Nils Behling and Christoph Gugelmann, co-founders of Tradeteq, explain why artificial intelligence is the answer to the issues of transparency and standardisation that have obstructed trade finance asset distribution until now.
When the financial sector was hit by the double-whammy of stepped-up regulation and record-low yields in the aftermath of the global financial crisis, trade finance found itself in the middle of a perfect storm. The low-risk profile of trade finance transactions made the sector appealing as an asset class, while trade financiers themselves looked to unburden their balance sheets through distribution.
Yet, almost a decade later, aside from a handful of large-scale portfolio securitisations by global banks, trade finance asset distribution is still an uncommon practice. This is due to fundamental differences between the trade finance sector and the investment community in terms of language and standard requirements, but also to a certain difficulty in achieving the level of compliance and return transparency demanded by investors.
Institutional investors: an untapped opportunity
In the past five years, advances in technology, combined with the entrepreneurial spirit of a number of ex-bankers who have chosen to join the fintech train, have resulted in incredible progress in the area of trade and supply chain finance. Many steps were simplified, previously paper-based transactions were digitised and small corporates gained access to more financing through invoice auction platforms. But few people focused on trade finance asset distribution, and when they did, it was normally on a bank-to-bank basis.
Up until now, institutional investors may have appeared somewhat closed to the trade finance opportunity while collectively financing a US$28.4tn corporate bond market. Investor surveys have shown that credit and environmental regulatory constraints are some of the main obstacles accessing corporate risk through trade finance instruments. Transparency is therefore key: without an efficient platform providing visibility on the nature and credit risk of transactions, institutional investors will remain reluctant to get involved. Trade finance digitalisation in combination with new technology makes this an opportunity investors can no longer afford to miss.
Tradeteq aims to correct this imbalance with a platform that allows trade financiers to distribute their assets safely and efficiently to institutional investors. Artificial intelligence and analytics capabilities that until now were geared towards the loan market are used here to deliver advanced credit analytics and reporting on trade finance asset investment, making them both transparent and scalable. Investors such as insurance companies, pension funds and family offices can use this technology to make sound credit, diversification and pooling decisions, with a rules-based workflow that ensures eligibility criteria and portfolio guidelines are met, and that assets are fairly priced.
Standardised procedures and data transparency
For originators such as trade finance banks, the benefits are clear. Banks looking to run a profitable originate-and-distribute business model need appropriate infrastructure, but have not had the time or resources to develop the type of standardised marketplace investors are after. The Tradeteq platform allows them to list opportunities, share data and negotiate the transaction structure and terms, with improved credit risk transparency.
Non-bank originators such as invoice discounters have excellent knowledge of the needs of the corporates they serve, but they sometimes struggle to match the wide array of reporting expectations of the investors that could be interested in their portfolios. To address this, they will benefit from an easy and standardised procedure to upload and advertise their portfolio opportunities with institutional investors. Tradeteq provides exactly that in the common language needed for greater understanding between the two sectors.
Since data is key for transparency, Tradeteq was built to ensure its accurate collection and management. The aggregated information can then be used to make trade finance data not only transparent but actionable. By being cloud-based, the platform can also give investors unprecedented access to trade finance assets, whatever their device or location.
Tradeteq connects originators and investors, equips both with the tools they need to distribute and invest efficiently and in compliance with regulatory requirements.
The motivation for starting Tradeteq comes from the founders’ experience in finance, specifically trade finance, and in arranging, sourcing, funding and distributing transactions. They have seen trade finance asset distribution from every single angle and understand the investor side particularly well. Throughout the years they were repeatedly faced with the market gaps blocking wider distribution: appropriate technology infrastructure, transparency and standardisation. This is what they aim to solve with Tradeteq.
Since the soft launch last year, US$130mn of assets have already been processed through the platform, covering obligors in seven jurisdictions. Based in London, Tradeteq sees Europe as an important market, but the company has global ambitions and recently opened an office in Singapore to kick off its Asian expansion.
In March 2018, Tradeteq was one of five companies in GTR Ventures’ debut US$50mn portfolio of equity investments – a token of the recognised potential of its model. “The founders behind Tradeteq […] are driving change by using technology and data analytics to mitigate risks, make lending more efficient and close the trade finance gap,” says Kelvin Tan, GTR Ventures’ CIO.