Trade finance revenue is slipping at the world's largest banks, especially as companies struggle in a global trade environment operating with a $1.5 trillion gap in trade finance availability.
The FinTech space is hoping to address these challenges head-on, targeting the paper and manual-based processes of trade finance transactions though innovations like blockchain. It's a popular hotbed of innovation for FinTechs and, according to the September 2017 Asian Development Bank (ADB) report on the topic, FinTech investment in trade finance saw more than $13 billion in venture capital in 2016 alone.
According to the ADB's latest survey findings, though, outlined in its Trade Finance Gaps, Growth and Jobs report, FinTech players have yet to make a meaningful impact on the trade finance industry.
The survey polled more than 515 banks and 1,336 companies across 103 countries, finding that FinTech innovators can, indeed, help address the $1.5 trillion trade finance gap which disproportionately impacts small- and medium-sized businesses (SMBs). But, according to Steven Beck, head of trade finance at Asian Development Bank, the FinTech market needs to be strategic about its efforts.
“More than reducing cost, FinTech needs to deliver an enhanced capability for financial institutions to conduct due diligence on [Ministry of Micro, Small and Medium Enterprises] MSMEs before it can play a role in reducing gaps,” Beck said in a statement earlier this month.
Approximately one-fifth of the companies surveyed said they had used some type of digital finance, alternative lending or FinTech platform to access trade finance, according to the ADB results.
“Though FinTech credit is growing rapidly, low usage likely reflects the small size of FinTech markets outside of the United States, United Kingdom and the PRC,” the report concluded, adding that more than one-third of companies said they received FinTech finance in addition to bank finance, suggesting FinTech is used to supplement and diversify access to capital. Nearly two-thirds, meanwhile, said only FinTech-based finance was used.
In addition to the survey suggesting that alternative and marketplace lending tools have had a limited impact on small businesses' ability to access trade finance, the ADB also found digitization is similarly showing a limited impact on banks' ability to fill the trade finance gap.
More banks in 2017 are implementing digitized technologies than in 2016, researchers found, with FinTechs providing these solutions focusing on cost reduction for banks. In fact, 80 percent of banks surveyed told the ADP digitization of trade finance processes could have the greatest impact in the area of cost reduction, especially in making it more affordable to comply with regulatory requirements and due-diligence.
But, cost savings stop short of addressing the trade finance gap.
“While digitization may lead to more inclusion, its potential impact on the gap is not yet realized,” the report concluded, adding that the 2016 report showed no correlation between banks' implantation of digitized solutions in their trade finance operations and rejection rates of providing trade finance to businesses.
In 2017, two-thirds of financial institutions (FIs) said digitization is likely to enhance SMB risk assessment, but the ADB noted rejection rates for SMBs seeking trade finance remain “elevated.”
Indeed, while SMBs make up just 12 percent of all trade finance proposals, they account for 22 percent of rejections. The most common reason for rejecting trade finance is that banks have know your customer (KYC) concerns. Twenty-nine percent cited this factor, while approximately one-fifth said there is a need for more collateral or information.
According to the ADB, there are several steps the trade finance industry can take to address the gap. And, while FinTech has so far played a limited role in that initiative, there are steps the FinTech industry in particular can take, too, to increase its impact.
“Even as digitization has opened up new ways to administer the financing of trade, the lack of interoperability limits the ability to scale solutions,” the report concluded. “Regulators, banks, customs, shipping, logistics and FinTech companies need to work together to inform new regulatory, legal and technical standards. This would enable all actors to generate and use new sources of credit and risk data to inform the due diligence that could help reduce gaps for [SMBs].”