Change Picture Outlook of Trade Finance and Credit Insurance in the Global Trade Digitalisation Isidoro Unda CEO - Atradius IACPM 2018 Spring Conference
Objectives Analyse the global trade market and Trade Finance Outline the implications and suggest opportunities in trade finance for banks and credit insurers in the new global trade ecosystem facilitated by the digital transformation Introduce most recent cases 2
Table of contents 1. Global Trade Market 2. Global Supply Chain & Trade Finance Today 3. Challenges in Trade Finance 4. Shifting in Global Trade Development 3
Global Trade Market Global trade size: USD 15.8 trillion in 2016 Global trade flows expected reach USD 18.7bn In 2020 Source: ICC report 2017 Re-thinking trade & finance / BCG Trade Finance Model 2016 Expected to reach USD 18.7 trillion in 2020 (4.3% p.a.) Key drivers will be inter-regional trades within: Asia Pacific; Europe; and, Between Asia Pacific and Europe In general, trade growth has been higher than GDP growth Trade Finance revenues are estimated to grow from USD 36 billion in 2016 to USD 44 billion in 2020 (4.7% p.a.) Source: WTO and UNCTAD for trade, consensus estimates for GDP 4
Table of contents 1. Global Trade Market 2. Global Supply Chain & Trade Finance Today 3. Challenges in Trade Finance 4. Shifting in Global Trade Development 5
Global Supply Chain Global Supply Chain is a distribution of goods (raw material, work-in-progress and end products) and services throughout companies, opening up market opportunities World Bank Doing Business project reported : A single export requires up to 11 different documents; and, Take as long as 86 days to process According to BCG: a single transaction can count approx. 5,000 data field interactions in the end-to-end trade finance process with more than 20 players involved 6
Trade Finance Financial products or arrangements linked to underlying (international) trade transactions 80-90 % of global trade is relying on Trade Finance Short term risk: 30-270 days Firms reliant on trade credit were less affected during the Global Financial Crisis Trade Value Chain Pre-export risk Invoice Out-Bound Logistics Shipment In-Bound Logistics Inspect Goods Invoice Approval Payment Collections Financial Supply Chain Banks Credit Insurers Physical Supply Chain Others 7
Trade Finance : Products / Overview Bank intermediated L/C (Most common) Documentary collections Pre-export finance Supplier credit Receivables discounting and forfaiting Import and export loans Supply chain finance Bank payment obligations etc. Bank-intermediated L/C Other products Credit insurance Mostly for open account transactions Can be combined with bank products Non-bank intermediated / Trade Credit Open account Cash-in-advance Non-bank intermediated (Inter-firm) Trade Credit +/- 10-15% +/- 5-10% +/- 80% Trade credit insurance* *Atradius own experience 8
Trade Finance : Products / Bank Intermediated Bank-intermediated trade finance is a financial arrangement facilitated by banks for the transactions between buyers and sellers, and if applicable, other parties involved Bank-intermediated short-term trade finance market was estimated at USD 3 3.5 trillion Demand on traditional trade finance (e.g. L/C) is declining, despite the fact that the Emerging Markets, especially Asia, is still heavily relying on L/C De-risking, deleveraging and Trade-related revenues for banks downsizing due to regulatory requirements are constraints Supply Chain Finance is estimated to be the key driver for the bank intermediated business growth Source: CEB TowerGroup analysis, Accenture estimates 9
Trade Finance : Products / Credit Insurance Credit Insurance protects suppliers of goods and services against the risk of nonpayment from their buyer due to commercial or political risks Supporting approx. 2.3 trillion worth of the world short-term trade Need for Credit Insurance is visible in all phases of economic cycles More banks tend to reply on credit insurers to transfer their trade risks AON Credit Solutions stated In 2017, 65% of our growth is related to financial institutions, which represents a major shift bn 2.500 2.000 1.500 1.000 500 0 Trade Credit Insurance Exposure ICISA Members 20052006200720082009 2010 2011 2012 2013 2014 2015 2016 Source: ICISA 10
Trade Finance : Risks / Default Rates Trade Finance is considered to be a safe form of finance But the risks can be influenced by: Economic cycles Concentration and Fraud Trade Finance Default Rate (2008-2016) Bank-Intermediated Obligor Import L/Cs 0.38% Export L/Cs 0.05% Loan for import/export 0.80% Performance Guarantee 0.47% Credit Insurance (Net claims / Exposure) 0.16% Source: ICC Trade Register 2017, ICISA Lack of control of companies exposure on risks 0,5% 0,4% 0,3% 0,2% Net Claims / Exposure (%) ICISA Members 0,1% 0,0% 200820092010 2011 20122013201420152016 Source: ICISA 11
Trade Finance : Risks / Payment Practices 40% - 50% of B2B invoices are not paid on due date Overdue periods around 22-28 days Overdue payments trigger highly costly actions Regions / Countries Ave. payment term + delay (days) % of unpaid invoices at the due Europe 32 + 22 40.0 % Germany 23 + 18 39.2 % Italy 49 + 29 46.4 % NL 26 + 17 36.3 % France 34 + 23 43.9 % Spain 46 + 25 44.8 % UK 24 + 24 46.1 % Poland 27 + 21 34.6 % Americas 28 + 28 47.0 % USA 20 + 32 51.0 % Canada 26 + 24 41.2 % Mexico 33 + 29 52.4 % Brazil 31 + 28 42.0 % Asia Pacific 32 + 25 44.0 % Australia 21 + 28 50.0 % China 35 + 24 43.0 % Japan 45 + 16 26.3 % Source: Atradius Payment Practices Barometer - Period 2014-2017 12
Table of contents 1. Global Trade Market 2. Global Supply Chain & Trade Finance Today 3. Challenges in Trade Finance 4. Shifting in Global Trade Development 13
Challenges in Trade Finance (1) : Complex interactions for banks & credit insurers Process inefficiencies Delivery and payment Lack of insight into operational flows Interoperability within the supply chain Operational frictions Too many networks to connect with digital trade 14
Challenges in Trade Finance (2) : Unmet Demand on Trade Finance Still substantial unmet demands on Trade Finance, especially in SME segments Estimated global Trade Finance gap in 2016: USD 1.6 trillion Financing SMEs are often high complexity, yet are low scale Proposed and rejected trade finance transactions Driven also by regulation, banks reduced their exposure on SMEs 48% 39% 52% Proposed Rejected Lacking the skills and resources to handle SME transactions 26% 12% 22% MNEs and Large Corporates Midcap Micro and SMEs Source: WEF, ADB 15
Challenges in Trade Finance (3) : Regulatory Frameworks Growing concern over a host of regulations : e.g. Basel III (Basel IV) / Solvency II Total Loss Absorbing Capacity IFRS 9 Policing & Crime Act 2017 Incumbents (Banks, Insurance) Know-your-customer GDPR Sanctions Anti-money-laundering Additionally, regulatory frameworks for new service propositions with digital technology are still under discussions 16
Challenges in Trade Finance (4) : PSD2 Second Payment Services Directive (PSD2) is a directive replacing the Payments Services Directive (PSD) passed in 2009 focusing on: Market efficiency Consumer protection Competition and choice Security Obliging banks to release their data in a secure, standardized form, so that it can be shared more easily between authorized organizations online Legal framework for all payments made in the EU with the purpose of making these faster, more efficient and easier to use for European consumers and payment services providers. 17
Table of contents 1. Global Trade Market 2. Global Supply Chain & Trade Finance Today 3. Challenges in Trade Finance 4. Shifting in Global Trade Development 18
Shifting in Global Trade Development Current status Trade is the biggest market in the world : Expected to be USD 18.7 trillion in 2020 Trade brings additional business to participants Financing is the fuel for global trade : 80% - 90% of trade is financed Trade finance is a recurrent source of revenues Banks Credit Insurers play a fundamental role in trade credit e.g. Payment execution Risk assessment Risk mitigation Financing Collecting Expanding sales 19
Shifting in Global Trade Development Analysing the main trend themes it is obvious, that banks and credit insurers perceive the shift in trade restructuring Source: Main Trend analysis Nordea 20
Shifting in Global Trade Development Fundaments are changing 1. Digitalization and platformisation of supply chain and trade financing is underway 2. Managing risks and payments effectively becomes more and more relevant for corporate profitability 3. Core competencies of banks and credit insurers are critical in the supply chain 4. New sources of information and new players can disrupt the market chasing traditional players 21
Shifting in Global Trade Development We are currently living at the edge of new global trade patterns driven from global digital platforms and there are clear signs of this shift Disruptive The global B2C e-commerce platforms like Alibaba and Amazon are fully stepping in the B2B supply chain Market capitalisation of such platform-oriented companies exceed traditional banks 2017, market capitalization, $ billion Source: Corporate Performance Analytics by McKinsey Source: Corporate Performance Analytics by McKinsey Evolutionary Parts or the full supply chain will be optimised and digitalised e.g. trade finance platforms, logistics platforms To avoid the disruptive scenario and evolve their business models banks and insurers needs to play an active role in building trade platforms 22
Shifting in Global Trade Development Disruption is on its way Amazon now hosts more than 2 million 3rd party sellers in 2017 Global B2B e-commerce / Gross merchandise volume 2013 to 2017 (USD bn) Amazon Lending surpassed $3 billion in loans to SMEs since the program launched in 2011 5.826 6.449 6.906 7.300 7.661 Alibaba is also supporting SMEs expand business to global markets Alibaba launched its Indian trade finance program to boost logistics, trade finance, checks & inspections for wholesale trade 2013 2014 2015 2016 2017 Source: Statista Digital Market Outlook 2017 BUT there are good examples for evolutionary developments in trade 23
Shifting in Global Trade Development Examples of evolutionary developments Maersk IBM s joint venture provides more efficient and secure methods for conducting global trade using blockchain technology, introducing an open global trade digitalisation platform Supply chain platform which connects financial institutions with suppliers to offer trade financing directly through their platform Lenders are granted access to granular data that enables them to underwrite the loan. 24
Shifting in Global Trade Development Trade on platforms from an Atradius Perspective 5. Performance completed: smart contract release V- value to supplier Credit insurers Banks Collectors 3. Risk transfer payment Seller Smart contracts Buyer 1. Supplier creates contract Distributed ledgers Carriers 2. Buyer validates contract Customs office 5. Apply regulations 4. Shipment tracked and delivered to Buyer 25
Atradius use case - We.trade Founded by 9 banks (Open to more participants) Seller Buyer Delivery Supported by Trade finance blockchain platform connecting the entire trade ecosystem Quick, easy and paperless transactions we.trade Payment & Invoice Financing we.trade platform Bank Payment Undertaking Automated fulfillment of end-to-end settlement with full KYC Build in phases (first optimising the Trade Finance facilities for the banks (Q 2 2018), than adding further services like CI, logistics on board (Q 1 2019) Seller s Bank as a potential partner Buyer s Bank to support with Credit Insurance, Company reports &ratings Collections etc 26
Atradius use case - Kemiex First online global trading platform for pharmaceutical ingredients Kemiex PLATFORM Kemiex INSURED SELLERS = supplier & creditor 1 Company Vetting Credit Information) Monitoring services 2 Kemiex BUYERS = Debtor 27
Advantages of the digital environment for Banks & Credit Insurers If banks and credit insurers are able to transform their business model in fostering on technology and digitalization, strong opportunities are ahead of us Savings through process automation Reduce credit losses through improved data sources Improved capital position through diversified portfolio 50% 40% 30% Improvement potential Credit Insurers in 10 years Growing market participation through globalisation and new segments (SME) 20% 10% 0% 20% 15% 20% 40% Savings Credits losses Capital finance Growing market Source: Atradius estimates 28
Evolutionary Development for Banks and Insurers in Trade Both the business fields of banks and Credit Insurers are getting more and more closer through the new trade frameworks in digital transformation. A lot of opportunities to work together Banks Large customer base Reliability endorsed by regulations Need to meet the demands in the new global trade framework Expertise in Financing FinTechs Technological innovator Need to build reliability in market and access to customer basis Credit insurers Huge database Sophisticated risk assessment infrastructure Leading players have a global network Collections Trade Platforms Providing simpler trading framework Enormous customer base Analytics 29
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten - Bill Gates 30