5 Trade Finance Risks and Challenges That Modern-Day Banks Should Answer

Kreg Bale
Kreg Bale July 7, 2022
Updated 2022/07/07 at 11:54 AM
Trade finance risks

When banks invest in their programs for trade finance, or the financing of trade flows outside of their home countries, the fruits of their investments can reward them for a long time. By providing vital support to the global financial supply chain, banks stand to deepen their relationships with both their local and international clients and increase patronage for high-value cross-border transactions. 

But due to its scope and the number of considerations that need to be factored into each process, trade finance is not easy to implement. The current financial climate—which is still recovering in the wake of the COVID-19 pandemic—will make it even more challenging for banks to oversee the financing of goods and services across countries.

All the same, if your bank has plans to take business abroad and establish its brand among global players, now is a good time to explore upgraded trade finance solutions and other permanent improvements to your trade finance program. To achieve success in your future trade finance activities, here are five risks and challenges that you’ll have to confront:

Difficulty Venturing into Trade Finance in a Time of Economic Crisis

The first layer of difficulty that you’ll need to deal with is the general pulse of the global financial market after the economic fallout of COVID-19. Short-term trade finance activities, which involve products that defer payment for less than a year, have slowed due to restricted liquidity or fear of risk exposure on the part of international stakeholders.

If you want to revamp your bank’s current trade finance program, you must be able to adjust your expectations of how enthusiastic your clients will be to enter into new trade agreements. Your prospects will be better when the global economy improves, but until it does, avoid being overly ambitious about your projections.

The Need to Acclimatize to Different Business Cultures

Second, although finance is a global language, there are other factors that you need to pay attention to when doing business outside of your country of origin. You and your trade finance team must be ready to acclimatize to the different business cultures you’ll be exploring outside of your home country. These can range from differences in financial management perspectives to general attitudes towards financial institutions.

Thus, make it a point to research ahead and engage with the different financial cultures you’ll encounter. This may save your bank the trouble of dealing with problems like major misunderstandings over contracts.

The Costliness and Tedium of Trade Finance Operations

Third, it’s well understood that trade finance services can be very costly and burdensome to implement. Key trade finance processes, like putting together letters of credit and keeping bills of lading, require many steps and a lot of time to fully process. Transaction fees and delays in payments can also make this area of operation a pretty expensive one for banks.

If not run efficiently and with full visibility and control, a bank’s trade finance program can quickly become one of its biggest sinkholes. But the opposite is also true: a well-run program that can boast efficient turnovers and round-the-clock visibility on all its global transaction data will eventually add lasting value to a bank’s finances. 

Threats from Global Money Laundering Networks and Other Illicit Organizations

Fourth, there is also the looming threat of financial crime and a bank’s risk of being exposed to global money-laundering rings or other cross-border criminal networks. Not only have criminals’ methods evolved over the decades, but the most sophisticated operators also know how to take advantage of the global banking system’s vastness and bureaucracy.

To keep your trade financing activities free from the taint of cross-border financial crime, you will need to bolster the systems and protocols that you depend on for financial crime protection. All strides you make in your trade financing program have to be accompanied by strengthened initiatives for anti-money laundering (AML) and combating the financing of terrorism (CFT). 

Increasingly Difficult Compliance Requirements 

The last hurdle that your bank may need to clear to roll out its new-and-improved trade financing program is your compliance. To run your trade finance program smoothly, you will need to submit to the regulatory requirements of authorities like the World Trade Organization (WTO), the International Finance Corporation, and the like.

With this in mind, it’s imperative that you run a tight ship with regard to compliance initiatives for AML, CFT, and know your customer (KYC). If your regulators can trust you with these affairs, then you will be able to roll out your trade finance products and instruments unhampered.


The area of trade finance presents a wealth of new opportunities for your bank. In order to truly capitalize on them, you will need to prepare to do business in this global financial climate. This entails revamping your current system to be more data-driven and getting a better handle on processes related to compliance and financial crime protection, among others.

These challenges may indeed be difficult to address at first. But with the right strategy, your bank’s performance on the global stage will be all the better for it.

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