How is Tradetech bridging the trade finance gap in ASEAN?
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Trade is an engine for global economic growth, representing $9 trillion USD globally, and predicted to grow to $24 trillion by 2026, according to predictions from Boston Consulting Group.
We spoke to Deepesh Patel, Marketing Director at Trade Finance Global about the global state of trade in 2019, and what this means for MSMEs in ASEAN.
ASEAN, consisting of 10 independent countries and 9% of the world’s population, has an economy predicted to be the world’s 4th largest single market after the EU, US and China by 2030, driven largely by a growing middle class and consumer market with a population currently standing at 630 million.
Trade has been identified as a significant barrier to growth within ASEAN, promoting both 0% tariff intra-ASEAN trade, as well as international opportunities. Growth in ASEAN MSME’s is often hindered by the trade gap, that is, the provision of trade and receivables finance to provide liquidity and working capital for growth.
Proposed and Rejected Trade Finance Transactions (by region):
Figure 1: Source: ADB. 2017 Trade Finance Gaps, Growth, and Jobs Survey.
Why is trade difficult to finance?
Generally speaking, ASEAN based MSMEs bear the brunt of the estimated US$1.5tn trade finance gap, largely due to:
- Lack of credit information and a shift towards open account terms
- Stringent financial regulations since the global financial crisis have made it challenging for banks to lend to businesses
- Geopolitical events (US-China trade war) has had an adverse impact in ASEAN
Around 80% of the world’s trade is financed on open account terms, an ongoing trend away from paper-heavy instruments such as Bank Guarantees and the Letter of Credit.
Open account transactions rely on trust, that is, an agreement from the buyer that they will pay for goods or services at a given date, however, that trust is hard to establish when dealing with cross-border suppliers, overseas buyers and customers where there is little public information available.
Banks are lending less to MSMEs. It’s a well-known fact and frequently cited by development banks, inter-governmental trade bodies and world trade organisations. Since the 2008 financial crisis, banks are required to hold more cash in their balance sheet, and MSMEs, which are inherently risky nature, are often underrepresented by bank funders when it comes to accessing finance to grow.
Basel III regulation has been particularly challenging for the trade finance sector. As an example, when using the Credit Conversion Factor (CCF), which is used to calculate leverage ratios (i.e., the amount of leverage a bank can lend using its balance sheet), the ratio was changed from 100% to 20% for short-term self-liquidating letters of credit secured by the underlying shipments, and 50% for other transaction-related items (including performance bonds, bid bonds and standby letters of credit). Basel III has increased the cost of trade finance, making it more challenging for correspondent banking relationships, particularly in developing countries and ASEAN.
Therein lies a huge opportunity for non-bank funders, institutional funding and supply chain financing to help smaller suppliers, and MSMEs finance business for trading overseas, unlock new growth opportunities and find supply chain efficiencies.
2018 saw an unprecedented pace of change in trade, driven by geopolitics, sweeping regulatory changes and technological developments. Moving into 2019, in a climate of uncertainty, there are three main themes emerging: trade wars and sanctions, the regulatory treatment of trade, and the digitisation of trade.
For ASEAN markets, the US-China trade war has proven delicate for businesses. As recent trade data continues to show slower growth in China, in terms of recent PMI figures, trade data and GDP growth, the growth of neighbouring markets in ASEAN could be hindered due to close interlinkages, according to the ICAEW.
Tradetech – What is it and how is it bridging the gap?
UK-ASEAN Business Council heard from Trade Finance Global’s Deepesh Patel on three tradetech businesses who are actively addressing some of the business needs, explaining why they are focussing on financing challenges that ASEAN based MSMEs may face.
Tradeteq are creating a secondary trade finance marketplace:
Since the global financial crisis, banks have been moving to the ‘originate-and-distribute’ model to keep their lending portfolio off-balance sheet. This model has opportunities for non-bank finance specialists to deliver the US $1.5 trillion trade finance gap to fund global growth.
Tradeteq are bringing technology into their trade finance distribution platform to help non-bank investors assess risk and automate the selling of secondary trade finance products, helping standardise trade finance as an asset class to bring more liquidity into the market. Introducing non-bank capital to developing ASEAN markets is key to helping address the trade sector’s finance gap.
Traydstream is building systems which allow funders to document check quickly, building a better business case for financing smaller companies:
Traydstream is using technology to reduce the time taken to document check, by using OCR technology to read Letters of Credit, cross-check for consistency against ISBP and UCP rules and address any issues around missing fields and inconsistency. For ASEAN MSME’s, trading with suppliers and customers who are overseas through advising and correspondent banks would be easier, given the average time to process a Letter of Credit can be reduced from 2 hours to 45 seconds using this technology.
Also integrated with vessel checking software and freight forwarding data, the SAAS based product is designed to make trade processing more efficient. For ASEAN based companies, their advising banks can use software such as Traydstream to streamline the process for Letter of Credit transactions and speed up compliance checking times, which is often prohibitive and costly for small ticket deals.
Trade Finance Market (TFM) is bringing liquidity into SMEs in ASEAN markets:
TFM’s technology helps provide liquidity for global trade – especially to Small and Medium-sized Enterprises in emerging markets which are unable to access finance easily. Their applications focus on derisking and machine learning, pioneering the use of blockchain solutions to lower costs and reduce risk.
TFM makes it easy for trade finance companies of any size to utilise the power of distributed ledger technology to lower costs and reduce risk – their blockchain tools are API based so they work alongside existing workflows and ERP systems.
Innovating in the trade and finance space will continue to grow as we head into 2019, and adoption of fintech and tradetech continues in ASEAN, underpinned by high mobile usage, a growing, literate middle class and a large amount of investment, according to a recent EY study.
Singapore remains one of the larger hubs of trade and fintech in the region but continues to expand and build momentum across ASEAN. For MSMEs, debt related finance still remains a challenge to increase intra- and inter-trade flows outside and within ASEAN, but we believe that the advancement of technology to facilitate trade and receivables finance will only be a good thing for ASEAN.