Is technology bridging the trade finance gap?

In short, not really. We spoke to Trade Finance Global on their views following the recent Asian Development Bank (ADB) addressing the multi-trillion trade finance gap in 2017.

Only last week, a report from the ADB’s 2017 trade finance survey announced a $1.5 trillion trade finance gap, down from $1.6 trillion the previous year. What drove the gap? The report alluded to three contributing factors which seem to be driving a global shortage in trade finance provision:

  1. Lack of trade finance provision in Asian and Australia-Pacific countries
  2. SMEs and mid sized enterprises struggling to access trade finance
  3. Banks continuing to lend less through trade finance

 What is trade finance?

In short, trade finance is the financing of any form of goods or services both domestically or internationally. One of the oldest types of finance dating from Mesopotamian times, trade finance is essentially an IOU, guaranteed by a bank or financial institution. Trade finance helps bridge the trust gap between buyers who want guarantee of goods / services from a seller, who typically wants up front payment.

Trade finance exists in the form of open accounts, Letters of Credit, forfaiting, Bills of Exchange and invoice finance, and coupled with freight forwarding services, tracking of vessels and foreign currency services, facilitates international trade.

International trade has increased steadily year-on-year, by between 2.7 - 3.1% according to the OECD, but there is still a sufficient lack of credit for SMEs seeking growth opportunities through trade finance, contributing to a loss of job creation and economic growth.

“A sizeable trade finance gap is a drag on trade, growth, and job creation,” said Steven Beck, Head of Trade Finance at ADB.

How the trade-tech revolution stacks up

Fintech and digitisation has been earmarked a huge opportunity for the trade finance sector, predicted to make material savings of around USD $50mn per year, according to Misys. 2017 has seen some breakthroughs in trade finance, with the world’s first global trade transaction through a Letter of Credit.

Trade tech has the potential to disrupt and also facilitate cross-border trade in the following ways:

  • Using the blockchain as an escrow service to confirm payment or auto-release funds once contract conditions have been confirmed / met
  • Conducting know your customer / know your goods (KYC / KYG) on the supply chain transaction and ensuring anti-money laundering (AML) measures are taken
  • Automatically assessing risk and credit rating for the businesses to auto-qualify SMEs for trade and invoice finance facilities
  • Peer-to-peer finance organisations to help institutions / high net worth individuals to invest trade finance into companies

The rise of alternative funders, funding sources from a ‘bottom up’ approach also has the potential to facilitate trade. To date, this is a high consideration, low uptake business, which needs to grow in order to bridge the $1.5tn trade finance gap (Figure 1).

 

The biggest blocker in the digitisation of trade finance remains that it is inherently complicated. Operating in different countries where legislation is different means that trade finance is generally assessed on a case by case basis, and there are thousands of ways to structure finance.

One way various consortiums of banks and financial institutions are overcoming the trade finance gap through digitisation, is to work together, share information and piece together the end to end supply chain to see the bigger picture and get suppliers / buyers / financiers working together - after all it’s the same transaction, right?

Thanks to Trade Finance Global for their contributions to this article.