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Fintechs Haven't Reduced the Trade Finance Gap – So far

By Zack Andresen

Despite efforts from financial technology (fintech) start-ups, the import-export trade finance gap does not appear to be improving much – particularly for micro, small, and medium-sized businesses (MSMEs).

According to a September 2017 report from the Asian Development Bank (ADB), the trade finance gap remained relatively steady at $1.5 trillion in 2016 compared to a record high $1.6 trillion gap the year prior.1 MSMEs remain hardest hit by gaps in trade finance: the ADB report attributed 74 percent of rejected trade finance requests to MSMEs and midcap firms in 2016, compared to just 57 percent in 2015.2

 

ADB says this is despite fintech investment in trade finance that exceeded $13 billion in 2016 – more than half of the estimated $24 billion in total 2016 fintech investment cited in a separate report from the International Chamber of Commerce (ICC).3 Some experts – including Steven Beck, Head of Trade Finance at ADB – say fintech efforts may need to be redirected before their impact on import-export trade finance can be fully realized.4

 

The Role of Fintech in Import-Export Trade Finance Today

 

Fintech companies operating in trade finance typically focus on cost-reduction initiatives such as digitization and automation, including blockchain and alternative lending options (e.g., peer-to-peer (P2P) lending). The $1.5 trillion trade finance gap has both micro and macro effects on global import-export traders. For example, 60 percent of companies with rejected trade finance requests were unable to complete the transaction as a result of the rejection.5 On a macro level, trade growth slowed to a 1.3 percent in 2016, the first time since 2001 that the ratio of trade growth to GDP growth fell below 1:1.6 The ADB report also notes that while quantifying the impact on job growth is difficult, data suggests a 10 percent increase in trade finance would equate to a 1 percent increase in global employment.7

 

Reducing the Trade Finance Gap Through Enhanced Credit Risk Assessment

 

But, according to the ADB report, cost-cutting measures alone are not having the desired impact, as evidenced by the still-high trade finance gap and increased MSME rejection rate.8 In a press release announcing the new report, ADB's Beck said, "More than reducing cost, fintech needs to deliver an enhanced capability for financial institutions to conduct due diligence on MSMEs before it can play a role in reducing gaps."9

 

The report suggests that reducing the gap will require fintech companies to address MSME risk assessment.10 With banks spending up to $500 million annually on "Know Your Customer" (KYC) regulations11 and 29 percent of rejected import-export trade finance requests tied to KYC concerns, improving banks' ability to conduct due diligence could open doors to more MSME financing.12

 

The ADB report mentions the Legal Entity Identifier (LEI) — a 20-character alphanumeric code that identifies over 500,000 organizations from 195 countries as of May 2017,13 including over 130,000 in the United States14 — as a proposed solution. However, the LEI faces many of the same adoption issues experienced by fintech companies.15 While organizations like the ICC,16 World Trade Board,17 and of course, the Global Legal Entity Identifier Foundation (GLEIF)18 continue to advocate for universal LEI adoption, costs and change management remain barriers to adoption by small organizations and large corporations alike.19

 

The ADB concludes by suggesting supply chain finance (SCF) as a new approach to enhanced credit risk assessment. According to the report, "...SCF assesses performance history and the ‘stickiness' of relationships in a supply chain," where more "traditional methods" reliant on financials tend to be a weak point for MSMEs.20 Some fintech companies21 are already tackling SCF as a means of reducing the effect of late payments on MSME suppliers.22 Banks are supportive about the future of SCF as well. According to a survey from the ICC, 40 percent of banks ranked SCF's position as "high priority and significant growth" in 2017.23

 

The

Takeaway:

Though fintech companies are significantly investing in import-export trade finance, focusing on cost reduction initiatives appears to have had little impact on the trade finance gap to-date. ADB's 2017 report brings to light some alternative approaches fintech companies could take to open doors for more trade finance options at the small-to-medium-sized business level, emphasizing the need for help with due diligence.

Zack Andersen - The Author

The Author

Zack Andresen

Zack Andresen is a business technology writer based in Brooklyn, NY, but currently traveling the world with his wife and son. Learn more at ZackWrites.com.

Sources

1. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
2. “$1.5 Trillion Trade Finance Gap Persists Despite Fintech Breakthroughs,” Asian Development Bank; https://www.adb.org/news/15-trillion-trade-finance-gap-persists-despite-fintech-breakthroughs
3. 2017 Rethinking Trade & Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
4. “$1.5 Trillion Trade Finance Gap Persists Despite Fintech Breakthroughs,” Asian Development Bank; https://www.adb.org/news/15-trillion-trade-finance-gap-persists-despite-fintech-breakthroughs
5. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
6. “Trade recovery expected in 2017 and 2018, amid policy uncertainty,” World Trade Organization; https://www.wto.org/english/news_e/pres17_e/pr791_e.htm
7. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
8. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
9. “$1.5 Trillion Trade Finance Gap Persists Despite Fintech Breakthroughs,” Asian Development Bank; https://www.adb.org/news/15-trillion-trade-finance-gap-persists-despite-fintech-breakthroughs
10. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
11. “Thomson Reuters 2016 Know Your Customer Surveys Reveal Escalating Costs and Complexity,” Thomson Reuters; https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html
12. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
13. “The Legal Entity Identifier Regulatory Oversight Committee - LEI ROC,” LEI Regulatory Oversight Committee; https://www.leiroc.org/
14. “LEI Statistics,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics
15. “Who is Who and What is What? The Need for Universal Entity Identification in the United States September 2017,” Data Foundation; http://www.datafoundation.org/lei-report-2017/
16. 2017 Rethinking Trade & Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
17. “World Trade Board Initiative: To drive adoption of Global Legal Entity Identifier numbers by corporates and SMEs,” World Trade Symposium; https://worldtradesymposium.com/to-drive-adoption-of-global-legal-entity-identifier-numbers/
18. “Our Vision: One Identity Behind Every Business,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/about/our-vision#
19. “Who is Who and What is What? The Need for Universal Entity Identification in the United States September 2017,” Data Foundation; http://www.datafoundation.org/lei-report-2017/
20. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
21. “Connecting Corporates, Suppliers and Funding Providers,” Crossflow Payments; https://www.crossflowpayments.co.uk/services
22. “How FinTech Can Modernize SME Supply Chains,” Let’s Talk Payments; https://letstalkpayments.com/how-fintech-modernizes-sme-supply-chain/
23. 2017 Rethinking Trade & Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf

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