Trade finance has become a popular target of FinTech innovators looking to disrupt what has been, for decades, a manual, paper-based process.
Traditional banks are unsurprisingly not always invested in revamping their own trade finance operations. The costs associated with acquiring, underwriting and managing a trade financing facility are high and rarely worth the expense, considering the volume of small and medium-sized businesses (SMBs) that need funding for lower-value transactions.
FinTechs are moving into the space in an effort to digitize and automate many of those workflows for banks — or to connect SMBs to alternative sources of finance. Yet Desmond Loh, chief executive officer of GUUD, said the market continues to overlook key pain points for financiers.
In a recent interview with PYMNTS, Loh spoke about the challenges of onboarding, data management and fraud that have held the trade finance industry back from making a dent in the notorious $1.5 trillion trade finance gap.
Overlooking Friction
According to Loh, there are two major points of friction when it comes to providing and servicing trade finance: credit onboarding and transactional financing.
“Most FinTech platforms target the second point,” he said. “However, I sometimes feel that is putting the cart before the horse.”
FinTechs that either collaborate with banks or aim to disrupt them can streamline transactional financing, the process of connecting a small business to trade finance and enabling them to use it. But that can often mean overlooking onboarding, which is where some of the biggest challenges involving application and underwriting exist.
From the very beginning, trade finance FinTechs can miss the opportunity to mitigate these pain points by adequately understanding a small business and guiding it to the appropriate source of funding, whether it be a bank or nonbank financial institution (NBFI) that is most likely to approve the trade finance facility.
And with global regulations growing more arduous, financial institutions’ pain points don’t end there.
“Trade finance compliance checks are tedious — and perhaps even onerous,” Loh said. “I can see that banks and NBFIs are naturally shying away from trade financing, especially for smaller amounts since the work involved is the same.”
Tackling Fraud
Those compliance checks are tedious, but they are essential to mitigating the risk of fraud, which can plague the trade finance arena in a variety of ways.
In theory, trade finance is a relatively straightforward process compared to other forms of financing, said Loh. Financing directly correlates with the cost of a trade transaction, creating a “linear flow.” Yet paper and a lack of automation make monitoring that flow a challenge, resulting in a higher risk of fraud.
This is yet another area where trade finance FinTechs can fail to ease pain points for financiers. Loh highlighted three areas that hold the greatest opportunity to mitigate risk, all of which involve data.
The first occurs in the process of obtaining data from key sources, like Internet of Things (IoT) devices used to transport goods. Those tools can record product weight, type, quality and quantity, among other metrics, and when that data is adequately provided to a financier, due diligence workflows can be eased.
The second involves ensuring that the source of that data is authentic and secure, and requires the adoption of authentic data sources such as a bill of lading, customs permits and other key trade documents.
Finally, Loh said, tools like artificial intelligence can check trade finance applications and associated invoices against a database to ensure that businesses are not submitting duplicate invoices to be financed.
In all three areas, inadequate data management and checks can result in fraud.
Loh assured that this risk remains relatively low compared to the high volume of incident-free trade finance transactions.
“I would hazard a guess that it is a relatively small percentage,” he said. “Unfortunately, there have been many cases of high-profile trade finance fraud cases over the last two to three years in commodities and supply chain financing.”
Mitigating risk from the onset at the time of onboarding can enable FinTech to make a true impact in the trade finance arena.
Supporting SMB Health
Supply chain financing scandals and other trade finance fraud headlines have garnered some criticism of the market in recent years. With delayed B2B payments a frequent source of pain for small importers and exporters, some critics of trade finance argue the tool only perpetuates the ability for larger firms to impose poor B2B payment practices on their SMB partners.
Loh disagrees with that sentiment, however.
“I tend to relate trade finance to nutrition,” especially for SMBs, he said. “No one would argue with having more food.”
There is a direct correlation between the availability of trade finance and the ability for a small business to grow, he said. This can have a positive impact on B2B payment practices as it negates the need for SMBs to stick with their late-paying customers and remain dependent on unfavorable credit terms. Trade finance promotes cash flow health and the flexibility for smaller terms to choose their customers.
Making a dent in the massive trade finance gap is not easy, and despite the surge of trade finance FinTechs, that gap remains. But by expanding efforts to combat friction to include the on-boarding process and supporting financiers’ throughout the lifecycle of the facility, trade finance innovators have an opportunity to wield technologies like IoT, artificial intelligence (AI) and even blockchain to promote security and offer cost-effective tools with a global reach, said Loh.