Alternative lenders are using the latest technology to enter the Asian trade space. Liz Salecka asks whether they are likely to support or rival the traditional players.
The emergence of non-bank finance providers, harnessing the latest technologies to make of finance available to corporates and SMEs, is gathering pace in Asia.
Already considered almost a mainstream form of financing in many western markets, there are now more than 20 specialist technology platform-based providers of finance in the Asia Pacific region. The chief areas of operation are peer-to-peer lending, product-development-based crowdfunding, equity-based crowdfunding, merchant cash advances and invoice advances (trade finance).
The latest technologies are also being exploited by other non-bank players including Chinese e-commerce giant Alibaba.com, which recently started offering an integrated trade finance service to users of its online marketplace. The move highlights the greater financial services ambitions of the Alibaba Group, whose affiliate Ant Financial Services Group, which encompasses Alipay, one of the world’s largest third-party payment platforms, is also harnessing internet technologies to offer financial services.
According to Singapore-headquartered ApexPeak, a platform-based provider of trade finance in emerging markets, this model of financing looks set to play a critical role in Asia in the years to come.
“Post-financial crisis, the banking sector has been crippled with unending compliance updates, Basel III regulations, know-your-customer (KYC) rules, anti-money laundering (AML) rules and much, much more,” says Gakim Solomons, CEO and co-founder of ApexPeak, who ascribes to the common view that Basel III will restrict the amount of trade finance banks can offer.
“As a result, banks are all converging to funding the top 20% of corporates – typically the MNCs – as they all have good credit, leaving the bottom 80% of companies essentially underserved. Natural market forces dictate that other non-bank capital providers will step in and fill in the funding gap.”
Many Asian SMEs have also already seen their cashflows come under pressure as a result of less favourable payment terms from buyers. Lots of MNCs are working their supply chains hard and giving their upstream suppliers “poor” terms of payment, forcing them to look for expensive debt in order to fund their working capital cycle.
“Those who can retain their prices give generous terms of payment to their customers. But why should SMEs act as a bank for their MNC customers when they have already provided the goods and services?” asks Solomons.
Bridging the cashflow gaps experienced by SMEs is also at the heart of the Alibaba Group’s move into financial services.
Its new e-Credit Line service, which was launched in March in conjunction with e-lenders ezbob and iwoca, looks set to benefit both UK SME buyers, when making purchases of stock from Chinese suppliers trading via Alibaba.com, and the Chinese suppliers themselves.
“The offering allows UK SMEs to apply for a line of credit, receive approval, and then use the line of credit to make multiple drawdowns to finance purchases,” Wei Duan, Alibaba.com’s EMEA head of business development and marketing tells GTR.
Duan says the service also eliminates a certain amount of risk for Chinese suppliers who are often asked to manufacture and ship products before receiving full payment.
“Because the funds are disbursed directly to the suppliers in China, facilitated by either ezbob or iwoca, the suppliers receive their payment quickly with minimum delay,” she adds.
Alibaba affiliate Ant Financial is also looking to service the needs of SMEs – particularly in China. “Traditional banks provide bigger loans and SMEs in China have difficulties in applying for loans,” says Miranda Shek, international communications specialist at Ant Financial Services, pointing out that as her company is an online/mobile platform, which uses big data and cloud technologies, its operational costs are lower than traditional banks, putting it in a better position to provide smaller loans to SMEs.
At Standard Chartered, Gautam Jain, managing director and global head of client access, says that growing demand for trade finance in Asia could mean smaller companies are left short.
“Asia is witnessing a lot of growth in the need for financing, which is not just in relation to east-to-west trade, but also intra-regional trade,” he says. “In my opinion, banks can satisfy these requirements – however, a lot will depend on the level of capital they have and this will determine how far they want to go into the SME sector. The SME sector is a part of many large supply chains – at the end of which you have corporates buying goods.”
Jain says that while Standard Chartered’s supply chain finance model looks at companies of all size, “there may be opportunities for alternative providers to service SMEs in isolation”.
It’s a sentiment shared at Deutsche Bank, where Shivkumar Seerapu, Asia Pacific head of trade finance, notes: “The movement of alternative providers into this space provides more options to borrowers as there are parts of the economy that global banks cannot serve easily. Most banks have a target client segment and are looking to serve companies that meet those definitions.”
Advantages over traditional players
Many alternative lenders believe they can offer their customers “a better user experience” than traditional players.
ApexPeak, which offers supply chain finance to buyers and invoice advance services to SMEs via a suite of digital platforms, argues that it has used technology to lower the cost of processing and achieve faster turnaround. It says that its customers are financed more quickly, and that its approval rates are higher.
“We can fund invoice discounting deals as quickly as five to seven days. The average turnaround for banks can be up to two to three months,” says Solomons. “Simplicity is also a key differentiation. Opening an account on an online lending platform can be a hassle-free process, while opening a new bank account can be a painful and time-consuming affair in itself.
“Business owners want to spend time on running their own businesses – not on their relationships with their bankers.”
Speed of service is also a critical part of the Alibaba-backed e-Credit Line service. iwoca, one of the two e-lenders involved, claims that it can provide UK buyers using the service with approval for a facility of up to £50,000 in five minutes when making purchases via Alibaba.com. The buyer has up to eight months to repay the finance.
At Deutsche Bank, Seerapu acknowledges that platform-based lenders and internet companies are successfully capitalising on the latest and most sophisticated technologies: “Technology is often a key part of their offering and they do invest in it and keep it up to date. Banks, by contrast, always face conflicting priorities when deciding the use of their investment dollars – should they put it into people, technology or another part of the business?”
He adds that as alternative providers are not regulated in the same way as banks, “they might be able to be more flexible and nimble in certain aspects, and service customers efficiently because there is less intensive documentation”. Banks are always required to complete detailed documentation.
However, Jain at Standard Chartered believes that this could be a drawback. “Large banks involved in trade finance have a moral obligation to meet rules on AML and trade sanctions. But with other types of organisations, questions remain about the level of regulation they adhere to, and the support they will provide to meeting these rules.”
As more digital financiers emerge and grow their businesses, new challenges to this model are anticipated, including ensuring they have access to significant capital resources. Already, there are strong suggestions that they will seek to work in closer relationships with banks.
While ApexPeak relies on multiple channels for finance including its own funding, third-party funds and bank debt, it also enters partnerships with traditional providers, particularly mid-sized Asian banks.
“It is very difficult to scale a fintech business alone,” says Solomons. “Ways in which one could partner with banks include accessing capital through co-financing lines, or through a securitisation vehicle which banks can either arrange and/or help fund.” Jain anticipates that a model based on both collaboration and competition between the two types of businesses
“The alternative finance provider model needs some rethinking, and banks do need to look at how they can work with them,” he says, pointing out that although banks have offered finance on an end-to-end basis by themselves in the past, partnerships with alternative providers could have benefits.
“At the moment, the impact of these organisations is quite minimal and some of them are quite small. However, more new players will emerge and they could well play a complementary role to banks in the trade finance market as well as providing competition.”
However, Seerapu believes “that banks must tread with caution”, saying that as banks become more regulated, they must be careful in where they invest, in all spheres. The rules also applies to banks investing in alternative financiers.
Securing business growth
As alternative finance providers seek to grow their businesses, ensuring access to new customers and understanding their target markets will also prove crucial.
Alibaba.com has achieved this by making trade finance available as an additional service to the companies using its online marketplace. Similar initiatives to make trade finance available to buyers based in countries other than the UK and US are anticipated in the future.
ApexPeak, meanwhile, which is marketplace-agnostic, is offering trade finance directly to both buyers and suppliers as well as to companies transacting on established e-invoicing networks.
It has also been able to boost its business levels by working in collaboration with other third-party platform providers of supply chain finance. It recently entered a partnership with global third-party solutions provider PrimeRevenue, under which it has agreed to fund invoices on the latter’s platform.
“PrimeRevenue always gets enquiries from the mid-market space. However, a lot of banks do not want to fund sub-investment grade companies,” says Gakim Solomons, CEO and co-founder.