The hidden catalyst for economic growth

Decades of globalized trade lifted emerging economies out of poverty while providing consumers with access to goods and services from all around the world. That progress faltered during the recession. While the global economy has recovered, globalized trade growth is lagging.

The culprit? A disconnect between the trade finance access enjoyed by large firms located in the developed world and everyone else.

The answer? Fintech.

“Technological progress will have the largest impact on GDP levels by 2035, accounting for 9% higher or lower GDP levels in developed countries. In emerging markets the variation is even greater — up to 20% high/lower GDP in Brazil and 55% in China.”International Chamber of Commerce

To accelerate the trade journey, stakeholders can leverage fintech to remove barriers that keep small and midsize enterprises (SMEs), women-owned businesses, and emerging market organizations on the sidelines. Much like cellular phone service “leapfrogged” land lines in developing countries, fintech offers an efficient route past existing barriers.

Removing trade finance barriers with fintech

Navigating geopolitical shifts

Despite economic growth, global trade took a sharp downturn in 2016, the most recent year for which data is available. The reasons behind this reversal in trends include:

  • Slumping investment spending in the United States
  • Realignment in China away from investment and towards consumption
  • Financial turbulence in China
  • Falling commodity prices
  • Appreciation in the U.S. dollar

Trade is highly sensitive to shifts in economic and geopolitical sentiment especially as supply chains shorten. Leveraging fintech and digitalization can position organizations with the adaptability to capitalize on positive trends and avoid bumps in the road.

Improving transparency and data

Awareness of the precise nature of trade data is a recent development, as the technology available pre-financial crisis didn’t possess the necessary granularity, complexity and transparency for complex data analysis. Fintech facilitates both the analysis and potential solutions for stakeholders on all sides of the trade finance equation.

When stakeholders — including regulators, financial facilitators, banks, fintechs themselves, large corporates, SMEs, emerging market companies and women-owned businesses — can collaborate more effectively, further barriers to improved trade finance will fall.

Global trade growth

Digitizing the supply chain

While considerable progress has been made on digitalization within individual companies and industries, the International Chamber of Commerce identifies digital islands or siloes as a significant barrier to progress on breaking down trade finance barriers.

The process starts with clarifying exactly what digitizing the supply chain means and what it can accomplish. Let’s start with what it is not — the process of converting paper documents into images and conveying those images to banks.

Digitization involves data extraction and analysis to improve business processes within both the financial and physical supply chain. The International Chamber of Commerce lays out the steps that must occur to facilitate and accelerate the digital journey to facilitate trade and trade finance, which include:

  • Collaboration between banks, fintechs, large corporates, SMEs, women-owned businesses, regulators and industry groups
  • Enhancing connectivity between parts of the trade and trade finance supply chain  
  • Creation and enforcement of minimum standards and rules across trade and trade finance legal, liability, information security and technology
  • Facilitation of digitization across the ecosystem of buyers, sellers, banks, ports, customs and carriers in all verticals

Remaining barriers will be solved as emerging technology solutions, including distributed ledger technology, smart contracts, smart objects, artificial intelligence, the Internet of Things, machine learning and 3D printing, speed and modernize global trade.

Bank-fintech collaboration

Eighty percent of banks surveyed by the Asian Development Bank believe that employing financial technology to mitigate the trade finance gap has potential to make a meaningful difference. This can occur through:

  • Facilitating Know Your Customer checks
  • Lowering costs of due diligence
  • Increasing ability to assess credit risk of SME clients

Currently, SMEs, women-owned businesses and companies in the Global South are experiencing higher than necessary rejection of trade finance applications due to trade finance industry fragmentation, lack of digitalization and compliance/regulatory issues.

Proposed trade finance applications

It’s no accident that companies experiencing these rates of rejection are typically viewed as more risky by traditional financial services providers than large firms headquartered in the developed world. The International Chamber of Commerce suggests that increased regulation and wariness from the Global Financial Crisis contribute to a “de-risking” trend. That trend has raised the costs of trade finance and increased potential regulatory consequences of non-compliance within banking correspondent relationships.

“The trade finance gap estimated at $1.5 trillion represents untapped potential in trade, unrealized economic value and lost opportunity in terms of development impact and economic inclusiveness.”[viii] International Chamber of Commerce

The International Monetary Fund (IMF) notes that the ranks of active correspondent financial institutions — those that facilitate global trade finance — has declined by approximately five percent during 2011 to 2015. During that period, the number of these relationships actually increased by 30 percent.

These rejection rates remain high despite the fact that the average default rate on short-term international trade credit is a minuscule 0.021 percent. Of that number, 57 percent is recovered through the sale of the underlying asset[iv].

As noted, the gap manifests most clearly in the Asia Pacific region, for SMEs and for female-owned companies. The Asian Development Bank found the highest percentage of trade finance proposals and rejections come from Asia and the Pacific Region[vi].

Through bank collaboration with innovative fintech trade finance platforms, this need for increased trade finance support can be more fully realized. That’s because fintech streamlines processes, enables cross-platform collaboration and reduces the cost of regulatory compliance and due diligence. Fintech eliminates the barriers for stakeholders on all sides of the trade finance equation, including regulators, financial facilitators, banks, large corporates, SMEs, emerging market companies and women-own businesses.

Awareness is the first step toward solving the trade finance gap

While the trade finance gap won’t be solved quickly, the growing ranks of fintech solutions are making inroads. Many banks surveyed by the International Chamber of Commerce foresee a future where traditional financial institutions collaborate with innovative fintechs to bring cheap, available, and easily accessible solutions to the trade finance market.

Profile of trade finance fintech users

Lack of knowledge about the most appropriate fintech solutions to global trade finance problems remains a major barrier, according to the Asian Development Bank. Other barriers include improving efficiencies around the process of credit, performance and Know Your Customer risk so that they are more cost effective and reliable.

The persistent trade gap poses a problem for all participants in global trade, including the largest firms with the lowest risk profiles. Many of their suppliers fall into the categories most impacted by the global trade gap. To mitigate supplier risk, CFOs are investigating and utilizing fintech solutions that provide suppliers with liquidity and cash flow.

SMEs, emerging market companies and women-owned firms must acquaint themselves with the most suitable fintech solutions so that they can maintain their cash flow and grow their businesses to meet customer demand, particularly in high-growth economies such as India and China. With competitive, affordable and accessible trade finance solutions in hand, those companies can focus on their core business, rather than fret that a cash flow crisis will negatively impact their operations.

Related:

Working Capital Outlook Survey: challenges and opportunities for the global economy

Trade finance innovation positioned to fuel growth for China SMEs

Attaining both yield and certainty through no-risk trade finance solutions

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Resources

[i,iii,iv]World Trade Statistical Review 2017, World Trade Organization,” 

[ii,v]Why do trade gaps persist: And does it matter for trade and development?” March 23, 2017, Economic Research and Statistics Division, World Trade Organization, 

[vi,vii]ADB Briefs: 2017 Trade Finance Gaps, Growth, and Jobs Survey,” September 2017, Asian Development Bank, 

[viii,ix] “2017: Rethinking Trade & Finance: An ICC Private Sector Development Perspective”, July, 2017, International Chamber of Commerce