Behind the headlines about inflation and interest rate hikes is an issue that has largely gone unnoticed in the finance sector – a formidable funding gap for businesses.
It’s reported that pre-Covid, smaller businesses in the UK faced a £56bn shortfall, a void which has potentially widened in the aftermath of the pandemic. On a global scale, the World Economic Forum estimated a staggering $2 trillion funding gap in cross-border trade.
What these figures suggest is an untapped reservoir of opportunity – one that has been, until now, largely overlooked by financial institutions. Once deemed cumbersome and document-heavy, trade finance could be a goldmine waiting to be discovered. So the question arises: could banks without a trade finance proposition seize this opportunity to develop a comprehensive solution that addresses this gap and turn it into a profitable venture while operating within their risk framework?
Evolution of trade finance
Historically, trade finance was a labyrinth of documentation, a maze navigated by vast teams diligently scrutinising paperwork in order to manage the risks. This included not only the risks between buyer and seller but also the risks inherent in cross-border transactions.
However, this image of trade finance is slowly becoming archaic. The advent of technology has paved the way for a leaner, more efficient trade finance model. Powerful tools now exist that allow for the mitigation of risk without the need for cumbersome back-office teams.
The automation of complex processes and the harnessing of artificial intelligence have enabled the creation of simplified, accessible trade finance propositions. This sea change empowers clients to develop their supply chains and build their businesses with increased vigour and confidence.
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The once-daunting prospect of trade finance is becoming more manageable. Today, banks can make strategic use of trade finance solutions, offering clients a more effective way of managing cross-border trade and bridging the aforementioned funding gap.
The digitalisation of trade finance processes also brings with it increased transparency, a factor that could help reduce fraudulent activity and bolster the confidence of buyers and sellers alike.
Yet, despite these advances, the question remains: why are UK financial institutions hesitant to embrace this opportunity? Are they reluctant to navigate this unfamiliar terrain? Or is it a case of underestimating the transformative potential of technology?
It’s fair to say the current landscape holds a significant, yet untapped, opportunity for UK financial institutions. The growing funding gap in cross-border trade is not just a challenge but an invitation to innovate, an opportunity to explore new avenues and a prospect for businesses to grow.
Richard Carter is a Consulting Director of Finativ