PAVING THE WAY FOR THE FUTURE OF TRADE AND WORKING CAPITAL FINANCE by Johanna Wissing, LiquidX

Today, much is being talked about the role of Fintech companies in the financial services sector and phrases such as “digital banking”, “technology disruption” and “Fintech revolution” are commonplace. New start-up businesses are emerging almost daily and the Fintech sector has by now become a major part to the overall size of the digital economy and is attracting significant investment from VC firms. Key drivers behind that development are the increasing adoption of smart-phone technology, changes in consumer preferences demanding the development of ever quicker and simpler ways to transact and an increasing need for alternative financing facilities. New digital developments such as cloud banking, the emergence of crypto currencies and of course blockchain technology (ultimately a component of the crypto currencies, but with the potential to be used for many other applications) are rapidly changing the industry.

The majority of the Fintech evolution so far has taken place in the payment, peer-to-peer lending and crowd-funding space with companies like Transferwise, iZettle and Funding Circle having acquired a significant customer base. The trade finance world on the flipside has been left largely untapped by technology companies, something which is changing right now and which will help to transform the way in which trade and working capital finance will be provided in future.

Having access to trade and working capital finance is key for companies worldwide whether they are trading globally or within their domestic home markets, yet the ICC 2016 Global Trade and Finance Survey concludes that next to slower growth of key emerging market economies, declining commodity prices and protectionist movements the shortage of supply of trade finance presents one of the biggest risks to global economic growth. Amongst other factors that shortage has to be attributed to a lack of bank financing with particularly the SME market suffering from the consequences of the same. But it would be too easy to simply blame the banks for that shortage, as the overall environment for banks active in trade is difficult to say the least: trade finance is generally regarded as a high-risk asset class by regulators despite its historic low default rates and therefore banks are holding significant balance sheet to support their trade book which becomes ever more difficult against the backdrop of tight market pricing. On top of the capital requirements many banks’ abilities to provide trade facilities – be it for risk mitigation purposes in, for example, the form of confirmed LCs, guarantees, indemnities etc. or for financing purposes such as supply-chain finance, receivables finance, trade loans etc. – is impacted by legacy operating systems which are out-dated thus significantly adding to the operational risks and costs of transactions.

But it is not all doom and gloom! Thanks to the emergence of Fintechs and the application of new technologies within the trade and working capital context there are numerous opportunities to improve on the current situation and help increase global trade volumes over the years to come. There are numerous ways in which Fintechs can add value by improving operational efficiencies through leaner and faster systems, minimising risk through more secure processing, providing access to additional sources of financing, enhancing corporates’ ability to forecast trade and working capital needs, enabling better regulatory reporting for banks by generally enhancing reporting capabilities and by offering systems capable of capturing the benefit of risk mitigation techniques such as credit insurance. Better reporting will also enable banks to finally capture and report historic low default rates of trade finance to regulators and could therefore eventually lead to a more preferential treatment of trade finance. All these advantages will lead to banks reducing costs and increasing profitability thus enhancing overall returns of their trade books.

Technology intermediaries are a lot better positioned than banks to drive change in the trade and working capital space. Due to their adaptability digital start-up companies are quick to innovate and even quicker to respond to customer demands. Ultimately, as with any technology solution Fintech innovation in the trade and working capital space should not be an art for art’s sake, but it must be relevant for corporates and financial institutions alike. Therefore, not surprisingly an increasing number of trade finance professionals are joining Fintechs coming from banks – including myself.

From a personal experience perspective I have had a great start into the Fintech world at LiquidX, which I joined two months ago after seven and a bit years in Corporate Banking. It is a very fast-paced, innovative and vibrant environment and there is something new to learn every day and no day is the same. But the one most amazing aspect of the role is being at the forefront of change in the industry and of being able to drive the creation of new and more efficient working capital and trade finance solutions. It is exciting to spot an opportunity that could massively support either a bank or other financial institution or a corporate and then actually being able to implement such new opportunity as well. People who know me closely enough would wonder when I became a technology expert and I am not, but a lot of the technology out there isn’t only made for rocket scientists, but can be adopted for multiple uses rather easily, although I would never be able to build the underlying technology myself. But then again I didn’t build my car and I am still able to drive it.

The long and short is that there is some amazing technology available, it just all comes down to putting it to best use. The most revolutionary of it all has to be the blockchain – a buzz word everyone would have heard by now and I bet some people might roll their eyes as soon as they hear it, but the matter of fact is that there are numerous potential uses for blockchain along the entire trade supply chain from sourcing raw materials and all the way to post-trade settlement. So, Fintechs do not only help banks of course, but also corporates by creating better treasury management systems and therefore allowing better forecasts of financing needs and faster processing of orders, invoices and payments.

The digital evolution of trade and working capital has just begun and there are some exciting tools out there, such as blockchain, to drive it. As such it is not surprising that ITFA has newly created a Fintech Committee that will engage closely with all ITFA members to educate and inform about the on-going digital evolution of the trade and working capital space and to work with ITFA members to bring technology to its best use and develop the solutions our members require. Much has been said about Fintech companies disrupting markets and taking business from traditional banks – I couldn’t disagree more with such statements. Fintechs aren’t here to “eat banks’ lunch” – in fact Fintechs help banks to run smoother, more secure and efficient operations and to originate additional business by being able to leverage off business generated by technology intermediaries. Particularly in the trade finance context digital change is all about collaboration for everyone’s benefit: the banks, the Fintechs, the corporates and therefore benefiting the growth of global trade volumes as a whole. There is much change ahead – watch this space, it will be very exciting!