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Weighing Pressures on Trade Finance Pricing and Fees

By Karen Lynch

Trade finance pricing is an area of increasing uncertainty in international trade and supply chain finance, amid changing regulatory, market, and technology conditions, according to a recent report from the International Chamber of Commerce's (ICC's) Banking Commission. The report, titled Rethinking Trade & Finance 2017, combined survey data with forward-looking recommendations on trade finance.

The report's good news is that interest rates charged by banks and other service providers for financing big export deals decreased in 2016. Bank fees for trade finance also dropped, according to a survey included in the report (the "TXF-ICC Global Export Finance Survey"). However, the report's bad news is that banks may not be able to sustain these lower prices due to their own cost pressures.1

 

In fact, the ICC Banking Commission is calling for a re-evaluation of the pricing of trade and supply chain finance. Its perspective is that high-value trade finance services and solutions are often underpriced in product fees or commoditized in a competitive arena. "The time may be ideal for the start of a value-driven discussion around the price of trade financing," the commission said, citing the need to ensure the long-term viability of the businesses providing trade finance.2 For now, it is unclear what this stance could mean for trade loans and other instruments of trade and supply chain finance, such as factoring, bank guarantees, trade credit on open account transactions, and letters of credit.

 

Surveys Reveal Trade Finance Trends

 

By the ICC's estimate, "bank-intermediated transactions now represent more than a third of world trade, equal to trillions of dollars each year."3

 

In this context, about a quarter of TXF-ICC survey respondents saw trade finance pricing/interest rates drop 11 to 20 percent in 2016, and another quarter cited a decrease of 1 to 10 percent. The survey cut across banks, government export credit agencies (ECAs), and major importers and exporters.4

 

In an already low interest rate environment, bankers responding to the TXF-ICC survey also cited the low rates charged by ECAs, in part, for driving down the pricing of the export loans used for larger international trade deals. In September 2017, for example, the U.S. Export-Import Bank was quoting a rate of 2.54 percent for a five-year loan.5 Banks sometimes feel competitive pressure to drop their interest rates in light of ECAs' pricing, the report said.

 

Also decreasing are trade finance fees, which apply to instruments used by smaller companies as well, such as trade credit on open account transactions. Twenty-eight percent of respondents saw a single-digit decrease in fees in 2016, and 26 percent cited a double-digit drop.6 This is an area in which the ICC Banking Commission is suggesting a move away from a cost-plus, transaction basis for fees, to better reflect the added value that banks can bring to such transactions.

 

Trade Finance Influencers

 

Going forward, several factors could put upward pressure on trade finance interest rates and fees, the ICC Banking Commission said. For example, regulatory compliance requirements have driven up banks' costs of maintaining basic correspondent relationships with other banks overseas, which has also resulted in significant consolidation. Anti-terrorism and anti-money laundering regulations also apply to client transactions. As described by the Bankers' Association for Foreign Trade, varying local regulatory requirements for trade finance can include validating prices by checking for over/under-invoicing, screening for the potential military use of goods, and validating the representation of shipment data in transaction documents.7

 

Meanwhile, central banks' interest rates are increasing.8 In addition, the interest-rate indicator known as the London Interbank Offered Rate (LIBOR) has risen over the past year. The overnight rate has increased from about 0.43 percent in October 2016 to 1.18 percent in September 2017,9 and the 12-month rate has gone from about 1.56 percent to 1.71 percent in the same period.10 Adding uncertainty is the planned phase-out of LIBOR, which is to be replaced by one or more new benchmarks.11 "Why this matters for trade finance is that billions of dollars of receivables are priced based on LIBOR," according to David Gustin, president of Global Business Intelligence.12

 

Tempering upward pressure, according to Rethinking Trade & Finance, is the ongoing digitization of bank operations including trade finance. Digital automation would not only improve trade banks' operations and services, but also help address costly regulatory compliance, according to Boston Consulting Group.13 About half of banks expect most trade flow processes to be digitized by 2027, the report said.14

 

The rise of financial technology (fintech) service providers could also be a factor. "FinTech embodies a new set of products tailored to the needs of small businesses," including online international trade and supply chain finance," according to a report from the World Economic Forum.15

 

The

Takeaway:

Interest rates and fees for trade finance dropped last year, but the outlook is uncertain going forward, according to a 2017 report from the ICC Banking Commission. The commission is calling for a re-evaluation of pricing and fees amid today's heightened regulatory requirements, competition, and a general trend toward higher interest rates.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. 2017 Rethinking Trade & Finance, ICC Banking Commission; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
2. Ibid.
3. “Access to Trade Finance,” International Chamber of Commerce; https://iccwbo.org/global-issues-trends/banking-finance/access-trade-finance/
4. 2017 Rethinking Trade & Finance, ICC Banking Commission; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
5. “Ex-Im Bank Minimum CIRR Rates for All Direct Loans,” U.S. Export-Import Bank; https://www.exim.gov/tools-for-exporters/commercial-interest-reference-rates
6. 2017 Rethinking Trade & Finance, ICC Banking Commission; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
7. Trade Finance, Euromoney; https://www.baft.org/docs/default-source/default-document-library/trade-finance-sibos-2016.pdf
8. “The Party is Over: Central Banks Pull the Plug on Bond Market Rally,” CNBC; https://www.cnbc.com/2017/07/06/interest-rates-central-banks-bond-market.html
9. “Overnight London Interbank Offered Rate (LIBOR), Based on U.S. Dollar,” FRED Economic Data; https://fred.stlouisfed.org/series/USDONTD156N
10. “12 Month U.S. Dollar LIBOR Interest Rate,” global-rates.com; http://www.global-rates.com/interest-rates/libor/american-dollar/usd-libor-interest-rate-12-months.aspx
11. “LIBOR Funeral Set for 2021 as FCA Abandons Scandal-Tarred Rate,” Bloomberg; https://www.bloomberg.com/news/articles/2017-07-27/libor-to-end-in-2021-as-fca-says-bank-benchmark-is-untenable-j5m5fepe
12. “Interest Rates Diverge and Impact Trade Finance,” Trade Financing Matters;http://spendmatters.com/tfmatters/interest-rates-diverge-impact-trade-finance/
13. 2017 Rethinking Trade & Finance, ICC Banking Commission; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
14. Ibid.
15. The Future of FinTech: A Paradigm Shift in Small Business Finance, World Economic Forum; http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf

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