Trade Finance, Cross-bank partnerships – navigating the challenges facing the trade finance sector
Confronted with changing macroeconomic trends, financial institutions are finding it increasingly challenging and costly to offer trade finance services.
IN.sights speaks with Christian Toben, Head of Emerging Markets, Arne Graeber, CEO of Commerz Global Service Solutions, and Gerald Dannhaeuser, Regional Head of Financial Institutions, to discuss how banks both large and small are adapting.
Global trade flows have endured significant disruptions in recent years – from the supply chain shocks of the pandemic to the war in Ukraine. Has the volatility caused some banks to re-think the way they offer trade finance services?
Gerald Dannhaeuser:
The global trade landscape has certainly seen some dramatic changes – and it’s true that they have affected us in the banking sector. These disruptions have each contributed to an increased need for due diligence, KYC and sanctions screening, all of which serve to make trade finance services more costly. Offering trade finance to corporate clients has therefore become more challenging, particularly for smaller and medium-sized banks.
Christian Toben:
Another factor at play here is that, to carry out these due diligence checks efficiently, banks are increasingly investing in digitalisation. Of course, banks are already investing significantly in automation, robotics and AI, and this will only increase in the future. But many are coming to realise that it is no longer worth developing, operating and advancing these systems to process just a few letters of credit.
Are banks managing to find the right staff to keep up with these additional requirements?
CT:
Staffing is another area where macro trends have made our work more challenging over the past years. Ever since the pandemic, we’ve seen financial institutions (FIs) – in Europe and elsewhere – struggle to find the right talent for certain operational jobs. Documentary trade finance processing is technical and specialised, involving a lot of law-based and regulation-oriented work. This needs handling by staff with a certain level of training – but today, many people with this level of education aren’t necessarily looking for processing roles.
The difficulty in finding adequate staff is therefore prompting many banks to look to technology to plug this gap. Of course, we will always need people – corporate banking is a relationship business. But as demographic changes, regulation and other trends make their impact felt, automation will become more and more important.
And with significant investment required – to address these processing gaps, as well as the compliance needs mentioned previously– it can be hard for smaller banks to access these solutions directly.
With costs mounting and the complexity of the trade finance sector ever increasing, how are these smaller or medium-sized banks keeping up?
Arne Graeber:
The increased cost of doing business, and demographic changes we have just discussed, have led to a consolidation in the industry. Often smaller players realise that they need a partner bank that provides dedicated Trade Finance services within a global network. Commerzbank, for instance, has always been a reliable partner in both advanced and emerging markets.
CT:
Indeed, some banks have decided that providing trade finance is no longer worthwhile at all. Others are re-thinking their existing business models. Many of these are turning to partner banks for Trade Finance as a Service (TFaaS), outsourcing part or all of their documentary trade finance operations.
With TFaaS as a banking solution, Commerzbank aims to help these clients. The solution is tailor made and can be used as a combination of an extended trade network for various documentary products or pure documentary LC services depending on the client needs.
Through this offering, clients can leverage the benefits of our digitalisation and analytics capabilities without incurring the sizeable costs associated with direct investment. And by getting more traffic on our platform, we can reduce the transaction cost significantly – helping our clients and also fuelling our own digital transformation.
GD:
FIs want to ensure that they can continue to deliver the solutions that clients need, no matter what challenges tomorrow brings, and many are realising that the best way to do so, now and in the future, may be through a trusted partner.
Is the growing demand for TFaaS a global phenomenon, or has it so far been focused on certain particular regions?
GD:
We have already seen strong demand for TFaaS in developed markets across the APAC region – especially Australia and New Zealand. What these markets have in common is a relatively high cost of labour and a strong level of regulatory scrutiny, as well as high volumes of trade. Looking ahead, as these macro trends make themselves felt more and more in emerging markets, the Middle East could become the next major hub for this business model.
Going back to the comment about the processing workforce, does the sector now feel as if it is facing a broad generational shift, with trade finance expertise diminishing over time? How can banks adapt to the changing job market realities?
AG:
Solving this issue requires a global approach to staffing. Like in any business, you need to invest in your talent. Once your people feel that they can be successful, and be part of a successful business, they are willing to work hard.
For example, at our Commerz Global Service Solutions centre in Kuala Lumpur, we have long-standing collaboration agreements with universities – which provide talented, committed young staff through a dedicated trade finance academy. We have been present in Malaysia for twelve years now, and we have created the right work culture to ensure that staff enjoy their work.
Our setup is flexible, and we are able to allocate shifts to ensure that we can cover APAC, EMEA and American time zones. This round-the-clock coverage is what we can put at our clients’ disposal.
From the feedback you get from clients, what value do local and regional banks obtain from working with a partner like Commerzbank to offer trade finance services?
CT:
Arne has rightly outlined the benefits of our regional centre in Kuala Lumpur. But not every bank can afford to set up such a hub. Whether you are in Europe, Asia or anywhere else in the world, if you want to be an active player in transaction banking, you need a certain minimum volume to make the investments worthwhile.
AG:
There is also a case for TFaaS as a scalability solution. No matter their size, banks want to grow their business – they might be predominantly focused on other products, but if their client needs a trade finance solution, they still want to offer it. Working with a partner can help make that possible.
Commerzbank has a strong international reputation as a trade finance bank, built on years of strong customer relationships. How does this position the bank to become a leader in offering trade finance as a service?
CT:
Commerzbank has a strong international network of correspondent banks; we have trade finance in our DNA. Our clients know we are a reliable partner, they know our team of trade specialists, and they recognise that we want to build on our existing market position to become a leading player in this next phase of market consolidation.
GD:
With TFaaS, the more strategic the relationship, the more beneficial it is for both parties. We know our clients and their businesses well, and we know how to tailor the solution to their needs.
AG:
Banks looking to outsource their trade finance are often hesitant to work with the largest global FIs, as they could be seen as direct competitors for their corporate business. Commerzbank, however, has a unique position – while we work extensively with corporates in Europe, globally we are much more focused on FI clients. This makes local and regional banks much more comfortable working with us than some of the big, international players.
As the trade finance sector continues to evolve, I have no doubt that we will see more regional and local FIs teaming up with banks like Commerzbank – this will be the way to compete with the major global banks.