeneous. A bank which provides a strong trade services package for one market may find its offering unsuitable for another market.

What is needed is technology which can cope with fragmented supply chains spanning multiple countries.
Critically, Asian businesses are much less likely to rely on their bank for all their international trade needs. As trade finance has become more complex, specialist firms which focus on niche areas of trade finance have emerged, for example, credit insurers, cross-border payments firms or supply chain financiers.

This means that banks are not only competing with other banks, but with a whole host of specialist providers.

How are banks to then adapt to this changing international trade environment in Asia? A good approach is for banks to view specialist international trade providers as potential partners rather than competitors.

A lot of banks in Asia enjoy deep relationships with local corporates, but lack the resources to adequately develop strong trade finance offerings in house. By embedding the technology of third-party providers, these banks can gain a competitive advantage over other banks and increase profit margins from existing clients by capturing more of the trade finance value chain.

Banks in other continents can also embed such technology to capture more revenue from the Asian trade revenue.

For example, a bank with a basic international trade offering could improve it by embedding the capabilities of a specialist international payments firm. This would allow the bank to offer its clients payments in a wider variety of currencies, fair and transparent exchange rates and ensure that the bank is not exposed to FX risk by the straight through processing of currency exchange.

Developing such a service in house would be a significant capital expenditure. By collaborating with a third-party specialist, the bank can bring to market a superior product at a fraction of the time and cost of a traditional IT project.

The international trade boom in Asia is a revenue opportunity that banks should not miss. Smaller and regional banks in particular should consider partnering with specialist trade finance providers if they are not to lose out.