Global banks are looking at digitization and automation to help bridge the trade finance gap, which is created by unmet funding demand mostly from small businesses in emerging markets.
The gap, measured in rejected trade finance applications, currently stands at between $1.4 trillion and $1.6 trillion, equal to 8% to 10% of global merchandise trade, according to estimates from the Asian Development Bank. This comes against the backdrop of a U.S.-China trade war, which threatens to disrupt global value chains, although the two sides may be getting closer to an agreement.
The rejection rate is higher among small and medium-sized enterprises due to the higher cost and risk for banks. When dealing with SMEs, banks often have to compensate for information asymmetry in the applications, which may not contain sufficient data about the business network or financial performance of the borrowers or may be missing collateral or guarantees.
Know-your-customer, or KYC, concerns and the need for more collateral or information about the companies are the two top reasons for rejecting SME applications given by banks surveyed by the ADB. Financial crime checks and the low ratings of local correspondent banks or the SMEs themselves are more expensive for global trade finance banks, the organization said.
Data issues
"Solving the trade finance gap is going to come down to data," Michael Vrontamitis head of trade at Standard Chartered PLC said at the Sibos technology and banking infrastructure conference in London in late September. SME lending is turned down mainly due to lack of data about the client, the transaction or the right data being provided, he said.
"The lack of trade financing is a significant non-tariff barrier to trade, particularly for SMEs in developing economies," the ADB said. As much as 44% of SMEs do not find alternative funding options after being rejected by a bank, its latest survey shows.
It also shows that banks and other companies believe new technologies such as blockchain, artificial intelligence and machine learning can help significantly improve an SME's access to trade finance.
Technology can help by facilitating KYC and financial crime checks through automation, driven by banks and regulation technology firms such as Quantexa Ltd., according to Cécile André Leruste, a European banking lead at technology consultancy Accenture.
"There is also a trend for banks to create consortia and utilities around KYC to share client data, speed up and reduce the cost of the KYC process," she said in an interview.
There are many ways to support SME financing, such as application programming interfaces for treasury and cash flow forecasting, Leruste said. Accenture offers such APIs and, in parallel, is testing alternative scoring models with a number of banks based on enriched data, which increases the number of accepted companies, she added.
Such open APIs help both companies and their lenders. Companies can automate their payments and cash management from a single portal across multiple banks and banks can use open APIs to connect and share information.
In late September, HSBC Holdings PLC launched a trade finance API that allows other banks to provide import and export guarantees to their clients. The guarantees will be offered on the HSBC partners' own portals but can be provided by the U.K. group's partners as well as itself. ING Groep NV and Standard Bank Group Ltd. are testing the system.
New lenders needed
Technology holds great potential for bridging the trade finance gap. Ant Financial Services Group's Mybank platform has onboarded 15 million out of 38 million Chinese SMEs already, creating an opportunity for financing $70 billion to $120 billion SME trade out of China, Accenture estimated.
The trade finance gap is biggest in the Asia-Pacific region, which accounts for 39% of rejected applications globally, according to ADB data. Asia-Pacific also accounts for about half of all trade finance applications globally, the data shows.
Nevertheless, digitization alone will not be enough to close the gap without new lending sources.
Banks are the main provider of global trade finance and will remain so in the future, but nonbanks have an important role to play, Mark Evans, transaction banking managing director at Australia & New Zealand Banking Group Ltd. said, speaking at Sibos.
The International Chamber of Commerce has identified the attraction of nonbank capital as the key issue to solving the global trade finance shortage in the next three to five years, according to ANZ.
Insurers could potentially become more than a risk mitigator for banks and start investing in trade finance themselves, Olivier Paul, director of finance for development at the ICC said, also speaking at Sibos.