Five minutes on… trade finance asset distribution

A new report hails trade finance asset distribution as vital for turning today’s SMEs into tomorrow’s big players. Matt Packer looks into it

Three critical challenges are currently facing the global business community:

1. According to recent estimates from the World Bank, businesses must create 600 million jobs by 2030 to absorb a growing, global population into the workforce. At present, the organisation says, SMEs account for around 90% of the world’s businesses and 50% of its employment. But given the need for such significant job creation over the next decade, more must be done to help SMEs flourish into tomorrow’s big, corporate players.
2. As last year drew to a close, global research from the International Finance Corporation (IFC) cited credit as the top challenge for SMEs in their dealings with traditional banks. In second place were macroeconomic, environmental or government-policy factors over which the firms themselves have no control.
3. One such macroeconomic factor – the COVID-19 crisis – has caused considerable damage to the prospects of SMEs across the global economy. For example, February research from the Center for Global Development found that, in China, 80% of SMEs had yet to reopen amid the nation’s battle with coronavirus, while 40% had no timeframe for resumption.

With these challenges in mind, UK fintech company Tradeteq has recommended that, to ensure SMEs have the development resources they need, the banking sector should explore trade finance asset distribution.

What exactly is trade finance asset distribution?

Put simply, a process in which a bank will leverage a fintech platform to distribute trade finance assets to institutional investors, thereby securing the required liquidity to support business clients – such as SMEs.

Why is now the right time for trade finance to rise to the fore?

Tradeteq sets out its argument in a new report entitled Trade Finance in 2020: Asset Distribution – A Macro-economic Necessity.

The report takes stock of initiatives that the EU and US have launched to help their business communities contend with the fallout of COVID-19 – but stresses that government support “can only go so far”.

It explains: “Even with state guarantees, banks are still haunted by the level of unsustainable loans that led to the 2008 financial crisis. Additionally, emergency measures tend to be focused on specific types of companies, omitting the complex and ever-connected supply chains they form a part of.

“This is why SME support should be focused on trade finance: not only does it support entire supply chains, but its short-term tenors also allow for a certain programme amount to be deployed several times a year, where it is needed most.”

Further to that, the report points out, the impact of the funding can be monitored daily, allowing for an efficient allocation of funds within financial mechanisms that require no additional collateral from their corporate beneficiaries.

What about the technology angle behind asset distribution – does blockchain have anything to do with this?

In one way or another, the report notes, the majority of global banks are currently helping to develop blockchain technology for trade, via high-profile initiatives such as R3, Marco Polo and We.Trade. However, it says, while these ventures are promising, they “have yet to show concrete results” beyond pilots and soft launches.

“On the other hand,” it notes, “never before has the necessity of paperless, automated trade been so obvious, with social-distancing measures preventing physical meetings and wet-ink signatures. [The COVID-19] crisis could be the catalyst to turn years of investment into paperless trade and smart contracts into an everyday reality.”

Are any other technology drivers helping this area of finance evolve?

According to the report, artificial intelligence (AI) and machine learning are “truly changing the trade finance game, and pushing traditional credit scoring methods out the door”.

It explains: “It is possible to accommodate varying data availability across the depth of datasets. [AI] also allows financiers to consider new and valuable information that could change the creditworthiness of SMEs, such as geographic location or industry.”

In addition, AI “can automatically update these datasets from a variety of sources, making credit ratings more timely and accurate”.

These sorts of facilities enable investors “to gauge the risk of the trade finance assets they purchase quickly and accurately, streamlining transactions”.

What about broader developments within the tech and finance industries?

In Tradeteq’s assessment, fintech is currently undergoing a period of consolidation and entering a phase of maturity. Meanwhile, financiers are becoming “more and more comfortable” with new technology tools.

As such, traditional bankers are likely to be increasingly confident about harnessing fintech platforms and services for the purpose of executing trade finance functions.

More specifically, though, one of the biggest recent developments was the 2019 launch of the Trade Finance Distribution Initiative (or TFD Initiative, for short) – described as “an industry-wide effort to use technology and standardise the market to support the wider distribution of trade finance assets”.

The report notes that the initiative – which aims to create a secondary trade finance marketplace with greater participation from non-bank entities – “gained significant momentum since its launch, with the number of members doubling from 14 to more than 30 in January 2020”.

It adds: “In March, the TFD Initiative formed a formal association with the International Trade and Forfaiting Association (ITFA), which will give all ITFA members full access to the TFD Initiative’s workstreams and enable them to participate in live projects and proof of concepts. This partnership is expected to give a further boost to the initiative’s efforts to standardise trade finance asset distribution.”

Are any financial institutions involved with the initiative?

Quite a few. The first to step aboard were ANZ, Crédit Agricole, Deutsche Bank, HSBC, ING, Lloyds Bank, Rabobank, Standard Bank, Standard Chartered and SMBC.

They were joined almost a year ago by ABN Amro, the Commonwealth Bank of Australia, Crown Agents Bank, the London Forfaiting Company and Natixis.

With that sort of backing, it looks like the initiative will play a key role in determining the future shape of trade finance.

Indeed – as London Forfaiting Company CEO Simon Lay said: “We all stand to gain by increasing collaboration, leveraging new technologies and adopting standardised processes in the trade finance space.”

For further details…

Read Tradeteq’s full report here.

About the author

Matt Packer is a freelance business, finance and leadership journalist