Technology is reshaping the nature of how buyers and sellers of goods finance their transactions, and logistics processes are serving as the foothold for opportunities on both the shipper and financier sides of the equation.
The macro trend of allowing sellers to get paid faster and buyers to hold on to capital longer has been playing out for years, but is moving into overdrive during the COVID-19 pandemic as demand for products strains suppliers in their production process and working capital needs for importers. What’s more, trade flows are shifting in a way that will necessitate more — and smaller — suppliers in Asia gaining access to cheaper capital in the years ahead.
According to UK-based banking and financial services firm Standard Chartered, Asia is expected to account for 40 percent of global trade flows by 2027, up from 34 percent in 2010.
“The major regions trading with Asia — like the US, Europe, and Africa — are expecting a slowdown, driving contraction in trade volumes along these corridors,” Michael Sugirin, head of open account and trade implementation at Standard Chartered, told JOC.com. “In Asia, even though SMEs [small and medium enterprises] make up 42 percent of the region’s GDP and are responsible for over half the jobs, they only receive 18.7 percent of the total bank credit, according to ADB [the Asian Development Bank].”
Sugirin said the total SME financing gap is approximately $1.5 trillion, with most existing supply chain finance entities focused on solutions that hinge on the receipt of goods or at least a post-shipment notification.
“You have to move the goods and you have to move the cash,” said Gary Schneider, vice president of financial services at the software provider Infor Nexus, which offers trade finance solutions and recently tied up a deal with Standard Chartered. “But the data on which both are reliant, it’s the same. What did you order? What did you ship? What’s in the container? And for the buyer, what should I pay and when?”
Connectivity and data
The broadening of access to trade finance is based on some of the same concepts that have taken root in other areas of logistics: connectivity to a network of trading partners, real-time sharing of data, and a comfort level with cloud-hosted, browser-based systems.
“Banks were providing liquidity where they were, but it was a paper-based and disconnected world,” Schneider said. “Networks like Infor Nexus were building, and their clients were joining our network and it was an opportunity for financing. We were deep in retail and apparel and footwear; we had a dense network with lots of transactions and lots of suppliers. There was the realization that big suppliers are on our network, and we want to finance them.”
Schneider said trade financing has typically fallen into two categories based on risk profiles. In one, a bank is more comfortable that a big buyer of goods — i.e., an importer — is a safer bet to back than the thousands of sellers — i.e., overseas suppliers — it buys from.
The other category is financing the suppliers, smaller entities that typically need cash in their pre-production phase. That need, he said, has traditionally been served through letters of credit issued by local banks that have a higher comfort level with the risk of backing a small company in their region.
The new mentality around trade finance, however, is to use the volume of transaction data captured in logistics networks such as Infor Nexus’ and use that to moderate risk for financiers.
“In the last five years, that buyer and supplier have transacted a lot,” Schneider said. “Here’s what’s been ordered, here’s how likely the production stays on schedule, how much has been deducted. There’s this rich trove of information.”
That information helps a bank or other financing entity mitigate risk and provide visibility in the financing decision, Schneider said.
“You weren’t able to get the insights as a bank to what’s happening in that relationship,” he said. “So they’re incorporating information into their risk models, and it’s more than just balance sheet information, which is especially important in that pre-shipment decision.”
A multitude of entities have inserted themselves into the trade finance picture in recent years, and that list continues to grow. It includes legacy financial institutions such as Bolero, Mastercard, and NASDAQ; startups such as Mundi, which focuses on US–Latin America trade finance; and logistics providers such as Beacon, a London-based digitally oriented forwarder that focuses on integrating trade finance and freight processes.
In the middle are long-established container carriers, notably Maersk Line and CMA CGM, forwarders such as Flexport, and software providers such as Arviem and Infor Nexus.
Suppliers driving demand for new options
Sugirin said that multinational corporations are focused on the sustainability of their supply chains and simultaneously looking to shorten and simplify them, “moving from just-in-time to just-in-case strategies.”
“Trade finance solutions will help dampen the impact,” he said. “We are seeing a significant increase in interest in our supply chain finance solutions in geographies where the suppliers are based. Moreover, with the heightened focus on digitization, collaboration between banks and platforms will accelerate innovation to deliver financing to the last mile.”
Standard Chartered incorporated Infor Nexus’ trade finance platform to augment its own trade finance solutions, which range from cash management and liquidity to trade finance, to reach customers that had previously built their supplier networks via Infor Nexus.
“Clients with complex supply chains and multi-bank relationships tend to work with third-party platforms,” he said. “Some clients had already invested heavily in digitizing their supply chains with platforms such as Infor Nexus. With the development of an API [application programing interface], these linkages and collaboration will ease the implementation and make the experience even more immersive.”
He said the API also gives Standard Chartered reach into a market of smaller suppliers that might have been seen as too risky to back in the past.
“We get far deeper insights into the physical supply chain and this data provides more visibility on the performance of each supplier,” he said. “Today we are looking at the data to see historical track records, and over time we will be able to use this data to predict financing needs and opportunities in real time.”
Historical decisions ‘intrinsically out of date’
Another major player in the trade finance space is Greensill, a London-based firm that focuses on providing working capital to large and small businesses globally. The company uses “technology, legal structure, and a significant and diverse source of capital” to serve millions of small customers in 170 countries, CEO Lex Greensill said in an interview in late July with Radu Palamariu, who runs a Singapore-based executive search consultancy.
“Delivering credit real time to millions of organizations, such as we do, is about getting information faster,” he said. “It’s about having better and more complete information than historically has been available and having information that’s real-time and forward-looking, as opposed to credit that’s driven on a backward-looking basis, where the information you’re using is intrinsically out of date.”
Greensill said that even a decade into its business, the supplier trade finance market has room to grow because “finance to SMEs is, for all intents and purposes, nonexistent, or at least nonexistent at price points that are fair.”
That technology might help smooth the rough edges of global buyer-seller relationships is no shock to companies that have seen opportunities there for the taking as both the financial and logistics world gravitated toward digital environments.
The difficulty in developing such solutions, according to James Coombes, founder of the data ingestion software provider Vector.ai, lies not just in the opacity of shipment information for financing institutions but also in an administrative inertia in the banking industry.
“The bank helps the tension between an importer and exporter when they don’t know each other well,” he said. “The importer doesn’t want to pay until they get the goods, and the exporter wants to be sure the importer will pay.”
The mechanism used to reduce that tension, the letter of credit, is linked to shipping documents, such as the bill of lading (BL) and the packing list, “anything it takes to allow a good to cross an international border,” Coombes said.
“The bank has the title because they have the BL, but banks have a huge operational aspect,” he said. “The documents have to fit all these rules, and it’s incumbent on the bank to get it right. In sum, the docs rule this financing aspect. It’s almost over-collateralized. Rates are low but banks charge a lot because of this administrative friction. The pain point is not the credit, it’s the operational part.”
That friction has driven players such as Maersk, CMA CGM, and the Swiss visibility provider Arviem, all of whom serve shippers as customers, to tether their own data from those customers to the ability to offer trade finance options.
The container lines use transactional data to create a risk profile about who and what to finance, similar to Infor Nexus’ approach but without the in-house network of connected suppliers. Schneider said Infor Nexus is open to being the “engine” for container lines or other service providers to add a trade finance solution and that supplier connectivity.
“Our engine is for rent,” he said. “We have no problem with a carrier sticking their logo on that engine. The larger networks will be more agnostic to service providers.” Sugirin noted that Standard Chartered recently joined TradeLens, the Maersk- and IBM-developed container visibility and data platform, a signal that there will be more interconnectedness between banks, software vendors, and container lines.
Arviem uses sensor-based visibility data on containerized goods to reduce the risk profile of cargo in transit, thus allowing partner banks to feel more secure in knowing when goods are likely to arrive. That, in turn, allows buyers to preserve working capital by getting credit from financiers that are comfortable the goods are indeed where they are purported to be.
Another approach is incorporating a trade finance option at the time of booking freight instantly, such as Alibaba began offering to sellers on its business-to-business marketplace to US buyers in April. That model is similar to what Beacon, a new entrant into the digital forwarding category, has based its business around.
There’s a further theory in the trade finance world that the industry will be mostly populated by non-traditional bank entities as those entities figure how to use data to tap into pools of capital on one side and the networks of suppliers on the other. One software vendor suggested to JOC.com that, over time, these smaller, transactional financing events “don’t produce enough juice for the squeeze” for traditional banks.