Fintechs and the financial side of global value chains – Statistical implications
Document prepared for the Working Party on Financial Statistics to be held on 6 and 7 November 2017 at the OECD Conference Centre
Structural changes to the trade finance market occurred during the last decade: Fintechs – Financial technology companies – have been established and become successful in segments traditionally occupied by banks; and alternative trade finance solutions, such as supply-chain financing (SCF), have emerged.
Trade finance contributes significantly to the growth and changing pattern of international trade. Trade in intermediate goods has grown rapidly. It has a high level of reliance on new instruments of trade finance. Periods of stress and disruptions of trade finance during the Global Financial Crisis posed systemic risks to world trade leading the March 2009 G-20 summit to commit $250 billion to support trade finance and to call for better data: “…the lack of a comprehensive international dataset for trade finance during the crisis has been a significant and avoidable hurdle for policy-makers to make informed, timely decisions. […] It is recommended that multilateral agencies coordinate and establish a comprehensive and regular collection of trade credit in a systematic fashion.”
Estimates on global trade finance are scarce and very divergent. Estimates by the WTO (for 2009) suggest that the global trade finance market (including credit insurance) is about 80 percent of global merchandise trade. For 2015, this would roughly be $17 trillion in trade finance flows, with an estimated outstanding stock amount of $6 trillion (assuming an average duration till maturity of 4 months). The estimated outstanding stock of other investment trade credits, based on BOPSY for 2015, is about $1.14 trillion.
To ensure that macroeconomic statistics mirror global realities and maintain policy relevance, a stepping-up of trade finance statistics is needed. Current statistical frameworks do not adequately capture the trade finance market. Trade finance instruments currently included in macroeconomic statistics are spread over different functional categories, are combined with other instruments, and often only proxied or imputed in data compilation. No separate breakdown is available on third party supply chain financing, and current data do not capture the great variety of traditional and new SCF instruments. A stand-alone, exclusive (satellite) trade finance dataset to support informed and timely policy decisions may be needed to respond to the call by policy makers, and existing statistical frameworks beyond the international accounts will need to be updated to reflect (new) types of trade finance instruments and providers.
The trade-financing market and relevance for (IMF) surveillance
The reduction of world trade in the 2008-2009 financial crisis was associated with breakdowns in traditional trade finance and disruptions in global supply chains’ finance. The crisis led to adverse feedback loops between the financial system and the real economy. Global Value Chains (GVCs) have become dominant features of world trade. They are complex, interconnected, multi-layered networks of suppliers, buyers, service providers, and customers. GVCs have changed the dynamics of financial stability and thus call for special recognition in surveillance. Macroeconomic effects could include bankruptcies, layoffs, and contraction of trade.
Financial disruptions at the level of a supplier can have ripple effects throughout the entire value chain. Upstream companies are vulnerable to the risks and resilience of small and medium-sized companies (SMEs) in their supply chains, as critical product components are often sourced from SMEs abroad. Constraints on cash flow affect investment and growth. Financial shocks may affect trade financing for SMEs, especially in emerging markets.
For surveillance, better data are needed to track and examine the evolution of the trade finance market, and evaluate ongoing market dynamics. Stability analysis will extend to the new market entrants, the use of securitization markets to raise trade finance capital, and increased competition in the supply chain market. For example, Fintechs could qualify as (money-creating) depository corporations, funding themselves with short-term loans and providing loans to goods suppliers. Further insight into third-party financing would be useful to monitor the role and impact of new players, and the extent to which these companies themselves could become the origins for disruptions in the supply chain market. There are no readily available data covering the trade finance exposures of banks or other financial intermediates.
The changing trade finance environment
Fintechs – new players in the trade finance market
Fintechs are non-bank institutions that use advanced technologies to perform traditional banking activities. Increased regulations for banks have made it less attractive for them to do business in certain jurisdictions with stricter compliance rules regarding transparency, consumer protection, and capital requirements. Providing financial support to SMEs, especially in developing countries, requires specialized risk-assessment and evaluation models that banks are not necessarily willing or able to adopt.
New partnerships between Fintechs and banks have been established. The International Chamber of Commerce (ICC) noted in its Global Survey on Trade Finance 2017 report, that Fintechs count major financial institutions among their shareholders.
Fintechs use big data and cloud-based technology to offer new and established services in trade finance, marketplace lenders, micro-lending, and “robo-investment platforms.” Most of these startups have not yet been subject to the same regulatory scrutiny and constraints as conventional banks.
Regulators are in early stages to catch up with these developments. Blockchain is another emerging game changer. In a nutshell, Blockchain is a digital ledger of trade related financial transactions traceable in real time which is shared among participants with access rights. While traditional trade finance requires each participant to maintain their own administration and databases, Blockchain integrates the information in one digital document. Payments can be monitored by both parties, and the bank can see both the original contract as well as the order placed between companies and can verify both authenticity and state of fulfilment at any given time.
Currently, there is no comprehensive global dataset covering trade finance statistics and the G-20 called for a comprehensive collection of trade credit data. Statistics currently only separately distinguish trade credits as part of other investment. This instrument is narrowly defined as credit extended directly by the suppliers of goods and services to their customers (BPM6 5.70). Therefore, trade credits do not include financial intermediation (other than the settlement through the banking system). This definition does not cover trade financing provided by third parties/financial intermediaries, such as direct working capital financing by suppliers, and new SCF techniques with financial intermediaries added back to the equation.
The traditional letters of credit category is not considered a financial instrument until documents are received and funds are transferred by banks; at that point this category is included under deposit-taking corporation loans not differentiated as trade finance.
A comprehensive collection should be based on the umbrella term ‘trade finance’ and take into account:
traditional bank-guaranteed instruments (letter of credits and other documentary collection instruments), which are off-balance sheet;
other bilateral working capital financing between suppliers and financial intermediaries (such as export-related working capital lending, pre-export finance, supplier credits, receivables discounting, or forfaiting);
conventional open account trade financing, i.e., directly extended trade finance loans by the supplier to the buyer (currently trade credits in other investment);
newer open account SCF instruments that include the financing of a supplier by a bank or a nonbank financial intermediary (based on standardized definitions drafted by the GSCFF);
information about export credit insurance provided by public export credit agencies or private insurance firms to bridge the gap or cover the risk.
A stand-alone comprehensive (satellite) trade finance dataset to support informed and timely decisions can be considered to respond to the call by policy makers. This dataset will also facilitate tracking the dynamics of the trade finance market. The statistical frameworks (BPM6, 2008 SNA, MFSM) would need to be updated to reflect trade financing instruments and SCF providers.
A comprehensive dataset on trade financing could also shed light on the different regional patterns, because the nature of trade finance varies widely from country to country and region to region due to distance from trading partners, product types, and the efficiency of local market practices.
This document was prepared by Cornelia L. Hammer, Real Sector Division at the International Monetary Fund. The IMF is currently drafting a chapter on the financial side of global value chains for the Handbook on Accounting for Global Value Chains by the UN Expert Group on International Trade and Economic Globalization Statistics (EG-ITEGS).