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Digital Disruption: How FinTechs Are Outpacing Traditional Banks in Trade Finance

Trade finance has always been pivotal for global trade, shoring up global supply chains and addressing liquidity concerns. However, there has been a significant shift in its landscape in recent years. While traditional banks once dominated trade finance, FinTechs are rapidly ascending due to several prevailing industry trends.

FinTechs: Pioneers of a Digital-First Era

As in many other industries, the COVID-19 pandemic expedited the digital transformation of the trade finance sector. Data from Statista highlights that the trade finance deficit recently rose to $2 trillion, up from $1.5 trillion before the pandemic.

As the world’s trade infrastructure felt the strain, it became clear that established systems and conventional bank services were lagging behind, enabling the growth of the trade finance gap. Many traditional banks struggled to adapt quickly enough, causing disruptions and delays in trade financing processes.

Enter FinTechs – with digital, cloud-centric solutions that boosted the accessibility of trade finance, which particularly benefited SMEs in emerging markets. In contrast to banks, burdened by paperwork and red tape, FinTechs harnessed innovations like open banking, digital data capture, and cloud-based storage.

By Oliver Carson, CEO and Co-Founder of Universal Partners

Oliver Carson, CEO and Co-Founder of Universal Partners

This gave way to a much more refined, agile process – introducing a modern approach that has effectively addressed the inefficiencies of traditional trade finance, heralding a new era for the industry.

Tailored Financial Solutions for SMEs

For decades, traditional banking practices, with their rigid criteria and legacy systems, have often disadvantaged SMEs. The innate nature of SMEs, characterised by limited credit histories and sporadic cash flows, has frequently resulted in declined trade finance applications.

However, FinTechs recognised an overlooked opportunity. Rather than viewing SMEs through the same lens as traditional banks, FinTechs delved deeper into understanding their unique needs, challenges, and potential.

FinTechs saw SMEs’ requirements and developed tailored financial solutions, such as non-recourse financing. This not only placed the responsibility of payment recovery squarely on the financiers but gave SMEs the crucial working capital they needed without the usual risks.

The success of this approach is evident in the numbers, with FinTechs able to offer a faster, more cost-effective digital service. According to Bain & Co’s projections, by serving these previously underserved SME sectors, FinTechs could earn an extra $2 billion annually in trade finance fees and potentially drive trade volumes up to a staggering $1 trillion by 2026.

A Battle of Agility and Reputation

Traditional banks, once dominant, are now facing challenges in the trade finance domain. Regulatory measures like the Basel III framework, designed to ensure financial stability, have inadvertently decreased the operational flexibility of banks, making it harder for them to adapt swiftly to changing market dynamics.

Compounding this is the banks’ cautionary approach toward SMEs, and this conservative stance has not only limited the growth potential of these enterprises but has also dented the banks’ image as holistic financial service providers.

In contrast, FinTechs have shown remarkable agility in adapting to the current market needs. Their strategies, inherently more favourable towards SMEs, have filled the void left by traditional banks. By leveraging the latest technological advancements, FinTechs have introduced enhanced security measures and streamlined operations, providing a more user-centric experience.

While banks recognise the evolving landscape and are making concerted efforts to innovate with platforms like ‘we.trade’ and ‘Trade Finance Gate’, there’s a palpable sense the institutions are trying to regain lost momentum. The challenge is not just about introducing new tools or platforms but fundamentally reshaping their approach to be more inclusive and adaptive, much like the FinTechs they now compete with.

In summary, FinTechs, with their proactive models and emphasis on customer needs, are continuously making their mark in the trade finance landscape. For traditional banks, the onus is now twofold: not only to innovate but to re-establish the trust of SMEs who now see FinTechs as more dependable allies. As the financial world moves ahead, agility, innovation, and customer-centricity will be at the heart of success, and at present, FinTechs are leading the charge and will find themselves the trusted partners of the global giants of the future.

CategoriesAnalytics Banking as a Service (BaaS) IBSi Blogs IBSi Flagship Offerings

What’s the difference between BaaS and embedded banking? Quite a lot

The problem with a loosely defined term is that its meaning can become stretched. Anyone who has described a stadium-filling act such as Ed Sheeran as “indie” because he plays a guitar is guilty of this.

Banking-as-a-Service (BaaS) is just such a loosely defined term.

Some providers have stretched the term to encompass services such as Open Banking, card platforms, and APIs. This confusion is further exacerbated when aggressive marketing campaigns overlap BaaS with another fast-growing term: embedded banking. Using one term to describe all of these disparate services makes about as much sense as using the same word to describe a multi-platinum-selling artist and the band playing to three people in the local pub.

By John Salter, Chief Customer Officer at ClearBank

John Salter, Chief Customer Officer at ClearBank

 

Confusion over these terms is already widespread. According to Aite, a third of fintech providers do not believe there is any difference between embedded banking and BaaS.

There are, however, important differences between BaaS and embedded banking. Businesses need to understand the differences between these two concepts if they are to understand their own responsibilities, especially around governance and compliance, and what it could mean for scaling up or adding new features in the future.

Breaking it down: What’s the difference?

Despite its name, BaaS does not necessarily mean working directly with the holder of a banking license or that the services provided require a license. Instead, providers offer banking-related services and infrastructure, sometimes on behalf of a licensed bank, to firms including fintech startups, e-commerce platforms, and even other financial institutions.

BaaS is a “push” model. A banking product is created and offered “as a service” to a potential user. BaaS is the distribution of banking products to financial institutions and non-financial institutions. For example, non-bank players like Uber or Lyft work with a BaaS provider that is responsible for payments, cards, accounts, and loans. However, who is responsible for compliance and governance can vary between providers and use cases.

On the other hand, embedded banking is on the “pull” side. This simply means that financial services and products are embedded into financial or non-financial platforms, such as e-commerce and mobile banking applications. Embedded banking is the provision of a banking service directly from the holder of a banking license and embedded directly into the user experience. A typical example would be the Buy Now Pay Later (BNPL) functionality online shops have included at the point of purchase for customers to access installment payment options.

Do businesses need to understand the difference?

Should anyone care about this? This is a good question as most businesses won’t start with the question of whether they want BaaS or embedded banking. In fact, they’re unlikely to ask this question at all. Instead, they will have specific requirements for banking or banking-like services, and approach the right provider with those needs in mind.

So, who cares? Aren’t we simply over-analysing the technicalities?

It may seem so, but there are important implications for regulation and who is responsible for compliance.

BaaS providers may have a banking licence, or they may hold an EMI licence. Embedded banking providers are, by definition, holders of a banking licence. It’s important when entering into any agreement that the customer-facing business understands the regulatory nature of the agreement—who is responsible for compliance and KYC, how funds are safeguarded, and whether they are protected by a full banking licence. There is already concern from regulators around where consumers’ money is held and how safe it is—is there enough transparency? Knowing the difference is important, especially when the “gold standard” is when funds are held by a bank in an embedded solution.

Businesses aiming to enhance their offerings with financial services have the potential to create differentiated services that set them apart from the competition. But working with the right partner is crucial to success. When evaluating a partner, businesses must consider the range of services on offer, technology implications, compliance, security, and more.

So, a clear understanding of the differences between BaaS and embedded banking will make it easier for any business to decide what is right for them and their customers.

CategoriesAnalytics ESG IBSi Blogs IBSi Flagship Offerings

A cleaner, greener future; Why fintech can lead the way to greater sustainability

With the Intergovernmental Panel on Climate Change (IPCC) delivering a “final warning” on the climate crisis earlier this year, we’ve reached a point where green changes are needed without further delay. The urgency for investments made to be directed by sustainable hands is urgent, as we are now at “a code red for humanity.” Historically, the finance sector has always been the principal driver for incorporating lower-carbon practices, so to safeguard a green transition and avert further damage from the current environmental practice, we must look to them to lead the way.

By Jeremy Baber, CEO of Lanistar

Jeremy Baber, CEO, Lanistar

The finance sector has invested in energy-efficient and work-efficient technologies that have completely revolutionised both their own sector and beyond. The rise of fintechs, alongside investments in the use of artificial intelligence (AI), the Internet of things (IoT) and machine learning (ML) are all ways in which finance has been ahead of the mainstream in adopting newer, cleaner technology. Even the rise of blockchain that we are seeing helps proliferate cleaner technology throughout their industry and beyond.

The time for sustainable net zero or even net negative global CO2 emissions is now to ensure a sustainable future before it is too late. With environmental consciousness currently at an all-time high, both from a governmental and consumer standpoint, we need fintechs to take the helm in mediating a smooth transition towards greater sustainability. The responsibility is upon fintechs to mediate this transition to greater sustainability.

Investing in sustainability is far and wide

Fintechs have always enabled innovation and contributed positively towards sustainability for a lower-carbon world, particularly as they aim to disrupt traditional finance operations in a customer-focused way. The rise of financial technology over the past decade has created a new era of potential for sustainable investing, particularly in ESG investing, green financing, and carbon neutrality.

Digital payment solutions can lead the charge toward sustainability and a low-carbon economy. The carbon footprint brought by physical currency – i.e., its creation, transportation, disposal, etc. – is minimised or eclipsed by digital cash transactions. Utilising digital removes the need for both plastic cards and paper transactions, streamlining transaction processes in an environmentally conscious way by reducing company waste.

Consumers want a cleaner conscience

Retail Week recently reported over half of UK consumers are more likely to buy from a retailer or brand with a strong ethical and sustainable ethos, with Millennials more likely to be eco-conscious and, by contrast, the Boomer generation less so than other generations. The new market is a more sustainably-conscious one, and fintechs should be looking to capitalise upon it. Gen Z and millennials want greater transparency regarding tracking and reducing their overall impact on the environment.

Recent research from the open banking platform Tink revealed that 40% of customers wish to track impact through services provided by their bank, and therefore holding their retail businesses of choice accountable is a big part of this, especially when many will stake green claims for consumer trust but not follow through. Consumers want a clear conscience when it comes to their personal impact, and that is reflected in the retailers they choose to shop with.

Currently, there is a significant gap in the market for innovative tracking solutions, with Tink’s research suggesting a significant number of customers would switch purely for access to tools to track their carbon footprint. Whilst 30% of surveyed banks have expressed interest in offering these tools, currently, these institutions have zero plans to actually do so. Fintechs can hold feet to the fire in this regard and act in the best interests of their consumers as an intermediary for directing businesses to change. It is easy to make green claims to gain customer support, but fintech’s pushing for responsibility for the sake of their customers helps motivate action.

A business incentive is still needed

No operational change can happen without the final say of the business CEO, and no CEO will consider investing in an operation that doesn’t have some business advantage to go with it. In highlighting the rising consumer demand, business leaders can feel more secure in adopting innovative yet lower-carbon alternative technology to gain customer rapport. As customers are more discerning than ever, they are more likely to scrutinise green credentials for authenticity before committing to a provider.

By contrast, change must be meaningful and not just surface-level support. It is no longer as simple as claiming to support green initiatives; real action is needed at every step. With every initiative to attract and secure interest from target consumers, businesses must follow through or their customers will quickly seek a stronger alternative elsewhere. And whilst many bigger fintechs have greater resources to allocate to sustainable initiatives, few are actually choosing to do so.

SME fintechs have greater mobility for impactful business moves

Where financial organisations with bigger pockets may have the power to push for greener tech across the board, they seldom have the mobility to enact changes across their operations. Yet the agility of smaller fintechs to deploy sustainable initiatives has meant that they can often overtake and lead the charge for greener decisions across operations. Smaller underdog competitors suddenly have an incredible advantage with this ability to outmanoeuvre their larger counterparts limited by traditional operations.

As the fintech sector continues to mature, business initiatives can continue to refocus the ecosystem away from short-term successes and instead towards long-term green practices. But without critical support from the UK government to support and protect green initiatives, we cannot make meaningful industry change. An updated policy is needed – without the demand for profit – to best help the finance sector to put pressure on change and secure a cleaner, greener future.

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