International trade plays an essential role in our everyday lives: in both developed countries and emerging markets, a large part of the products and services result — either partially or totally — from commercial dealings with other countries.
Although trade flows have been impacted by economic cycles and financial crises, its growth over time has been robust and has generally fared better than GDP. This trend is expected to continue over the next decade, although the drivers will be very different from the preceding period. The Asia-Pacific region, which together with Europe and the United States is already a powerful force in international trade, will see its influence increase; decentralized production chains will be overhauled; in the (until now) large net exporters like India and China, internal demand will play a major role; and the impact of the increased protectionism of recent years will materialise. Although the most tangible feature are the tariffs imposed by the U.S., greater uncertainty lies with events like Brexit due to is potential for disruption.
International trade goes hand-in-hand with complexity, obstacles and uncertainties, often unavoidable, that arise from factors that are outside the control of the commercial parties. Examples include the jurisdictional differences between importer and exporter, the need for —often times long-haul— transport, and customs practices, to name a few. All this reflects higher risk (whether it be currency risk, country risk, a buyer’s credit risk, the risk associated with a vendor’s fulfillment, transportation or legal risks) and longer delivery times, all of which increase the importance of financing.
Banks support international trade with the transaction services they offer; they have a wide range of solutions —either bundled with financing options or not— to help manage the risks previously mentioned. The complexity of solutions varies from the simplest and/or standardized to those that are structured for a specific transaction. Those that are the most effective at mitigating risk, such as letters of credit, use documentary requirements to incorporate relevant milestones from the manufacturing processes and/or processes related to the supply of goods and services. Such milestones may include when the product leaves the manufacturing plant, international transportation start or end points, customs activity, product start up, or even the warranty period. Finally, the services of a correspondent bank rounds out the process by managing the transactional relationship between financial institutions, a key element for the transfer of risk.
Banks support international trade with the transaction services they offer
This symbiosis between financial transactions and commercial dealings, together with our decades of experience in trade finance, puts banks like ours —that are active in international trade— in a privileged position where we can make the most of technological advances. The challenge doesn’t stop with making life easier for customers and reducing their risks. Rather it includes the ambitious goal of opening international trade to all players, especially small and medium-sized enterprises. SMEs are precisely the companies that tend to be excluded from these types of transactions. This is due, on one hand, to a lack of confidence between importers and exporters, which reduces the number of commercial transactions, adversely impacting prosperity generation. On the other hand, banks often lack confidence in these smaller players during the initial phases of the production process, when purchase orders have not yet been translated into payment documents, leads to insufficient funding.
Today, we have a lot of tools in various degrees of development at our disposal. We have become accustomed to revolutionary innovations such as using digital channels to supply our services and to check the status of transactions, and digitize documents.
Even though we still have not exploited the full potential of this first digital revolution, we are already beginning to see the initial signs of the next revolution: blockchain applications, which are often driven by banks. The potential of this technology lies in its radical transformation of the way we establish confidence in transactions, confidence that is essential in trade finance. Despite how it may seem, these revolutions are not isolated, but rather complementary. The success of the new ecosystems, whether blockchain-based or built on alternative technologies, will require that interactions as well as documents are digitized.
* Orlando Guntiñas Rubio, Strategy & Business Development in BBVA's Transaction Banking department