Alex Skolar, Chief Product Officer at Tradeteq
The digitalisation of the trade finance market has been essential in helping evolve the sector as it recovers following the fallout of the pandemic. In what has always been cast as a traditionally manual industry, the rise of alternatives to paperwork-heavy trade finance has delivered a new era of investment opportunities.
A widening gap
Trade finance plays a crucial role in facilitating international trade across the global supply chain and driving economic growth. Effective trade finance provides liquidity and cash flows along with financial and geopolitical risk mitigation for the involved parties, allowing the smooth operation of cross-border trade.
The money involved in international trade is staggering, with the market valued at $45 billion and predicted to reach over $73 billion by 2032.[1] Despite this, there remains an unmet demand for trade finance where there is not enough supply of financing for businesses, particularly those in developing countries. The limited access to finance for these businesses that need it, is also known as the global trade finance gap.
The global trade finance gap was an estimated $1.7 trillion in 2020,[2] yet ballooned to $6.5 trillion a year later.[3] With financial institutions reluctant to provide money during the pandemic and increases in risks and disruptions across supply chains, the shortfall has grown, particularly affecting SMEs and businesses in emerging markets.
Tech benefits
Digitalisation is key to improving access to trade finance for developing countries. Digital trading platforms are now supporting centralised marketplaces that connect a network of buyers from across the world. This enables businesses in developing countries to showcase their products on a global scale and expand their market access.
Digitalisation also provides new gateways to accessing financing. Alternative lending platforms and financing models, such as peer-to-peer lending and crowdfunding can provide a greater choice of avenues for SMEs to access trade finance beyond traditional banking channels. Furthermore, online payments and transactions can counteract the limited access to banking services that some developing countries face. Having these electronic payment options can help facilitate trade finance to a broader customer base, reducing reliance on cash-based transactions and improving access to financial institutions for businesses in emerging markets.
Another important benefit of digitalisation is eliminating the need for physical paperwork. By storing and processing trade documents online, this can streamline trade processes, reduce costs, and accelerate transaction times, making the process more efficient for businesses.
One of the biggest changes in the trade finance sector is the rise of artificial intelligence (AI). AI is crucial in analysing and predicting risks. It looks at trade data to identify patterns and anomalies that may signify risks, and it supports financial institutions to make more informed decisions on funding. AI and machine learning is offering a new era of advanced data analytics to identify market trends and predict customer behaviour.
Breaking barriers
The integration of technology and AI into trade finance will help democratise access to trade finance. One such organisation that is supportive of this shift is the Trade Finance Distribution Initiative (TFD Initiative), established in 2018 to promote the issuance and accessibility of trade finance. The TFD Initiative now has over 70 members, including leading asset managers, banks and insurers, who are all supportive of the changes occurring in the sector.
The initiative looks to encourage the use of automation and blockchain technology to help digitise these manual processes, eliminate inefficiencies in the marketplace, and reduce processing times and costs, all of which can help improve access to trade finance for SMEs and businesses in emerging markets.
By integrating technology and AI into trade finance, we can enhance access to trade finance for developing countries and empower businesses to become part of the global trade network, while also supporting investors to more accurately analyse the data and risks of different trade finance assets. Through the innovations of tech companies, these new platforms can help close the global trade finance gap and grow the economy of nations, opening new doors for cross-border collaboration to businesses across the world, and creating a prosperous future for all.
[1] https://www.thebrainyinsights.com/report/trade-finance-market-13444
[2] https://www.adb.org/news/global-trade-finance-gap-widened-17-trillion-2020
[3] https://blogs.worldbank.org/trade/greasing-wheels-commerce-trade-finance-and-credit
