Global trade is expanding at an annual clip of 7%-9% but banks' involvement in the financing of the trade is decreasing. 50 years ago, letters of credit accounted for 80% of global trade finance, now they are less than 20%.
Banks are thus looking at how to reinvolve themselves with their clients' supply chains and so boost their role in global trade.
In Asia, the position is heightened because due to the inefficiencies in the system, banks still play a larger role in trade than they do in other parts of the world. But this just means they have even more to lose.
Addressing a panel discussion titled 'Corporate supply chain management - How soon will co-operation deliver returns?' the general manager of forex and deposit business operations department at Mizuho Corporate Bank, Akira Shima, spoke of the difficulties of achieving this integration in Asia. Huge differences in the rules, regulations and different degrees of IT standards all made it extremely difficult for banks to fully integrate with their clients across the region.
However he pointed out that in China, over 50% of the country's exports are actually undertaken by subsidiaries of foreign companies. "Japanese companies utilize their Chinese subsidiaries for the world exports and other companies from other countries do the same," he said.
This means that there is a large scope for banks to try to integrate with their client's supply chains within China, even if it is a process that might lose them money. "Banks have no alternative but to develop greater intimacy with their clients," he said. "Corporates want integrated electronic data interchange and banking services to harness the supply chain."
Akira is also a member of SWIFT's corporate access group that has been discussing how to get more corporate users onto SWIFT. In this role he has canvassed the views of many leading Japanese companies. He says that the companies have told him that banks need to change the way they do business or the companies will be forced to look for other partners in their supply chains.
However due to the market inefficiencies in Asia, banks still make a lot of money by transacting the old way. Thus it is easy for them to sit back and do nothing. "Trade and payments are still profitable for banks in Asia, [unlike in the rest of the world]," he said. "So the temptation is to be relaxed and do nothing."
He calls this approach short sighted saying that concentrating on today's profits will lead to no profits in the future. He says that from his experience, one of the best ways for banks to start integrating with their corporate clients' entire supply chains is to remove the internal silos between domestic payments, cross border payments and trade finance and to appoint a special team above those silos to lead the integration.
Corporates themselves have a role to play centralizing their own supply chain management and extending it out to the vendors and suppliers. This will allow banks to take a greater role and be more helpful in financing the corporate supply chain.
