LONDON--(BUSINESS WIRE)--Technavio’s latest report on the global trade finance market provides an analysis on the most important trends expected to impact the market outlook from 2016-2020. Technavio defines an emerging trend as a factor that has the potential to significantly impact the market and contribute to its growth or decline.
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The top three emerging trends driving the global trade finance market according to Technavio research analysts are:
- Factoring industry’s awareness of supply chain finance
- Enhanced strategic formulation and adoption of structuring and pricing tools
- Rise of Renminbi-backed transactions
Factoring industry’s awareness of supply chain finance
“There has been a significant improvement in the lending conditions worldwide, and this has increased the competitiveness in the financing of the supply chain. The growing awareness about supply chain financing, which optimizes the WC, in the factoring market is expected to enhance the lenders’ ability to finance the production units of individual companies with special focus on the supply value chain activities,” says Amit Sharma, one of the lead analysts at Technavio.
For instance, using supply chain financing, the factoring market will be able to help lenders finance the manufacturer even if they do not have a good borrowing term. This growth in business is likely to allow the players in the factoring business to compete with the banks. Factoring is allowing companies to raise the finances by selling receivables. Before and during the financial crisis in 2008, the factoring business had little exposure to the business media. With the growth of factoring business and utilization of the excess WC generated by its use, the overall scenario of financing a business and also the supply chain financing has changed. This will help the banks, financial institutions, and corporates to understand receivable financing (an arrangement in which the company uses the money owned by customers as collateral to finance one's needs) as an asset. In supply chain finance, factoring companies see an opportunity to grow their market presence and widen their reach to transactions-based receivables finance during the forecast period.
Enhanced strategic formulation and adoption of structuring and pricing tools
FX traders across the globe need strategies that help inaccurate valuation so that assessing the risk becomes easy. The policyholders need to formulate risk management analytics and different market standard models that will guide the players in terms of interest rates, inflation, and credit equity among others. Such strategies will help in the structuring and pricing of the currency trade execution, which includes the regulatory compliance in a single platform. Many strategies like the pre-trade analytics tool are used to manage specific currency exposure and, thereby, support the decision making of the market participants.
“Structuring and pricing tools help in understanding the risk profiles for transactions in different products such as structured notes and FX swaps. Trading workflow through standard communication systems also help in allocating the currency trade. Many top multi-national banks in different geographical markets offer custom-designed tools for stress testing and managing risks across different portfolios,” says Amit.
Rise of Renminbi-backed transactions
Settlements of trade agreements in the Chinese currency, the renminbi, have continued to grow rapidly over the last few years. Though the euro, sterling, Japanese yen, and the US dollar have been the top payment currencies for some time; the renminbi overtook the euro and sterling in 2015 to become the second most used currency for trade settlements. In January 2015, SWIFT revealed that the renminbi accounted for a 9.43% share of documentary credit transactions, overtaking the euro and sterling, which together accounted for just 6.45%. In 2016, it is expected that about 30% of China’s cross-border trade will be settled in the renminbi.
To further promote the currency, the Chinese government is establishing clearing centers around the world to trade, convert, or settle in renminbi. In 2015, China approved the addition of a Luxembourg hub, which gives a strategic advantage in terms of access to Germany and the opportunity to tap into SMEs in Germany. Germany already accounts for one-third of the EU exports to mainland China. The new hub will provide additional capital flows to corporations, suppliers, and customers. Further, China established its first trading hub for the renminbi in Canada in 2015 in a bid to strengthen trade relationships between Canada and China.
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