Closing the trade finance gap with technology and innovation (GTR MENA roundtable)

Finverity’s CEO and co-founder Viacheslav Oganezov joined a panel discussion as part of the GTR MENA conference in February to debate how technology and innovation can help close a $1.5 trillion trade finance gap that impacts emerging market SMEs disproportionately. Vincent O’Brien chaired the session, which also brought together Lisa McAuley, CEO of the Global Trade Professionals Alliance; Sudhir Dole, CEO of the Trade Information Network, Carl Wegner, CEO of Contour, and Sean Bowey, head of production, global trade and receivables finance at SABB.

Harmonisation, transparency and speed

Panellists noted how technology will in the future drive trade facilitation, and stressed the importance of building simple harmonised standards for associated data to help reduce the need for paper documentation and erode compliance barriers that hinder SMEs’ ability to access trade finance. They discussed how the ability to capture more data about SMEs and their trading partners mitigates fraud risk, double financing risk and performance risk, providing an early warning system that gives funders more comfort about their investments. The audience also heard how blockchain technology can enable the creation of a more transparent and efficient ecosystem in which every party in a trade transaction has sight of documentation simultaneously.

Offering investors better yields

The first step towards closing the trade finance gap is ensuring assets are attractive and accessible to a new generation of alternative investors that are currently seeking a better home for their capital, argued Oganezov, who recounted how Finverity was formed with the specific goal of helping reallocate capital to those most in need of trade finance. On reading, Asian Development Bank estimates that 60% of the trade finance gap is concentrated in emerging markets and 74% among SMEs and mid-caps, he said its founders sought to understand why this was – and then find a way to rectify the imbalance.

“When we started digging in, we realised that traditionally this industry has been dominated and funded by large banks that have unfortunately either been withdrawing or limiting their allocation to the industry since 2008, due to increased capital requirements and the complexity of the processes, which you have to do manually without digitisation,” he said. Over the same period, global trade surged, pushing up corporates’ demand for trade finance at the very time that global liquidity was drying up – hence the trade finance gap, which Oganezov believes is probably much larger even than the ADB’s estimate.

Fast-forward 12 years and Covid-19 stimulus programmes are placing record-low interest rates and weak yields for traditional fixed-income products under further downward pressure, making the stability of trade finance yields more attractive, he noted. Most trade finance funds, private lenders and fixed income investors are also not interested in the 100 to 200 basis points currently available for funding very large companies and are instead seeking the 6% to 10% yields associated with mid-market borrowers. However, “they don’t necessarily have the operational capabilities or the origination channels to be able to do that effectively.”

Cutting back-office costs

Supply chain finance, as offered through Finverity, helps investors overcome this hurdle, Oganezov argued. While the revolving nature of supply chain finance means they only need to conduct due diligence once before putting their money to work for an extended period. Processes around KYC and onboarding have historically been manual, paper-based and therefore expensive, making SCF unviable for financing firms that are mid-sized or smaller.

“What our platform does is it automates around 80% to 90% of mid-and back-office processes that these guys would have to go through in order to access this asset class,” he said. Investors are then able to tap the market for financing SMEs without building that capacity themselves and just focusing on understanding the credit risk.

Improving visibility into risks

Digitisation is also improving banks’ ability to support SMEs and bridge the trade finance gap, added SABB’s Bowey. “We can see… the whole transaction, we can see the statistics, we can see the data, who’s performing, who’s not performing. So it really helps us from a credit risk perspective,” he noted. Being able to see each stage of a transaction and having confidence that it has been verified provides banks with payment triggers that allow them to extend terms for longer, he explained. This means “we can get money into the SME sector quicker and with more confidence.”

Improved visibility also helps mitigate risks associated with fraud, double financing and financial crime more generally, not just in bilateral transactions but in a network of transactions, Bowey argued. “Once we have a network, we can build a map, we can see who’s trading with who, we can see who’s connected to who, which individuals are connected to which SMEs, which SMEs are dealing with which large corporates,” he added. This then “allows us to again finance into the ones that we’re confident of with a lot more precision, and it frees that liquidity up to go to the good actors in the equation.”

For SMEs, joining the right platforms – and thus being able to prove their identity, activities and connections more easily – can therefore have a “snowball effect”, helping them increase their pool of counterparties, grow their business and improve their credit quality, he concluded. Yet, banks recognise that they are no longer the ‘only party in town’ and that trade finance is becoming an increasingly recognised asset class by investors. Those banks that are willing to innovate and look at financing SMEs by working with the best platforms can direct liquidity alongside alternative lenders to help close the Trade Finance gap and speed up global economic recovery.