• Ashish Srivastava, Chief Commercial Officer at Triterras


• 19.05.2023 10:30 am
#supplychain #finance

Supply chain finance is one of the fastest-growing markets, with volume leaping from $330 billion in 2015 to $1.8 trillion in 2021. However, the global trade industry is experiencing a financing gap of $1.7 trillion as reported by the World Bank in 2020. The gap in the amount of money available versus the optimal amount needed by businesses is only growing. It is now estimated to have topped $2 trillion due to recent constructions in lending limits.

Micro, small, and medium-sized enterprises (MSMEs) that do not have the financial footing to qualify for commercial loans are disproportionately hurt. MSMEs run 70% of the world’s GDP and play a significant role in shaping growth, innovation and recovery in our global economy. Nine out of 10 of these businesses are struggling for survival due to the lack of affordable financing. 

With only a few banks ready to serve the backbone of our global economy, there’s a large market opportunity. Non-bank financial institutions (NFBIs) are responding by finding ways to fill in important funding. Fintech platforms are changing the way businesses are managing the trade finance system.

THE RISE OF AI-ENABLED FINANCE

Digital finance is expanding opportunities by increasing access to working capital. Cross-border supply chain finance platforms connect funders to MSME suppliers and give them access to alternative lending structures, such as dynamic discounting, factoring and payables financing. 

Advancements in analytics and machine learning enables platforms to innovate in financing decisioning and pricing. Meanwhile, the Internet of Things provides a constant data stream of shipping routes, storage methods, and more.

Taken together, AI-enabled financing helps traders ease the uncertainty of inventory management and solve for payment risks faster and with more transparency, while giving funders a short-term, flexible asset class for risk mitigation and diversification. 

FILLING THE FINANCING GAP

Banks lack the scalability to lend to MSME and mid-market sectors, where the margins are higher but the transaction size per ticket is lower. Plus, the risk weights are higher due to upcoming Basel IV regulations imposed on banks.

This brings a compelling opportunity for regional banks, NBFIs and emerging fintechs to step in to deploy capital and fulfill sellers’ needs. Together, they have the unique ability to process information through digitization and automation, making it ideal for modern trade finance. 

SMOOTH DEAL FLOW

Trade finance platforms provide a high-quality potential deal flow to lenders in real-time. Automation technologies are driving improved, inclusive economic growth in international trade.

​​Borrowers are located across the globe in a broad range of industries and products, such as food & beverage, retail, agriculture, metals & mining, medical, pharmaceutical, hospitality and electronics. Typical transaction sizes range from $5,000 to as high as $100 million. This enables lenders to quickly focus on their areas of comfort. 

Deals can be customized based on an investors’ risk criteria in terms of tenors, value and, if appropriate, goods or geography. Yields are transparent across the different risk profiles and the investment can be tailored to offer capital or income growth.

DEMYSTIFYING TRADE FINANCE OPERATIONS

Lenders unfamiliar with the world of supply chain finance now have a turnkey way to get into the game as trade finance platforms automate workflows and processes. Compliance is easy on fintech platforms with bank-grade know your customer (KYC) and anti money laundering (AML) data on all buyers and sellers as well as their detailed trading histories. Certain tasks can be outsourced, too, including direct loan disbursement and servicing. 

When it comes to managing processes, trade finance platforms bring state-of-the art efficiency as well as security through Blockchain. Transactions are fully digitized with a centralized repository of trade related documents, providing complete transparency and one version of the truth. 

Digital tools like smart contracts also help reduce risk and support efficient transaction management. Some platforms feature a payment portal, automated reporting and even trade credit insurance options. 

AN ATTRACTIVE ASSET CLASS

Trade finance is a lower-risk asset with attractive returns. The value of the loans is not tied to fluctuations in traditional markets, protecting investors against the erratics of the stock market. In today’s era of intense volatility and inflation, trade finance lending is seen as a safe haven. 

Yields exceed those of comparable private and public credits with similar risk, with both receivables and payables finance commanding an average yield of 9%. Default rates are low, too, with average rates (2017-2020) of 0.38% and 0.18%, respectively. 

An added benefit are the strong structural protections and high level of resilience as a result of the loans being secured by corporate accounts payable, receivables and inventory.

PARTNERING WITH FINTECHS

As the world continues to go digital, it is sensible for banks and NBFIs to work together to build a cost-efficient infrastructure for supply chain finance.

Around 65% of banks and credit unions are already engaged in joint partnerships with fintechs, and fintech partnership activity among regional banks is expected to rise. 

The platform model can provide an ideal environment for banks to collaborate with emerging fintechs. There’s a rising level of confidence by banks that these partnerships do not pose a threat to the finance industry, rather, they help to increase loan volume and productivity, as well as revenues.

Banks that opt to join a fintech-hosted platform as a funder are able to focus on their core offerings of underwriting and funding loans rather than figuring out how to build or buy a platform. This approach lowers banks’ customer acquisition costs and shortens the origination to execution timeline, while eliminating substantial development and maintenance costs.

Trade finance has an attractive investment profile and is a timely opportunity for institutional lenders. The technology and tools are available to analyze and drive real-time decision making like never before, supporting lenders and their specific objectives. 

Participating in the digital infrastructure for supply chain finance lets MSMEs across the globe leverage technology networks to securely conduct trade and keep the supply chain stable. After all, MSMEs shape the nature of innovation and growth across markets and generate lasting financial strength. The digital future for supply chain finance is the real, transformative breakthrough the world needs now.