The Traditional World of Trade Finance Can Be Transformed by Digital Platforms and the Network Effect

Will embracing digital platforms help solve funding problems within one of finance’s most paper-based markets? That’s the plan, says Hussein Al Amine, Head of Business Development at trade finance platform Fineon Exchange

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The pandemic and its side effects have been hugely disruptive for global supply chains, with a further negative consequence being interruptions to the availability of trade finance.

Financing is the lifeblood of global trade. Whether it is large corporates seeking to diversify their banking relationships or small and medium-sized enterprises (SMEs) looking to secure access to funding, receiving the support to serve their capital needs has become a critical priority for companies.

In response to the supply chain turmoil caused by the pandemic and the subsequent decline in funding availability from major banks -– the dynamic in trade finance was forced to evolve. The resulting vigorous adoption of digital platforms has led to the emergence of a new ecosystem within the industry, and this has the potential to bring greater efficiencies for all stakeholders.

Trade finance troubles

Trade finance’s often bureaucratic systems entail a multitude of stakeholders – including service providers, financial institutions, borrowers and intermediaries. The result: the flow of information and funding is subject to extensive checks and monitoring at various node points along the supply chain. This can make the practice of securing finance for their working capital (often the underlying need when using trade to raise funding) a complex task for companies and a near impossible one for SMEs.

Then there is the regulatory tightening that resulted from the global financial crisis (2007-09). This generated a squeeze on trade and supply-chain finance that became measured as the “trade finance gap” (the deficit of the funding available from funders to potential borrowers). Now, with the added market volatility caused by a global geopolitical crisis and with the rising cost of shipping putting a strain on margins, the problem has moved from being chronic to becoming critical – with the global trade finance gap increasing from US$1.5 trillion in 2018 to around US$1.7 trillion in 2020 as a result (according to the Asian Development Bank). Connecting with the right funding partners can therefore provide speed of funding at cost-effective rates and help narrow the gap.

Networks are the key

Digitalisation alone is unlikely to address the shortfall in funding, but it’s acknowledged that it can help. Networks are the key, with digital platforms – such as the one developed by Fineon Exchange – providing the means by which those that seek trade finance can be found by those with the appetite to lend. Done on a global basis, this allows pockets of appetite and liquidity to find deals worth backing.

At least that’s the theory. In reality, the picture becomes more complicated due to the role of those critical players in trade finance: brokers and intermediaries. Yet, digital platforms can also provide the answers, exemplified by a recent survey Fineon Exchange conducted on the trade finance intermediary community.

Certainly, intermediaries agree with the problem. Nearly three-quarters of respondents (72%) viewed low funder interest and poor risk appetite from lenders as a critical underlying cause for the trade finance gap. Drilling down, key obstacles recorded in the survey included regulations such as anti-money laundering stipulations (where punitive fines for even unknowing transgressors have led to many banks “derisking” from the market) – an issue for 38% of respondents, with the lack of available granular counterparty and transaction details accounting for further funding restrictions according to 31% of respondents.

Yet an interesting picture emerges when asking intermediaries for their view of the key deficit. Some 50% claim the issue is a shortage of willing funders seeking to finance quality deals, while the other 50% perceive a shortage of good “bankable” deals.

Of course, if the problem is both the lack of funding for borrowers and the lack of bankable deals for lenders, then this is undoubtedly a classic case of the right parties failing to meet the suitable counterparties. Both funder appetite and good deals are available but are failing to find each other. Given this, the efficient flow of information in a safe channel – i.e. a digital platform – can indeed address the shortfall in funding by improving connectivity between stakeholders.

Trade Finance intermediaries benefit too

But what about those intermediaries? Do they not benefit from the asymmetric information of a traditional market? Perhaps, yes, when the market functions well, although even here, the adoption of a digital platform by intermediaries can enable them to be more efficient and achieve more robust results for their clients. A global platform marrying risk with risk appetite can act as a lifesaver both in and outside crises for intermediaries who can act as aggregators for many (perhaps smaller) parties.

The potential for digital marketplaces to add value to global trade goes beyond times of crises and funding, however. Other advantages include increased real-time visibility of trade flows and increased optimisation and efficiency due to wide-reaching connectivity. Digital platforms can also act as a CRM tool, and by digitising client profiles, it becomes much easier to match borrowers with the correct funders effectively. As such, a digital platform provides enhanced suitability, and bankability as real-time confirmation of transactions enables a safer and more transparent process. All of which contribute to a higher chance of success for all stakeholders.

Suppose such platforms are utilised at various economic levels – including micro-SMEs, SMEs, mid-caps and large corporates. In that case, a global network effect could significantly enhance the prospects for the future of trade finance. Ultimately, this can help contribute to a substantial reduction in the endemic trade finance gap, which will be a positive result for digitalisation that even the most hardened trade finance traditionalist would surely welcome.


About the Author: Hussein Al Amine is the Head of Business Development at Fineon Exchange.

Read more about the survey in Fineon Exchange’s industry whitepaper, Trade Finance Optimisation: Connecting the Right People at the Right Time: