The future of money and global trade was a pressing subject of the recent Web Summit 2019 event, held this year in the Altice Arena in Lisbon, Portugal. At this time in the global financial system, there is an increasing need for what are often referred to as first world countries, and businesses located within them, to trade with developing economies.
Huge Funding Gap
But the existing financial infrastructure has struggled to adapt to the realities of this shifting paradigm. Consequently, there is a massive $1.5 trillion funding gap in global trade finance. This figure was confirmed by the latest ‘Trade Finance Gap, Growth, and Job Survey’, released by the Asian Development Bank.
Naturally, this figure sounds large enough in its own right, but it is also a significant 10% tranche of the overall market. No wonder then that the Asian Development Bank stated in reports that the $1.5 trillion gap is frustrating efforts to create employment and achieve growth in developing economies In particular, with small and medium-sized enterprises facing the biggest challenges.
And this situation is expected to get worse as before it gets better. Indeed, 60% of the banks who responded to the survey conducted by the Asian Development Bank expressed the opinion that the trade finance gap will increase in the next two years. This can only result in the further restriction of access to trade finance, further impeding prospects for economic growth and employment.
SMEs and Emerging Markets Impacted
What should be clear from this data is that emerging markets and SMEs are particularly impacted by this issue. Indeed, the businesses affected by the trade gap are 70% SMEs, and 60% based in emerging markets. And what is worrying for these market participants is that the existing financial system seems neither willing nor able to deal with the problem.
Banks are, in fact, moving out of the space, which obviously creates an even bigger gap, as this was previously the main source of funding for global trade finance. But banks have been reluctant, and in some cases unable, to participate further, due to regulation pushing them out of the niche. One of the most significant legislative mechanisms cited in this area are the capital reserves required by Basel III and its subsequent Basel IV successor. The original Basel III from 2010 required banks to fund themselves with 4.5% of common equity.
Thus, global trade finance is becoming an ever more complicated landscape, and one that is currently not functioning in the interests of all of market participants, or arguably even the majority. It was out of this climate that Finverity was created, and one of its founders, Alex Fenechiu, took to the stage in Lisbon in order to explain how the company is addressing some of the problems in the global trade finance system.
Finverity’s Direct Response
Finverity was indeed created as a direct response to this paradigm of the global trade finance gap, and aims to address the problem with a simple solution. Finverity is a blockchain-based cross-border P2P invoice trading platform, which connects investors from developed markets with the high yielding, low risk, opportunities in developing markets, by offering SMEs liquidity against invoices.
There are two major issues being addressed by Finverity. Firstly, the depressed interest rates in the developed market segment currently offer investors very low returns. Conversely, it can be difficult for SMEs in particular to acquire appropriate credit opportunities in emerging markets, due to excessively high interest rates and the lack of appropriate scoring systems and infrastructure.
Finverity thus enables investors to earn an annual return in the region of 10%, while making it possible for SMEs to gain access to affordable liquidity. And it simplifies the trading system associated with global finance, enabling a more joined-up approach to be put in place, which makes it possible for companies from all over the world to benefit from a more fluid system.
For example, Fenechiu explained that one of the companies that Finverity is working with is a flower importer, which imports its flowers from such diverse nations as the Netherlands, Colombia, and Nigeria, trading with over 70 countries in total. This is as complicated a logistical undertaking as it indeed appears, but there are unique market issues involved as well.
Everyone involved in the supply chain requires money in different currencies, while everyone has different payment terms and requirements. All sorts of issues emanate from this reality, and what results is a rather convoluted system. That’s where Finverity comes in.
Solving the Problems
Finverity aims to deliver access to early funding by ensuring that suppliers are able to sell invoices at the click of a button. This enables them to tie up all of the loose ends associated with complex transactions with relative ease, ensuring that they can acquire the cash flow required to run the business without difficulty.
The Finverity approach simplifies the system, and consolidates payments in the global trade finance market. Equally, the system that Finverity has implemented has meant that new investors have been able to penetrate the market for the first time. Some of these are smaller investors that were previously blackballed from global trade finance, while hedge funds and family offices are among the other market participants who have taken advantage of Finverity’s innovations.
What Finverity has done for these businesses is enable them to gain access to yield through an asset class that is completely declassified, and which doesn’t suffer from any damaging correlation to markets. By connecting investors from developed markets with emerging economies, Finverity has already been able to reduce the funding gap in the global trade finance market by over $100 million; just a taste of what is to come as the potential of this technology and approach is realised.
While the problems described on stage by Fenechiu at the Web Summit in Lisbon are far from solved, initiatives such as Finverity are demonstrating that the issues underlying them can indeed be addressed and overcome.