Financial institutions seeking to expand into the lucrative commercial sector face their own set of difficulties as regulations and cost containment take centre stage. In 2021, banks should be primed to address several overarching challenges in the quest
for SME business. Embedding comprehensive digital capabilities is also essential to aid expense reductions and efficiency gains.
Overcoming the trade finance gap
The COVID-19 pandemic has interrupted supply chains around the world and short-circuited business operations. The disruptions sent shockwaves through many industries, and when combined with shifting consumer demand, created cash flow concerns for SMEs across
the globe. As businesses struggle to recover from the impacts of the economic crisis caused by the pandemic, there are several factors limiting the odds of success.
First, the $1.5 billion global trade financing gap has had a tremendous impact on businesses, particularly smaller entities or those in developing countries. The International Chamber of Commerce (ICC) stated in November 2020 that finance underpins 80-90
percent of world trade.
ICC predicts that it will take an additional $1.9 to $5 trillion in trade financing to return business activity to 2019 levels. Meanwhile, the number of trade finance applications rejected by banks increased 26 percent over the six-year period between 2013
and 2019, as the number of banks engaged in trade finance fell from 92 percent in 2014 to 71 percent last year. The cost of regulatory compliance is a major contributing factor to this decline.
Know your customer (KYC) or anti-money laundering (AML) regulations, combined with the higher capital requirements introduced after the last global financial crisis, have pushed many financial institutions out of the global trade market. A study conducted
by Risk Management Association in 2018 revealed that half of financial institutions spend 6 to 10 percent of revenue on compliance costs. And this high regulatory price tag often reduces the number of services a bank or credit union can provide.
However, those financial institutions that can cost-effectively tackle the regulatory environment in the year ahead will find opportunity in trade finance.
Digital cash management
Recovering from an economic shock as significant as the COVID-19 pandemic will require businesses to optimise liquidity management in order to improve cash flow. As a result, many companies will be seeking digital capabilities that simplify cashflow forecasting,
as well as predict and manage risk.
Digital solutions in this space will provide centralised access to data to improve both efficiency and accuracy, but will also use real-time inputs in conjunction with automated cash flow forecasting to monitor available liquidity and increase cash visibility.
Real-time inputs will be particularly beneficial for receivables management.
Currently, few business treasurers have a complete view of their accounts receivables, and lack critical visibility into processes such as invoice management, payer reconciliation and invoice matching. Real-time data access provides an up-to-the-minute view
of accounts, enabling businesses to optimise receivables such as collections or cash applications, reducing the number of days sales outstanding.
Financial institutions that provide digital liquidity management solutions will be helping businesses recover from the current financial crisis while carving deeper inroads into the corporate banking market.
Integrated working capital
In 2021, businesses will be seeking to even out their liquidity woes with integrated working capital solutions. The World Trade Organization estimates today that 90 percent of global trade is dependent upon some form of bank intermediation to support products,
financing or payments. Simultaneously, technology is changing the way trade processes are completed, opening doors to outside players, such as logistics companies, to enter the market.
Unhampered by banking regulations, these service providers are delivering a faster and more efficient operating environment and offering services at lower costs than traditional financial institutions.
To remain competitive, banks will need to unify the complete suite of trade and working capital finance solutions under a single, streamlined digital solution. For example, service-based exports are anticipated to grow $2 trillion over the next five years,
according to a report published in August 2020 by Western Union and Oxford Economics.
Supply chain finance is another area that is ripe for growth. Only 64 percent of global banks offer these services, according to an ICC survey from July 2020. For regional and local banks, the numbers drop to 38 and 13 percent respectively.
The lack of market penetration makes sense when you look at the challenges associated with implementation. SMEs expect supply chain finance solutions to fit seamlessly into the financial institution’s overall working capital suite of services. However, financial
institutions can find it challenging to integrate multiple legacy systems to achieve the seamless results that SMEs expect.
Another barrier to entry is the associated cost. Many SMEs are budget-sensitive, and for financial institutions, these products are only profitable when they are automated at high volume. Fortunately, the growing use of cloud-based APIs is changing the landscape
for banks and credit unions, making it possible to unify a suite of working capital solutions, to meet an entire range of business needs.
When businesses can unite a complete realm of services under a single umbrella, they are more likely to stick with a financial institution, opening opportunities for cross-selling, as well as the benefits associated with customer loyalty. As a result, adoption
of open API-enabled solutions should escalate in 2021 as businesses tackle the road ahead and demand greater flexibility and capability from their financial institutions.