Historically, banks only disintermediate approximately 36% of total trade finance transactions with the remainder as cash-in-advance transactions or open account transactions. In addition, these transactions are lower risk, with an average duration of less than 90 days and very low default rates with high recovery rates for defaults. This particular form of finance yields a low, but steady margin in the range of 4% with relatively low risk. While this certainly leaves the opportunity set wide open and makes the operation an attractive one from a risk perspective, the reality is that slim margins, lack of balance sheet, and other regulatory issues limit how large the trade finance market can grow.
Trade finance is a traditional banking service that generates fee revenues. However, the high cost of manual contract creation, verification, validation, fraud prevention, and regulatory and compliance make trade finance margins quite thin. In addition, the high fixed costs associated with regulation and compliance limit banks from working with smaller clients.