Demica identifies key trends in trade finance amidst global economic shifts
Amidst ongoing high interest rates and geopolitical flux, Demica, a leading fintech supporting the trade finance programmes of the world’s major banks and corporations, offers its 2024 forecast for the sector. This analysis delves into anticipated trends and evolving strategies in supply chain finance, highlighting the critical role of banks and fintechs in shaping a resilient global economy.
1: Banks will invest behind long-term customer relationships amid economic uncertainty
Persistently high interest rates in 2024 will prompt banks to concentrate more on fostering and maintaining long-term relationships with existing customers. With an expected increase in corporate insolvenciesor bankruptcies due to escalating borrowing costs, banks will likely pivot towards working capital financing as a preferable alternative to traditional credit facilities for their customers. This preference is driven by its direct connection to underlying commercial activities and a comparatively lower risk profile, making it a more suitable option in a climate of economic uncertainty.
2: Increased direct origination of supply chain finance deals by banks and non-banks
The coming year is likely to see a strategic shift in the funding markets for supply chain finance. Banks that have built their assets through sub-participations will accelerate the origination of these transactions directly. In light of the persistently high interest rate environment, this move is not only driven by a need to build customer intimacy and capture more margin but also by the necessity to manage the impact of increased borrowing costs on profitability. Large private credit funds that have been building funding platforms are starting to reach scale and compete, notably in the US where pressure has been felt at the regional banks following the collapse of SVB and others.
3: Shift of volumes into open account drives investment in technology
In 2024, banks are expected to significantly ramp up their volume of supply chain finance assets. This strategic shift responds to the evolving global trade finance landscape, which is moving away from traditional documentary credit methods towards greater reliance on open account trading. Open account trade accounts for approximately 80% of all international trade, according to the Wolfsberg Group, International Chamber of Commerce (ICC) and BAFT . Banks are set to focus on enhancing operational efficiency and risk management by integrating advanced technological solutions. Key developments will include the implementation of portals and digital onboarding platforms featuring straight-through processing, which are vital for reducing the risk of fraud and errors inherent in open account finance systems. These technological advancements are crucial for maintaining banks’ profitability in trade finance and for navigating the complex landscape of modern financial transactions.
4: Continued expansion of fintech partnerships in trade finance
The 2024 forecast anticipates a significant increase in partnerships between banks and fintechs. These collaborations are essential for replacing outdated legacy systems, enhancing customer experiences, and accelerating the development of new products. Global trade bank leaders continue to emphasise ‘trade transformation’ projects as integral elements of their future strategies. In India, innovative fintechs like CashFlo, CredAble, FinAGG, Vayana, and Veefin are revolutionising supply chain financing. These companies are pioneering solutions in AP automation, working capital tech platforms, and comprehensive supply chain finance technologies.
Fintech companies are integrating financial services into their sales models, creating new financing opportunities across various industries. This innovation requires strong partnerships between fintechs and traditional banks, as well as active engagement with the broader financial market, to effectively deliver services. Fintechs are already partnering with key players in the financial ecosystem, significantly contributing to the growing market demand. Their collaborative efforts are leading to the rapid adoption of new technologies in the financial sector, particularly in emerging markets like India, where the absence of legacy systems facilitates faster integration of innovative solutions. Beyond market growth, these partnerships are proving beneficial in enhancing financial performance and stability for businesses, especially in times of economic volatility.
5: Sustainability agenda in supply chain finance takes shape
In 2024, sustainable finance is set to take a significant leap forward, particularly in emerging markets. This year is expected to witness innovative approaches to extending supply chain finance to smaller producers and suppliers in emerging economies. Partnerships with supranational institutions, such as Demica’s with Afreximbank[AT8] , will play a pivotal role in bringing financing solutions to more businesses through shared banking infrastructure. These initiatives will be instrumental in democratising access to working capital across the continent, aligning with the broader development goals of global financial institutions. In developed markets, funders will continue to provide preferential rates for programmes supporting the supply chain in industries that drive decarbonisation.
Maurice Benisty, chief commercial officer, Demica, comments: “The banking sector in 2024 will continue to face challenges from global volatility. However, our analysis indicates a strong push towards innovation and adaptation, with banks and fintechs collaboratively shaping more flexible and efficient supply chain finance programmes. These initiatives, while navigating economic headwinds, are set to mark significant progress in sustainable finance and democratisation of financial access in emerging markets.”
