Digital transformation is rewriting the rules of commerce and unlocking new opportunities for businesses to enter global value chains. To support this rapidly evolving digital economy, trade finance needs to become more efficient and accessible, embedded as a service into the marketplaces and platforms where transactions take place.
Around the world, customers have come to expect their financial services to be woven into the fabric of their digital lives. From buy now, pay later options on website shopping carts to credit programmes for drivers using ride-sharing apps, consumer financing is fast becoming a seamless, near-invisible service consumed through convenient interfaces.
Nowhere is this trend more apparent than in Asia, where avid e-commerce shoppers are predicted to spend US$2.8tn by 2025, up from US$1.7tn in 2020. However, this isn’t just a trend to watch in the consumer space: as the region continues to cement its dominant position in global trade, its businesses are increasingly calling for a consumer-grade experience in trade finance applications, to better enable them to grow and prosper.
“When we ask our clients what they want from a banking partner, the three priorities are faster turnaround times, error-free transactions with less paper, and lower costs,” says Ajay Sharma, Asia-Pacific co-head of global trade and receivables finance at HSBC. “The answer to all of these is for us to continuously offer them digital client journeys at the point of need, without having to switch screens or handle multiple logins.”
These digital offerings include HSBC Trade Solutions, developed in partnership with technology firm CGI to allow clients to originate and manage all their trade finance products online; and the Digital Receivables Finance Solution, which leverages fintech company Trade Ledger’s platform to eliminate time consuming and labour-intensive manual processes by enabling clients to transfer data directly from their accounting software package.
Trade’s shift to digital
The need for a remote working environment during the pandemic catalysed digitisation across all industries. The paper-heavy world of trade finance was no exception, to the extent that an eye-watering 88% of HSBC’s trade finance transactions are now originated online. Furthermore, as the proportion of global trade using documentary credit continues to decline – from about 50% in the 1970s to around 15% today – shifts in the way trade is conducted are also shaking up the landscape.
“Since 2015, traditional trade has been shrinking by about 4.3% every year, while structured trade and working capital solutions have been growing at 3.7% every year. This automatically increases the number of digital transactions that we can do,” says Sharma. “Covid-19 was a big driver for customers to start to work digitally with us, to the extent that our own digital penetration went from 20% to over 85%. Pandemic-related concerns over supply chain resilience also drove an uptick in the use of supply chain finance, which is delivered over digital platforms. But the most exciting trend is the rise of digital B2B marketplaces, which have opened up a new frontier for banks to directly embed plug-and-play finance products.”
Bringing finance to the point of need
Embedding financial services into the trade ecosystem can help link more parties within the value chain, thereby enhancing the entire trade process. What’s more, by harnessing digital capabilities, banks can have a presence at the very origin of where transactions take place, thereby aligning hitherto disconnected physical and financial supply chains.
What this looks like in practice can take numerous forms. In 2020, for example, HSBC forged a partnership with Chinese logistics firm Cainiao to offer fast trade finance loans to online merchants on the Alibaba-owned TMall Global e-marketplace. This was followed by a similar solution for Hong Kong-based HKTVmall, which saw the bank provide a new digital trade finance solution to the online shopping and entertainment platform’s e-commerce sellers.
As well as bringing trade finance closer to the point of sale, these partnerships leverage metrics provided by the platforms, such as business background, primary brands, inventory and receivables information, for loan approvals. The result is that smaller vendors, who are often unable to meet the collateral and documentary requirements for traditional supply chain finance offerings, can now more easily tap working capital funding.
“Having access to these rich sources of data enables new ways of doing things,” says Sharma. “As our first trade finance solution to use real-time third-party data for loan approval, our partnership with Cainiao was very much ahead of its time. With machine learning, we have developed ways to do digital decisioning and mitigate risk. Now, we’re moving towards a future where banks have to embed themselves in customers’ ecosystems to provide near-instantaneous decision making.”
For the conservative, paper-based world of trade finance, achieving this real-time, always-on decisioning requires a dramatic rethink of the way banks approach the ecosystem. Connecting to and crunching vast amounts of data – and then making sense of it – is beyond the abilities of legacy systems and processes. But by partnering with both emerging and established digital platforms, banks can achieve this goal.
“Over the last five years, we have spent about half a billion dollars on transforming our trade business, and we feel really comfortable with the capabilities that we have to interact with third parties via APIs and other host-to-host connectivity,” says Sharma. “As the type and number of platform providers that host the transaction data needed for risk underwriting continues to grow, we’re constantly looking at partnerships and equity investments to reach the entire gamut of customers out there – from the large top-end clients to the middle market, right down to the traditionally underbanked segments of the economy.”
Leveraging digital marketplaces
Beyond its proliferation of e-commerce platforms, Asia is also home to an ever-increasing number of digital marketplaces that seek to facilitate financing for SMEs. These include the Reserve Bank of India’s Trade Receivables Discounting System (TReDS), an online system that allows small firms to connect to financiers to fund their trade receivables, as well as the numerous platforms that have sprung up in China following a decision by the entity that oversees large state-owned enterprises to require the use of technology platforms for supplier financing.
“Some of these aggregators are huge, and are working across multiple tiers of suppliers. Our objective is to embed ourselves with them and scale together so that we can reach new client sets, triggering better accessibility to finance across the region,” says Sharma. “The opportunities are enormous: Hong Kong, Singapore, China and India are extremely attractive markets, but so too are Malaysia and Indonesia. Through this digital transformation, data can be accessed at scale at a very low cost, fundamentally changing the face of trade finance.”
Towards the embedded future of trade finance
Digital transformation is having a significant impact on the global economy, leading to the creation of new industries, the disruption of traditional ones, and the transformation of the way businesses operate and interact with customers.
“We’ve invested, innovated and challenged the status quo, fundamentally changing the shape of trade finance to meet the needs of the economy of the future,” says Sharma.
With the rise of e-commerce and new business models, opportunities for stronger, more inclusive, and sustainable growth abound. The future of trade is taking shape, and embedding the finance that supports it into the new economy in collaboration with digital marketplaces, platform technology providers and fintechs will enable everyone – from the largest multinational to the smallest merchant – to take part.