Growth in global trade in services is rapidly outstripping trade in goods, according to new World Trade Organization (WTO) data released this month, with the organisation’s director-general Roberto Azevêdo calling for this often “overlooked” area to be given more attention. Meanwhile, banks that GTR has spoken to say they are primed to support new services trade flows.
International trade involving less tangible offerings such as computing and digital services are rising rapidly, and are likely to continue their upward trajectory as global digitalisation efforts increase, the report says.
“Thanks to digitalisation, services that once had to be delivered face-to-face, like education, can now be delivered remotely. Yet services are often overlooked in discussions on global trade, and the extent of their contributions to global trade is not always fully appreciated. This report attempts to remedy this oversight,” said Azevêdo in his opening remarks at a WTO meeting in Geneva on October 9.
Global services trade grew on average 5.4% a year from 2005 to 2017, faster than the 4.6% average annual growth in goods, according to the WTO’s 2019 World Trade Report.
Based on a revised statistical model, the report found trade in services was worth US$13.3tn in 2017, and projects that it could grow by 50% by 2040.
Global banks have been keeping a close eye on the rapid ascent of services trade, particularly developments with newer technology such as embedded services, including software-as-a-service, annual maintenance contracts and e-commerce-related transactions.
“It is a huge opportunity,” Vinay Mendonca, global head of product and proposition for HSBC’s trade and receivables finance business tells GTR, adding that the bank is already actively financing services trade.
“A lot of our structures now support the financing of services. The biggest shift is to have the ability to extend beyond relying on physical documents to digital data input streams. You wouldn’t necessarily receive a shipping document, instead you may get a data stream confirming services. That’s where you need to have the ability to adapt and finance based on these new data streams,” he explains.
Over the years, banks have been ramping up their own digitalisation efforts as they move away from traditional paper-based trade finance.
Financing services trade – particularly for newer, digitised services – leverages that trend, Mendonca says.
He cites a deal where the bank provided a client with a revenue monetisation solution based on clicks on online ads.
The transaction – which was completed a couple of years ago – involved providing working capital to a firm that buys online advertising space from large websites to sell on to third-party companies and makes its money from people clicking on the adverts.
HSBC’s role was to plug the financing gap between the company buying the space and then receiving payment from the individual advertisers. The firm presented a data stream of clicks per advert to HSBC to prove that a “trade” transaction had taken place.
The success of deals like these relies on banks having the right kind of technology to handle the data.
“In terms of banks being ready to support this growth in services trade and have the ability to consume data, it is critical to have the right interfaces and API constructs,” says Mendonca. “It is one thing to have a lot of data in the ecosystem but another for a bank to be able to consume that data and integrate it into its credit decision-making processes.”
James Binns, global head of trade and working capital at Barclays, agrees that digitisation capabilities underpin the ability to finance trade in services.
“I was particularly pleased to see the WTO note the importance of digital technology for the future of trade in services. API connectivity now offers a far greater degree of interoperability between different systems and a deeper exchange of data across the supply chain,” he tells GTR.
“At Barclays, our focus for the next 18 months is to upgrade our core trade finance platforms to be cloud-based and API-enabled. With this we intend to maximise our connectivity across supply chains and different platforms, thereby offering increased choice and value to our clients, allowing them to trade more goods and services across the globe,” he adds.
The WTO report found that trade in computer services and research and development recorded the most rapid average annual growth from 2005 to 2017, growing at above 10%.
Distribution and financial services accounted for a fifth of trade in services, with education, health and environment services currently standing at negligible levels, although rising quickly.
The report added that policy barriers to the future growth of trade in services were much more “complex” than those facing trade in goods, noting that growth is dependent on these barriers being lowered.