The world of trade finance has no shortage of friction points. It’s why many FinTech innovators have flocked to the space, with statistics like the Asian Development Bank’s estimate of a $1.5 trillion gap in trade finance availability adding fuel to their innovation fire.
For small and medium-sized businesses (SMBs), FinTech solutions have made accessing trade finance as simple as a few clicks on an online portal. But for large, multinational conglomerates, the points of friction are so many, and so complex, that no single solution can ease them all.
One challenge those large corporates face today is rooted in the complexity of the bank-corporate relationship. Multinational corporations (MNCs) will work with several, sometimes dozens of financial institutions (FIs) for their trade finance needs.
In processes like obtaining a bank guarantee, in which a bank agrees to cover losses if its client fails to pay their supplier, what traditionally happens is a corporate will manually go to several of their banking partners and request a pricing quote. According to Jacob Katsman, founder of global trade finance technology company GTC, it’s a friction-filled process that has encouraged some MNCs to develop their own proprietary solutions to centralize and streamline the request for quote (RFQ) process.
“There are some corporates that ask multiple banks to quote for most large transaction they do.” he told PYMNTS in a recent interview. “This is a very manual process.”
This point of friction is nothing new, and according to Katsman, it has even been the focus of some FinTech solutions of the past. Their failure, he explained, is the result of one key factor often missing in FinTech solutions in the trade finance space: a focus on the bank.
While platforms that can streamline the RFQ process — and indeed promote automation and transparency within MNCs’ broader trade finance management initiatives — many of these solutions actually work against the bank themselves. As Katsman explained, historically, FIs have not enjoyed on-boarding into these kinds of solutions because they ensure that the lowest cost — not the bank-client relationship — is the deciding factor of which bank a corporate will choose.
“A major global corporate has its own bidding platform hosted internally, and banks dislike exception processing dealing with it,” he said. “They also feel it is commoditizing the relationship. If you’re bidding out the business and giving it to the bank with the lowest price, then it’s not a relationship.”
Keeping the FI in Mind
Despite the industry’s past failings, earlier this month, GTC announced the launch of its Trade Finance Exchange (TFX) platform. The solution streamlines price discovery for corporates, integrating that workflow into GTC’s existing @GlobalTrade Multi-Bank Trade Finance Management Platform.
What’s different, as Katsman noted, is that the solution has also identified points of friction for FIs themselves, and addressed them to provide value for those banks looped into the platform.
One major challenge for banks today is a lack of visibility into their operations across borders. For instance, one FI with branches in London, New York and Singapore may not have visibility into the quotes each of those branches is offering for the same business. Further, they often lack visibility into which quotes and which branches ultimately win business.
“Do they have visibility of pricing across those branches? And do they know what deals they’re winning or losing? The answer is, a lot of them don’t,” said Katsman, adding that the TFX solution lifts the veil for those FIs, allowing them to consolidate their own operations when submitting bids and managing clients.
Another incentive for FIs to adopt the platform is introducing the capability to manage their trade finance business after an agreement has been made with a corporate client. Often, these FIs wish to offload trade assets to other FIs and investors.
“That, today, is done through email and WhatsApp, believe it or not,” said Katsman.
TFX connects FIs to a digital trade finance marketplace for those assets, allowing FIs to make sales and manage their operations in the secondary trade finance market in a single platform as well.
By addressing banks’ biggest challenges in trade finance, and by including banks themselves in the development of such a solution (GTC collaborated with CA CIB, HSBC and Standard Chartered to launch TFX), FIs are more incentivized to embrace technology that global corporations have been seeking for years.
Trade Finance Digitization
While targeting the bank with trade finance technology can promote adoption, Katsman acknowledged that the complexities of trade finance mean no single solution will work for everyone. Many MNCs, for example, continue to negotiate pricing with their banks only once a year, then deploy those agreements when needed in favor of maintaining their FI relationships — even if that FI isn’t offering the lowest price.
But finding ways to appease both corporates and banks will be crucial in promoting digitization and efficiencies in the trade finance ecosystem that continues to rely on paper and manual processes.
“You’re going to see a lot more transparency,” said Katsman, adding that while corporates and banks continue to value their strategic relationships, FinTech disruption is waking up the trade finance ecosystem to the reality that the status quo may no longer endure.
“We’ve found that RFQ platforms do have an impact on pricing not only in trade finance but in FX and other areas,” he added. “Banks are seeing increased competition from FinTechs, and are trying to figure out what to do.”
When banks collaborate with FinTechs and participate in the disruption, that journey to digitization can be an easier pill to swallow for FIs.