Recognising that standing still means falling behind, nothing is off the table for governments, financial institutions, fintechs and corporates looking to technology to improve trade finance processes.
Much of the potential for digitisation to boost access to trade finance remains untapped. In June, the World Economic Forum observed that lack of digitisation and automation means access to trade finance as an asset class by institutional investors remains prohibitively expensive. However, the infrastructure is already in place to enable end-to-end straight through processing of hundreds of thousands of instruments in a low cost way, giving asset managers direct access to trade finance assets and enabling alternative investors to channel more capital into the market.
Last September, XDC Network and Tradeteq launched what they described as the world’s first trade finance-based non-fungible token (NFT) transaction with invoice finance company Accelerated Payments as the asset originator.
The transaction used XDC Network’s blockchain technology to transform trade finance assets into non-fungible tokens. Institutional investors can buy and sell these tokens – which represent the value of an off-chain asset – giving them legal entitlement to an asset or package of assets.
Ian Duffy, CEO of Accelerated Payments describes token-based fungible and non-fungible blockchain funding options as the future of trade finance. “A token-based, non-fungible financial instrument focuses on ownership and contract specifics,” he explains. “It evolves paper based (or electronic) contracts typically held by relevant investors incorporating expensive legal frameworks or compartments with no version control and/or dubious signature pages into cloud-based digital blockchain format that is verifiable, tamper proof, shareable and cost effective.”
According to Duffy there is strong demand from both institutional and retail investors for an asset class that is relatively low risk and pays a decent yield which includes receivable books. “The effect of non-fungible and fungible tokens will be to widen the access to such investment instruments as well as lowering the cost considerably with improved audit trail and transparency, similar to what has happened with quoted stocks and shares,” he adds.
When asked how many transactions have been performed to date and who has bought these NFTs, Nils Behling, Co-Founder and CFO at Tradeteq says the initial issuances have been placed with a limited number of sophisticated investors on a proof-of-concept basis.
“However, we are very active in the space and the case for real asset-backed crypto remains strong,” he adds.
The challenges of gaining traction in trade finance were underlined in June when digital trade platform we.trade closed its operations. But this hasn’t deterred other fintechs from exploring the potential of new trade and supply chain finance marketplaces.
In June 2021, the International Chamber of Commerce (ICC) and Finastra commenced a pilot for a trade funding marketplace to provide small businesses in Ecuador with short-term liquidity for their trade operations by allowing bank and non-bank financers to finance their invoices. Iain MacLennan, Head of Trade and Supply Chain Finance at Finastra explains that the ICC TRADECOMM pilot is still running and that the company has been working with a number of partners to expand the proposed marketplace offering from the original proof of concept.
“We plan to announce these partnerships in the near future once we have concluded contractual discussions,” he says. “These partners will also offer these additional services outside of the pilot market. We are in commercial negotiation with a number of financiers to provide liquidity to the marketplace.”
According to MacLennan, Finastra has already identified the next two markets where it plans to deploy the platform, both of which are in Latin America with the second marketplace expected to launch in the middle of next year.
“In addition to these markets, we have been approached directly in regards to other markets in South East Asia, Africa and the Middle East, which we will investigate,” he adds.
The ICC is also behind the UK Centre for Digital Trade and Innovation launched in April, described as the first neutral forum for co-ordinating the efforts of governments and trade sectors to adopt legal and standards frameworks. With the Electronic Trade Documents Bill (expected to enter law later this year or early 2023) putting electronic trade documents on the same legal footing as their paper equivalents in the UK – and the extensive use of English law in bills of lading – the ICC reckons there is an opportunity to tackle bureaucracy on a global level.
Chris Southworth, Secretary-General of the ICC United Kingdom expects Germany to have similar legislation in place by next year and the rest of the G7 to have followed suit within five years. “We can now begin the process of connecting platforms and systems,” he says.
The centre is running live technology agnostic pilot testing of end-to-end supply chain transactions, starting with electronic bills of lading, and similar facilities are expected to emerge in Germany, France, Belgium, and the Netherlands as well as Singapore and Thailand. Two other UK-based fintechs have been developing solutions that they say can help businesses release capital tied up in stock and payroll.
Hi promotes pay asset finance as a way to release working capital by externally financing a company’s payroll without adding debt to its balance sheet. The employer is charged a flat fee per employee per month to defer its payroll commitments and repays the amount financed after the two month deferral period plus the fee.
The fee depends on the size of the business, but according to Hi is ‘normally very competitive based on their current cost of capital’.
Supply@Me hopes to tap into the trend for companies to hold higher levels of stock that has emerged since the supply chain issues caused by the pandemic started to affect the freight and logistics sectors.
Its service is designed to enable companies with warehoused inventory to free up the value of this stock through an off-balance sheet solution, which allows firms to recognise inventory monetisation funds as a legal true sale.
Monetisation transactions can be facilitated for a wide range of inventory types providing the goods are stored in a warehouse and are not categorised as ‘slow moving’ or ‘non-moving’.
The banks are also keen to get in on the act. In March, Citi announced that it had started working with Stenn, a global platform providing SME funding, as part of the expansion of its global trade payables finance product offering to include deep-tier supplier financing – helping to provide access to funding across global supply chains.
Historically, deep-tier suppliers have had less access to credit as they are typically SMEs. Financing options available in the market have been limited or may come at a high cost.
“We hear first-hand from clients about the challenges their businesses are facing to extend support to manufacturers and second tier suppliers, whilst also having to shift their supply chains due to the current environment to retain continuity in procurement flows,” says Parvaiz Dalal, Global Head of Supply Chain Finance at Citi.
“Disruptions at any stage of the supply chain can have a knock-on effect to the upstream parties. Our aim is to reduce these disruptions by improving access to attractive financing at all levels of the supply chain, regardless of whether the supplier sells directly or indirectly to our client.”
The benefits include faster access to financing for downstream suppliers, often at a reduced cost compared to other options according to Dalal.
“Stenn’s digital onboarding experience helps support and address the working capital needs of both buyers and suppliers,” he adds. “As Citi maintains a trade relationship with the anchor buyer, all downstream participants can potentially benefit from this relationship and receive improved pricing.”
Other interesting recent developments include the acquisition of digital trade finance platform developer Bolero by logistics software firm WiseTech Global, and embedded business finance platform Liberis entering into a partnership with Barclaycard to offer their small business customers access to personalised revenue-based finance. Also in June, Dutch fintech Factris secured €10m of funding through asset manager NN Investment Partners. The company now offers factoring services in five EU countries after launching in Poland and Belgium in the first quarter of this year and will use the new funding to enter other European markets.
One of the most interesting – and potentially contentious – recent examples of innovation in trade finance is the evolution of buy-now-pay-later (BNPL) into a refined version of invoice factoring. B2B BNPL companies embed themselves in the supplier’s sale process and offer quasi-instant net terms to end customers. Suppliers get paid 100% of the invoice up front – minus the fee – with the BNPL company managing credit decisioning, bearing default risk, and managing collections. The platform providers use algorithms and credit checks to onboard customers.
The target audience for the service includes companies that lack assets such as real estate or inventory to put forward as security against loans. German B2B online workshop equipment marketplace Contorion started using Billie’s B2B BNPL service in 2018 when it encountered challenges around credit limits, risk identification and prevention.
The company’s credit limits were very low and while it paid for all the individual checks and everything was done to the best of its knowledge, technology or even data science was never part of the process explains Andreas Lehmann, SVP Operations.
“Also, customers had to wait for our manual order approval which was an issue for logistics cut-off times,” he says. “We realised we needed real time decisions and higher credit limits and were looking to outsource these processes – including managing the risk of customers not paying – as we also managed the dunning and encashment process in-house.”
With B2B BNPL, most of the orders Contorion receives are checked in real time. Customers therefore get an immediate decision and the order is ready to be processed immediately (although in rare cases Billie will put the order on hold to perform another check or see if the existing credit limit can be exceeded). Credit limits start at €7,500 but can be extended and customers have 30 days to pay their invoice from the date of shipment.
“Over the last four years our conversion rate has increased by more than half,” says Lehmann. “Almost two-thirds of all our customers use the invoice product provided by Billie at the checkout and the acceptance rate is 91%. The average order value for customers using BNPL is 28% higher than the average order value of those who use other payment methods.”
Brian Blank, Senior Manager at BNPL business services provider Splitit reckons there is considerable scope for the use of BNPL in B2B, especially among small companies.
“While getting it into mid-market and enterprise business may take a bit longer, there is a faster path in smaller businesses and sectors such as professional services,” he says. “Our services can be easily integrated into platforms through an API that can be turned on or off depending on the needs of their customers.”