New technologies such as the internet of things and 3D printing are not just transforming global supply chains – they are also changing the way trade is being financed, forcing trade finance providers to innovate their offerings.
In a conversation with GTR on the launch of a new report, Vinay Mendonca, HSBC’s global head of trade finance propositions, says the bank is currently exploring ways to finance the trade of data and design as 3D printing and the internet of things (IoT) gain momentum. It comes in response to a growing need from the bank’s customers for more innovative ways to finance modern supply chains.
The bank’s report Navigator: Now, next and how for business, released today, surveyed 6,033 firms of all sizes across 26 markets on their short-term outlook for global trade. It found a high degree of optimism: 77% of the companies expect their trade volumes to increase in the next 12 months.
But the nature of this trade is changing, and so is the need for financing. Flows of services, the report concludes, are outpacing growth in goods trade, and supply chains are getting shorter. In fact, almost three quarters of overseas trade in Europe and Asia Pacific is being conducted within the firms’ ‘home’ region.
The changes are driven by various factors: growth in ecommerce, for one, has pushed a significant demand for customisation and flexibility, leading many companies to ‘nearshore’ their supply chain operations. Another factor is that firms are seeking to diversify their supply chains to protect themselves against an increasingly uncertain political environment and protectionist regulations.
And then there’s the rise of technology: 3D printing, for example, is beginning to change the way manufactured goods are sourced, while the emergence of the IoT and connected products are blurring the distinction between goods and services.
Technological innovation among businesses is forcing banks to come up with more innovative finance solutions too. While demand for trade finance is growing – according to the report over 60% of the respondents expect to need more trade finance over the next year – it may not be for the traditional trade finance products that we know today.
HSBC, for one, is developing solutions to finance what has become the hottest commodity on the market today: data.
“The way you finance trade might change in the future,” Mendonca tells GTR. “You now have situations where the supply chain is being completely transformed on the back of technology. So we need to understand, for example, how we support supply chains leveraging 3D printing and finance underlying data of designs.”
Traditional financing becomes irrelevant
Albeit on a small scale, 3D printing is already starting to change production processes across diverse industries. The automotive industry has been investing in 3D printers for more than three decades. The method has also advanced quickly for medical devices: almost all hearing aids are now custom-made using 3D printers. Airbus uses 3D-printed parts in its aircraft, and the technology has even been used to print prosthetic limbs.
The role of 3D printing in the economy will increase fast, according to a recent report by ING, which points to the fact that the annual growth rate for investment in 3D printing has been 29% over the past five years, compared to only 9.7% investment growth in traditional machines.
With this trend, traditional financing models are becoming increasingly irrelevant.
“Traditionally, goods would move multiple times with job work or value being added to them before the finished good was ready, and each movement would offer one leg to finance. In the new age, the underlying raw material for the printing is shipped at regular intervals, and the actual sale event could be simply the transfer of data or designs for printing,” Mendonca says.
He continues to say that even though the data – in this example the 3D printing design – may arrive instantly with the customer, there’s a need for financing this.
“There’s the process for printing, creating that spare part and then the final buyer having sold it, so there is still very much a working capital gap. And that’s what we will look to finance, on the back of the design. The way you will do it may be very different. You may not have bills of lading or shipping documents – all you might have is a data feed that comes to you. It’s something that’s still very much in the evolving phase.”
The bank is also looking to finance the trade of so-called ‘smart products’ – products that are connected via the internet of things and thus allow data to be exchanged between the product and its manufacturer, for example.
“The line between tangible merchandise goods and services will start blurring into this whole smart product concept. A smart product is very alive, with real-time data feeds on how the product is being used and how it is functioning being fed back constantly to the supplier, so the supplier can use that to maybe enhance the product in real time, to make changes, or to advise the buyer in what way the product would be better leveraged,” Mendonca says.
“From a trade finance perspective, I’m happy to review the underlying data, as long as I have that data feed between buyer and seller, then we can step in and finance it,” he adds.
He says that HSBC is currently working on “active use cases” to understand how the bank can help its customers, including which types of data feeds the bank could finance. But it will likely take at least 12 to 18 months before a solution is ready. And, Mendonca notes, it will not substitute their traditional trade finance offering – but rather extend it.
“We’re seeing the need evolve,” he says. “But there is still a lot of supply chain finance demand out there in the traditional sense. Not everybody will transform at the same pace.”