Small and medium-sized enterprises (SMEs), especially those in developing countries, have historically struggled to gaint access to trade finance, which, over time, has led to a global gap that the Asian Development Bank (ABD) estimated at US$1.5 trillion in 2018.
The COVID-19 outbreak is further exacerbating these challenges with a new research by the International Chamber of Commerce (ICC) projecting a capacity of US$1.9 to US$5 trillion in the trade credit market just to return to pre-COVID-19 levels. By 2025, the World Economic Forum (WEF) believes the global trade finance gap could reach US$2.5 trillion.
SMEs face the biggest challenges obtaining trade finance, a 2019 ADB research found, with the rejection rate of SME proposals standing at 45%, higher relative to mid-sized and larger-sized firms (39%) and multinational corporations (17%).
Banks cited anti-money laundering (AML) and know-your-customer (KYC) regulations as the biggest obstacles to expanding their trade financing operations. While these regulations are critical to ensure that the global financial system is not used to fund terrorism or launder money, they can inadvertently cut off legitimate companies in less-developed markets from the financial support they need to grow.
But technological advances are bringing new hopes for the sector with fintech and digitalization expected to help bridge the trade finance gap, particularly amongst SMEs.
Alternative financing
In Asia, startups like Incomlend, Qupital and FundPark, are providing alternative funding options outside of the traditional bank financial system.
Incomlend, from Singapore, operates a global invoice exchange platform that allows suppliers from different countries to finance their export invoices by selling them to professional investors at a discount. For importers, Incomlend also provides supply chain finance solutions that allow them to extend credit terms with their overseas suppliers.
The platform employs AI-powered underwriting technology and is able to onboard clients and process deals in a more timely and flexible manner than a traditional financial institution would.
Incomlend, which raised US$20 million in August, said at the time that the platform had facilitated more than US$330 million in financing and covered invoice finance trades across 50 countries.
FundPark, from Hong Kong, offers an online trade finance platform targeting unbanked and underbanked corporate clients. The platform, which serves clients in Hong Kong and Taiwan, allows businesses to sell their account receivables at a discount to get immediate cash and improve cash flow. For both institutional and individual funders, it offers an innovative investment opportunity in trade finance.
FundPark has its own proprietary model for due diligence and invoice verification, supported by Euler Hermes, the world’s largest trade credit insurer. The startup plans to set up two additional offices in Southeast Asia.
Qupital is another startup from Hong Kong. Qupital provides a supply chain finance platform that allows SMEs to raise capital from professional investors. It uses data analytics to assess creditworthiness, streamlining processes and minimizing risk.
Qupital has raised US$17 million in funding so far including a US$15 million Series A last year. In June 2020, it signed a partnership with eBay to provide offshore financial services including working capital to eBay sellers in China and Hong Kong.
Blockchain in trade finance
Besides alternative funding players, Asia is also home to a number of startups that are using blockchain to improve traceability, transparency and operational efficiencies in trade finance.
For example, Contour, formerly known as Voltron, was established in Singapore earlier this years by fintech consortium R3, along with seven of the eight founding bank members, namely Bangkok Bank, BNP Paribas, CTBC, HSBC, ING, Standard Chartered and SEB.
Built on Corda, the platform digitalizes paper-based letters of credit (LOCs), reducing fraud, and speeding up the LOC process from 5 to 10 days to just one day.
Contour went live as a beta network in January 2020. It launched into live production in October 2020 following trials with 80+ banks and corporates in over 17 countries.
Dltledgers is another tech startup from Singapore that uses blockchain to facilitate cross-border trade digitization and execution. Dltledgers essentially works as a registry of trade finance transactions. Details associated with trade documents are submitted to the platform, which can then determine whether financing is being sought multiple times for the same cargo.
The project is jointly led by Standard Chartered and DBS Bank but brings together several other international financial institutions including ABN Amro, ANZ, CIMB, Deutsche Bank, ICICI Bank, Maybank, OCBC and UOB. It is supported by government agency Enterprise Singapore, with the Association Banks of Singapore acting as an advisor.
Since the first transaction went live in early 2018, Dltledgers claims it has executed over S$3 billion worth of live trade finance transactions involving 400+ traders, 65+ banks and tertiary partners.
Other noteworthy startups reinventing trade finance in Asia include Capital and Credit Risk Manager (CCRManager) from Singapore, a global digital platform for the secondary trading of trade finance obligations, as well as Liberatrade, a company from Hong Kong that uses AI for supply chain funding, logistics and predictive demand.
Featured image credit: Pexels
, especially those in developing countries, have historically struggled to gaint access to trade finance){kind=link}