Finding Another FinTech Angle To Tackle The Trade Finance Gap

With a market gap as wide as $1.5 trillion, it’s no wonder the trade finance industry has landed the attention of FinTechs at a lightning pace in recent years. Much of that focus occurs in the form of alternative lenders introducing new avenues through which businesses can access trade finance services that they cannot access through a traditional bank.

But research suggests that FinTech is struggling to make a dent in the $1.5 trillion trade finance gap (as estimated by the Asian Development Bank).

The ADB’s analysis, published in its Trade Finance Gaps, Growth and Jobs report last September, found only about a fifth of businesses surveyed had used some type of alternative finance to access trade finance.

“Though FinTech credit is growing rapidly, low usage likely reflects the small size of FinTech markets,” the report concluded.

There are companies emerging, however, that address the trade finance gap directly with traditional lenders — and investors are perking up to their solutions. One of them is CCRManager, based in Singapore. The company operates in the secondary trade finance market, enabling lenders to sell trade finance assets for liquidity, credit and capital management; this model positions CCRManager away from the borrower directly, instead tackling the trade finance gap by addressing trade finance banks’ biggest pain points.

According to the firm’s Co-Founder and COO George Lee, among those pain points is regulation.

“There are a number of surveys and studies that consistently show that the biggest challenge for trade finance banks, and consequently trade finance customers, is compliance and regulation,” he told PYMNTS.

Indeed, the Asian Development Bank found that 90 percent of financial institutions (FIs) cited anti-money laundering and Know Your Customer requirements as top barriers to expanding trade finance operations. Basel III regulations that set banks’ liquidity requirements were also top challenges for lenders, the ADB noted.

These regulations are, of course, necessary.

“It goes without saying that regulation and compliance is important in our view,” Lee said. “From the prevention of fraud, criminal activity or terrorist financing, to the more affirmative type of regulations that facilitate innovation for segments that would have been ignored otherwise, regulations are key to the efficient and orderly functioning of our financial markets, and there is general consensus that regulations are here to stay and will grow.”

These requirements, however, place what Lee described as the “unenviable task” of balancing risk mitigation and security with the need to broaden access to capital for trading businesses.

This challenge highlights the other massive hurdle for the trade finance market, according to Lee: collaboration.

“In an increasingly digitized global environment, regulators and financial institutions are going to have to work together to ensure that we don’t end up in a situation where legitimate trade finance business cannot be serviced sustainably,” he said.

CCRManager launched its platform last year in collaboration with the Monetary Authority of Singapore. Since then, the firm raised $6.5 million in funding from an array of backers, a sign of support for the company’s own ability to work with regulators.

The company also exemplifies the financial service industry’s increasing tendency to mix traditional and alternative as banks work with emerging FinTechs to solve problems. In the trade finance market, these collaborative efforts often appear in the area of finance origination, or, more vaguely, of competition — enabling lenders to gain an advantage over rivals and address “immediate business priorities,” explained Lee.

“[There’s] nothing wrong with that,” he said, “but [it’s] certainly not going to speed up the global transformation we need.”

He likened this strategy to the mobile commerce space: The development of mobile apps for online shopping can aid industry growth, but without solutions addressing the settlement and fulfillment of orders placed on mobile phones, industry needs remain unaddressed.

Targeting the secondary market is CCRManager’s effort to address one of those unmet needs for trade finance banks, namely the management of capital and liquidity as it relates to trade finance operations. Lee noted that the emergence of primary market solutions are beneficial (“I think it’s healthy to witness the proliferation of such solutions,” he said. “More choices lead to potentially better options for the borrowers), but the effective operation of the secondary market is important for the primary market to run optimally, Lee said.

But with a mountain as high as $1.5 trillion to climb, Lee acknowledged the difficulties of making an impact.

“The sheer scale of the changes required to deliver meaningful digital changes to trade finance businesses are often overwhelming and will take a long time to bear fruit,” he said, also noting the struggle for trade finance operations to compete for limited resources, particularly when FIs have to consider whether to make long-term investments to improve trade finance or place that capital toward initiatives with more immediate effects.

“Viewed cynically, I would find it difficult to put my promotions, pay raises and bonuses on the line, and I would certainly have a harder time explaining it to my shareholders,” said Lee.

Whereas collaboration between banks and regulators is a hefty task, Lee emphasized that collaboration between banks and FinTechs is a paramount strategy to address multiple angles of the trade finance market, improve operational efficiency, support compliance requirements and, ultimately, make meaningful progress to expand access to trade finance.

“Financial institutions have the opportunity to harness the agility and singular focus of FinTech companies like ourselves,” he said. “We are certainly seeing more of such symbiotic relationships with almost every major institution spawning a digital innovation lab or team.”

“There is uneven adoption and understanding of the power of such relationships across different organizations,” he continued, “but I’m positive we’ll get there as long as there is sincerity of purpose and a true desire to make things better. Then, perhaps, the trade finance gap can be a thing of the past.”