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With global trade facing ongoing turbulence and the trade finance gap at an all-time high – estimated at US$1.7tn and growing – stakeholders within trade finance are navigating an increasingly challenging landscape. To understand how the challenges could most effectively be addressed, Fineon Exchange’s new global survey (produced in association with GTR) sought to identify the specific pain points for practitioners when executing trade finance deals. The subsequent whitepaper draws on in-depth interviews with trade finance intermediaries, as well as the results of a survey of wider trade finance participants.

GTR sat down with Dominic Broom, CEO of Fineon Exchange, to learn about the key findings, and why using technology to bring compatible funders and corporates together could be a game changer in enabling trade finance support to underserved businesses the world over.

 

Q: What did the survey reveal to be the key pain points for trade finance practitioners when looking to execute trade finance deals?

Broom: Trade finance is the lifeblood enabling international trade, and constraints to trade finance therefore hinder trade and slow global growth rates. According to the World Economic Forum (WEF), inadequate trade finance is one of the top three export obstacles for half of the world’s countries.

Interestingly, one of the main findings from our survey is that lack of clarity about transaction structure and limited counterparty information are just as big a barrier to the successful conclusion of trade finance transactions as funding constraints. In fact, exactly half of participants believe there is a shortage of financeable deals, while the other half feel the issue is a shortage of funders to support quality transactions.

This indicates that the market contains funders looking to support good deals, as well as businesses with good deals needing funding – and that the core of the problem in fact lies with compatible counterparties’ inability to find and connect with each other. This apparent disconnect may explain why many negotiations can take months and still result in a ‘no deal’.

Nearly three quarters (72%) of participants did refer to funder interest and bank risk appetite as challenges, however. Notably, it was felt that companies in the mid-market and below are being squeezed and challenged when it comes to securing deals as a result of the de-risking of many banks from certain geographies and sectors – a trend initially triggered following the financial crisis, and potentially exacerbated by the pandemic. These findings were reinforced by the survey, with 38% of respondents believing KYC/compliance costs to be the primary cause of the trade finance gap.

 

Q: Respondents highlighted a number of biases against different types of companies seeking funding. Could you expand on the findings and how these biases are impacting businesses?

Broom: The most common bias is business size (identified by 53% of respondents), which reinforces other industry findings that SMEs in particular can struggle to secure trade finance. For example, research from the Asian Development Bank found that 40% of the trade finance applications rejected by banks worldwide are from SMEs, despite SMEs only accounting for 23% of demand.

The next most common bias is geography, with 41% highlighting a bias against emerging market transactions. This shows that many businesses in regions deemed as ‘high-risk’ – including countries in Asia, the Middle East, Latin America and Africa – find it hard to access finance, with funders favouring ‘blue chip’ borrowers with bigger balance sheets and an established track record.

With these biases persisting and when confronted by a myriad of factors disrupting global trade, accessing trade finance can seem an increasingly impossible feat for many businesses. Indeed, not that long ago companies were already dealing with low commodity prices and the US-China trade war, when the Covid-19 pandemic resulted in unprecedented global trade disruption. This, compounded by factors such as trade finance frauds, increased shipping costs and, most recently, Russia’s invasion of Ukraine, has resulted in businesses being placed under a sustained period of immense working capital pressure. Being able to secure trade finance has therefore become all the more essential for business survival and growth – at a time when it is, for many, becoming further out of reach.

 

Q: With that in mind, is technology the answer? We have seen uptake of digital solutions surge since the start of the pandemic, yet the issues experienced by smaller businesses in emerging markets persist. What can be done to apply technology more effectively to address the increasing inaccessibility of trade finance that many businesses are facing?

Broom: The Covid-19 pandemic has played a role in accelerating innovation and digital adoption within trade finance, which of course is positive. Building on this momentum, and the findings from our survey, we now need to ensure we can apply that technology in the best way to support businesses.

If there are good deals and willing and able funders in the market, this shifts the focus of the solution towards facilitating transaction discovery through the efficient introduction of compatible counterparties. And global AI-powered platforms exist today that can make that happen.

The final part of our survey centred upon this approach. Asked if digital networks can address the challenges identified within the industry, 100% of respondents agreed that they would be beneficial. With a range of factors causing funding bias, digital networks specifically connect businesses and brokers with funders and insurers that have the appetite to support their transaction needs. The improved access to a range of different funders ensures a higher chance of positive business outcomes for all involved, while reducing inefficiencies caused by unsuccessful transactions.

Fineon Exchange’s trade finance marketplace is an example of a tech-powered matchmaking platform that can greatly benefit all stakeholders, and is making waves within the trade finance industry. Of course, as with any network, the greater the volume of participants, the greater its strength and subsequent benefits for its users. Hence, it is the responsibility of the wider trade finance industry to promote these enhanced channels to ensure businesses’ ability to secure funding is improved, thereby increasing their productivity.

 

Q: We’ve touched upon the significant disruption in global trade over the past couple of years. Do you see a more positive outlook for businesses in the industry, driven by digital innovation?

 Broom: Absolutely, despite the uncertainties resulting from the current geopolitical instability. Digital networks facilitate a more even playing field, and their potential to add value to global trade is extensive. By enabling the sharing of meaningful data through secure, integrated platforms, digital technology underpins the possibility of creating rich, intelligent, symbiotic business ecosystems that incorporate and connect participants from across global trading networks.

Connecting and collaborating are key tenets of global trade and are particularly fundamental to increasing access to trade finance and narrowing the trade funding gap. Therefore, the integration of financial services into physical supply chain processes, such as the ordering, shipping and delivery of goods, will not only enable finance solutions to be implemented in tandem with trade logistics timings and decision making, but will enhance risk mitigation and the provision of working capital for businesses, thanks to greater transparency and alignment.

Digital ecosystems that connect key stakeholders, improve their operational efficiency, and drive greater transparency and convenience, are a win-win for all and should be championed within the industry and used to support growth – irrespective of sector, geography and business size.

Regarding trade finance specifically, directing businesses/ trade finance brokers straight to interested funders sets the stage for a more efficient, fruitful trade finance landscape. One in which SMEs can be confident they have the channels to pursue and successfully execute transactions, and that results in the wider industry benefit of taking a significant chunk out of the trade finance gap.

Read the full whitepaper here.