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Banks look to 'internet of things' to help better assess trade finance risks

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Banks look to 'internet of things' to help better assess trade finance risks

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Trucks at a container terminal on Harbor Island, Seattle.
Photo: AP

Trade finance-focused banks are beginning to experiment seriously with the internet of things as a way to assess credit risk and optimize lending practices, in an increasingly challenging global trade environment.

The IoT typically features in international trade in the form of smart devices attached to containers to track the journey of cargo, including location, intrusion, door opening, humidity and temperature, in real time.

The use of such devices is growing: technology research firm Gartner forecast the enterprise and automotive IoT market, which includes transportation, will grow to 5.8 billion endpoints — or internet-connected devices — in 2020, a 21% increase from 2019.

Shipping and logistics companies such as Maersk Line A/S and DHL Logistics GmbH have already deployed the technology. Arviem AG, a Switzerland-based cargo monitoring company, has offered its tracking service to multinationals across industries for more than a decade.

For trade finance banks, the adoption of IoT is still in the early stages, but some research suggests the opportunities could be significant. A survey published in June by Mobey Forum, an industry association for banks and technology companies, identified trade finance as one of the areas where IoT has the biggest potential to enhance products and services. It also said banks need to explore the technology to remain competitive.

IoT technology could particularly benefit the small and medium-sized enterprises which struggle to access trade finance under banks’ traditional lending criteria and which is one of the factors behind a trade finance gap of between $1.4 trillion and $1.6 trillion, according to the Asian Development Bank's estimates.

More transparency

For banks, the idea behind implementing IoT is to obtain real-time information about the physical flows they are financing. This information could help them better assess risk at different stages of the trade life cycle, allocate capital more efficiently and ultimately get the confidence to finance more and at cheaper rates than they do today.

In November, Arviem entered its first formal bank partnership, with Erste Group Bank AG in Austria, and it is finalizing similar agreements with banks in Asia, Europe and North America, said Fabio Manca, the company's director of working capital solutions, in an interview.

The partnership will see Erste offer IoT-based inventory finance to large corporate clients, helping them to take inventory off their balance sheets. Because Arviem can monitor the location and conditions of the goods all the way from supplier to buyer, it is able to offer a structure in which it takes ownership of the goods while Erste finances them.

"Internet of things provides direct visibility of the assets, which is an important change," said Manca.

It comes as potential disruption from the U.S.-China trade tensions and Brexit has prompted businesses to stock up on inventory and delay payments, making it even more urgent to find ways to free up cash in the supply chain.

"There is a market need. We have been approached by corporate clients asking us to provide solutions to finance, for example, consignment stocks," Patrick Götz, head of corporate flow products at Erste Group, told S&P Global Market Intelligence. Consignment stock is legally owned by one party but held by another. When it is delivered to a buyer but before payment has been confirmed, it remains a burden on the seller’s balance sheet.

Götz said the "additional layer of transparency" provided by IoT is an enabler for this new financing product, which the bank will offer initially to a "handful of clients" starting in the first quarter of 2020.

Disrupting trade finance

Inventory finance is just one use case for IoT in trade finance. In a proof of concept in late 2016 involving Commonwealth Bank of Australia, Wells Fargo & Co. and Australian cotton trader Brighann Cotton, IoT sensors were used to trigger the automatic release of funds once the goods arrived at their destination.

Standard Chartered PLC is currently testing a concept for IoT-enabled distributor financing with large auto manufacturers in Asia. Sensors that track exactly when a car is moved from one warehouse to another, or sold to the end customer, enable the bank to define tenors and limits and make repayment calls based on the exact location in the value chain. Distributor financing funds distributors or manufacturers until assets have been sold to a retailer or end-user.

Standard Chartered and Wells Fargo are among the world's largest trade finance banks.

Arviem has also developed an IoT-based working capital solution that helps commodity traders receive financing as soon as the assets are loaded into the container, whereas banks typically only fund such trades after a bill of lading has been issued at shipment.

New credit models needed

While many banks are interested in IoT, few are so far actively using the technology, Manca said.

Financial institutions will have to overcome several hurdles before IoT can become a mainstream part of their business. For example, it would require a change in credit risk models both on the part of the banks and the regulators, Michael Vrontamitis, head of trade for Europe and Americas at Standard Chartered, said in an interview.

He said most financial institutions currently look at risk "in a very traditional way," relying on historical information to assess the creditworthiness of a company, rather than looking at individual properties of a transaction.

So while banks may be able to collect real-time IoT data on the transactions they are backing, integrating it into a financing decision is "quite complex," said Vrontamitis. "There's no way to link the data to our decision process," he said.

IoT will also not be very significant on its own. Only when combined with other technologies such as machine learning and blockchain or cloud-based platforms will the technology have an impact, Vrontamitis said.

IoT is already on the roadmap of blockchain initiatives such as we.trade Innovation DAC, which is led by a consortium of banks including HSBC Holdings PLC, Deutsche Bank AG, Banco Santander SA, Société Générale SA, UniCredit SpA and Erste, together with IBM. However, the we.trade platform, which facilitates open account trade transactions, where exporters carry most of the risk, and financing for SMEs in Europe, is still in its infancy, with banks having only just started using it for commercial transactions this year.