The global trade finance gap in 2020 was US$1.7 trillion, according to a survey by the Asian Development Bank (ADB) released in October 2021. This was a leap of 15% from 2018.
The Covid-19 pandemic has hit the global economy and trade landscape hard, with the turmoil further fueled by recent supply chain disruption that may continue well into 2022. So the trade finance gap is unlikely to improve in the short term.
According to the same ADB research, 40% of the denied trade financing requests originated from small and medium-sized enterprises (SMEs). SMEs have long been underserved in trade finance due to traditional financiers' inclination towards having collateral or guarantee as security, rather than recognition of their creditworthiness or cash-flow cycles.
Recently, however, there have been suggestions that blockchain and big data analytics could fundamentally transform trade financing. Could such new technologies really close the trade finance gap and accelerate SMEs' business, or is it too good to be true?
Digitalizing Trade with Blockchain
Blockchain, simply put, is an immutable and shared digital record of transactions and asset ownership. Traditionally, trade finance processes are paper-intensive, with documents – including electronic paper form – circulated in the ecosystem. Such a paper-based operation model offers limited avenues for banks to verify the genuineness of underlying trade, and therefore banks' credit appetite is usually reserved for financially strong corporates.
The immutability nature of blockchain could provide a solution for SMEs, as blockchain provides assurances on trade transaction data authenticity while preserving data security. An example is eTradeConnect, a blockchain-based open-account trade finance platform facilitated by the Hong Kong Monetary Authority and co-founded by seven major local banks including Standard Chartered.
The platform aims to streamline end-to-end trade cycles, enabling users to exchange trade documents in structured data format, and users can leverage the platform to raise financing requests to banks. Such a platform improves banks' willingness to finance due to the reduced fraud risk, and also allows SMEs to manage trade conveniently on a single portal, with a complete trail of transaction history.
Standardized data further aids automation in reconciliation and reporting, thereby achieving greater operation and cost efficiencies for SMEs.
An operator in the documentary trade space is Contour. Apart from digitalizing the letter of credit (L/C) lifecycle amongst banks, importers and exporters, the network is also connected securely with third-party digital documents providers to make electronic presentation of e-bills of lading and other documents possible.
Standard Chartered has invested and collaborated with Contour on commercialization, with several pilots executed.
Facilitating SME Access
Blockchain is a technological infrastructure that underpins the possibility of global trade digitalization, and does not differentiate between SMEs and their larger counterparts. In fact, SMEs may turn out to be faster adopters of the technology. Boston Consulting Group (BCG) has projected that 20-25% of SME trade finance will be transacted on digital platforms by 2025, versus 10-15% for all trade finance flow combined.
Indeed, there are platforms designed specifically to meet the working capital and operational needs of SMEs. Ant Group's Trusple, for example, integrates trade marketplace with cross-border payment and financing solutions under one roof for SMEs.
As powerful as blockchain may seem, there are still many miles to go in the path to trade digitalization. Network effect – that is, systems improve as more people use them – is critical to the success of blockchain. Siloed blockchain platforms in the market that connect only fragments of users and data have limited scalability. This is why eTradeConnect has teamed up with the People's Bank of China Trade Finance Platform to extend support to China-Hong Kong corridor trades. We believe these initiatives will gradually foster interoperability between platforms across industries and geographies.
One of the key reasons that L/Cs are still used extensively is because the L/C system is backed by an internationally recognized framework. Likewise, for trade digitalization efforts to thrive, it is imperative to have a global digital trade standard in place.
Alternative Data for SMEs
Besides blockchain, leveraging on big data is a hot topic. Amid the current economic downturn, local SMEs are finding it more difficult to access trade finance facilities to resolve cash-flow challenges. In addition, the long approval turnaround time and the complex documentation process are major hindrances to SMEs on getting the necessary funding in time.
However, the increased availability of Alternative Data could potentially improve their access to banking facilities.
Alternative Data refers to data other than traditional credit or financial information, that can be used to assess the loan-repayment ability of SMEs. It could take various forms, such as data based on observation of the borrower's business operations, payment flows, ecommerce transaction data, trade logistic records, and data relating to the business principal's personal risk characteristics and credibility.
The use of Alternative Data in credit decisions could smooth the finance application process in two major ways: information advantage and timeliness.
For example, Standard Chartered has partnered with GS1 Hong Kong's ezTRADE, one of the largest local B2B trade platforms, to facilitate credit underwriting for trade finance.
Since the ezTRADE platform processes more than 20 million electronic transactions each year and maintains digital records of thousands of buyers and sellers across Hong Kong and the Greater Bay Area, the sea of business transaction data retrieved can provide useful insights on a company's creditworthiness and viability for credit, without the need of traditional information such as financial statements.
Platforms such as ezTRADE offer real-time evaluation of an SME's business and credit status. Banks could use Alternative Data to make better-informed decisions on loan applications, which may increase the accessibility of trade finance facilities for SMEs.
In conclusion, in today's digital economy, e-commerce marketplaces and digital trade platforms have opened up new ways for SMEs to conduct businesses and reach out to new target customers. The trade finance digitalization process will be expedited by maturing technologies like blockchain and big data analytics.
The critical question is, are SMEs ready to make the changes and reap the benefits along the transformation journey?
Carmen Chan, Managing Director, Head of Trade and Working Capital, Greater China and North Asia, Transaction Banking, and Winnie Tung, Managing Director and Head, Business Banking, Consumer, Private and Business Banking, Hong Kong, Standard Chartered