International Trade – A Critical Issue for Businesses in a Post-Brexit World
Total trade deficit in the UK widened by £3.0 billion to £9.5 billion in the September quarter, according to the UK Office for National Statistics. Between the three months to June and the three months to September, total trade (goods and services) exports decreased by 0.2 percent (£0.3 billion), while total trade imports increased by 1.6 percent (£2.6 billion).

As the UK advances towards its departure from the EU (European Union) in 2019 with the continuing uncertainty surrounding Brexit and what it will actually mean for the country, a critical issue for businesses, in both the UK and for those markets who trade with it, will be successfully enabling international trade. Banks, and other providers in this space, have a key role in supporting business customers to ensure they can continue to effectively trade internationally, minimising as best they can, any Brexit disruption but ideally enhancing the experience for those businesses.

Trade finance, supply chain funding and business FX payments are all key services that aid a business in international trade, but are also services that have mixed track records in how they are provided, especially by banks.  Business size is often the main determinant of the level, quality and price of service that enterprises receive, with smaller companies traditionally getting the poorer and more expensive service.

East & Partners global insights research across business FX payments, trade finance and supply chain funding has clearly illustrated this phenomenon but has also highlighted the dissatisfaction that corporates of all sizes often report.

A Growing Dissatisfaction with Trade Finance 
According to East’s global trade finance research around a third of large corporates are considering changing their current provider, this is further demonstrated by the decline in primary provider relationships and the growth in secondary relationships, as corporates look to spread their business around multiple providers to get the best deal and explore what else it out there.

UK businesses overall, and especially smaller enterprises, are clearly not getting the service they seek from their banks in accessing trade finance and supply chain funding. As Brexit looms ever closer, and the outcomes that result from it take effect, this lack of access can only serve to undermine UK business in its international trade efforts regardless of the UK government’s encouragement and campaigns to promote exports.

When asked what they look for in a trade finance provider the number one feature is a knowledgeable trade account officer with over a third citing this, while just 20 percent list improved trade loan facilities. However, while a knowledgeable account officer is a key selling point for business customers other East research shows this expertise is declining in banks resulting in a growing talent gap.

Supply Chain Funding – Unfulfilled Appetites
In the provision of supply chain funding there’s growing appetite for receivables financing and distribution / buyer financing solutions with business.
However, as East research from the UK shows, there’s limited availability of such solutions with less than 10 percent accessing the first and less than five percent the latter, although both are forecast to grow over the coming year.

Post-Brexit – New Horizons for the UK?
Despite these challenges UK businesses are definitely gearing up for the post-Brexit world.  East’s latest Business FX Payments Market Analysis shows that UK businesses are already looking beyond the EU, and increasingly so in their plans for 2018 and resulting currency usage. Small businesses are in the vanguard of this drive but lower corporates are aiming to follow suit.

The research shows that businesses in the UK plan to reduce their use of the Euro by 7.8 percent, with the biggest switch being among lower corporate companies who forecast they will reduce their Euro use by 23.1 percent.

As this reduction in the use of the Euro for international trade takes place, UK businesses are clearly looking to new international markets to trade with. While small increases in the use of the US Dollar (1.2 percent) and Chinese Renminbi (2.7 percent) are forecast, the biggest increase will be in the use of other currencies at 37.7 percent.

The biggest increase in the use of other currencies is planned by SMEs who are set to increase their usage by 51.9 percent.  Micro businesses closely follow, forecasting they will increase their other currency use by 34.1 percent, while lower corporates plan to increase by 30.3 percent.

Increasing FX Risk Management Sophistication in the UK
In the six months prior to the UK’s referendum vote in June 2016 to leave the EU, 100 percent of lower corporates reported the occasional use of FX hedging products such as FX Forwards and Options. Since then, the level of regular use, as opposed to occasional use, of such FX products, has continued to grow and reached nearly 56 percent with FX Forwards in the second half of this year.

This FX risk management sophistication is not exclusive to lower corporates with the use of such products showing a continuing growth in usage among Micro businesses and SMEs.  While not at the high levels seen in some markets, such as New Zealand where more than three-quarters of importing and exporting SMEs use FX hedging, UK businesses have the lead on other markets, particularly in Europe where both France and Germany lag behind the UK in FX risk management.

In meeting the needs of UK business as Brexit approaches, there’s much that banks and other providers can do to aid and serve UK businesses in meeting the uncertain challenges that face them.  But UK businesses are clearly not sitting around to wait for it to happen.  A significant opportunity awaits those who can better serve business in enabling their international trade more effectively as they look to markets outside the EU and guide them through the upcoming uncertainty.  If banks don’t up their game other providers and new entrants are increasingly appealing to business.
To find out how East & Partners can assist in growing your trade finance business