The subject of trade finance is a commonly heard one these days, particularly given the general pullback from traditional lending in developed markets with Basel III capital and liquidity requirements. The more commonly squeezed-out entities in this new order of segmented liquidity are small market enterprises (SME/SMB). At the same time, the rapidly evolving technology capabilities in and around trade finance (supply chain finance as the most frequently cited) is creating opportunity for these smaller companies to gain access to much needed cash.
World trade growth has slowed down over the past five years and banks have reduced their lending portfolio as a result of Basel III regulations, which basically mean that lent capital is characterized in a more stringent way and banks cannot leverage to pre-2008 levels. As a result, some 58 percent of all declined trade finance applications to banks originated from small- and medium-sized enterprises (SMEs), up from 53 percent in 2014.
Mercator has covered this subject in various research reports, including fintech coverage around potential blockchain use cases in corporate banking (trade finance, smart contracts, etc) and the range of collaborative funding solutions across the landscape to bring buyers and suppliers together. In this article some of the emphasis is on digitizing the paper processes that continue to dominate the flow of goods around the physical supply chain. This is one area where blockchain has great potential. The use of data to more closely manage risks between counterparties is also an important component. Additionally, once digitizing trade processes, the window opens into additional opportunities to take advantage of these digital funding solutions.
Allowing a peer-to-peer-like model gives sophisticated investors (in some arenas) the chance to not only help pool their capital into funding the SMEs of the future, but has also created an asset class that is less risky than lending to individual companies. The UK government has also taken a pro-investing-in-SMEs approach through the introduction of innovative finance ISAs and Seed Enterprise Investment Schemes.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
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