As the dollar value of global merchandise reduces, the value of cross-border services is rising, creating new opportunities for banks to innovative by embracing the change.
In an analysis of bilateral trade between 25 key trading nations, Global Trade Forecast, HSBC and research partner Oxford Economics found that growth in services exports has outstripped growth in goods trade since the global financial crisis. Services’ share of total world trade rose from 20% in 2011 to 23% in 2015, with outsourcing of intermediate business services to specialized suppliers driving much of this growth.
In 2016, the dollar value of goods is expected to contract by about 3%, while cross-border sales of services will likely rise by 1%. For 2017, the value of services is projected to grow by 2.9% compared to 2.1% for goods, as exclusively shared with GTR.
Looking further ahead, over the next 15 years, services’ share of global trade is expected to rise to 25% by 2030. The value of services exported each year is expected to increase by more than 2.5 times during this period, from US$4.8trn to US$12.4trn.
Talking to GTR, HSBC head of propositions, global trade and receivables finance, Vivek Ramachandran, says: “Trade in services has trebled over the last 15 years which is staggering. Many of these sectors, like information communications technology, have been growing at over 10% year on year despite the economic impact on physical goods trade. That is exciting and I think it’s refreshing that you have such strong growth in a tough environment.”
A major factor driving services is the fact that technology is changing the nature of what we understand to be goods vs services, explains Ramachandran. For example, people no longer buy hard drives as physical gadgets but are instead likely paying for cloud memory service. Technology is changing a lot of goods into services.”
This trend offers new opportunities for financial services companies. As cash flows structures change, companies may seek to alleviate enhanced risk or require new financial assistance.
“Take the example of the hard drive, as opposed to getting a few 100 dollars upfront: now [the seller] is getting paid US$10 per month as a contract. So banks’ ability to monetize the contact, recognize the unbilled receivables or milestone financing: I think is an opportunity to innovate and realize the world is changing,” says Ramachandran.
GTR recently reported in detail about the difficulties faced by services companies trying to get financing due to lack of understanding of the non-physical nature of services and more complex invoicing structures.