AltFin’s Role Evolves In Tense Global Trade Environment

The fallout from ongoing trade tensions between the U.S. and China is likely to be felt on both sides, with analysts expecting the economic impact to reach billions of dollars. Recent analysis from Reuters noted the pressure being felt, in particular, by the agriculture and technology sectors, with Wally Tyner, an agriculture economist at Purdue University, describing the current situation as a “lose-lose” scenario for both the U.S. and China.

Meanwhile, the U.K.’s Brexit troubles are likely to introduce new changes into global trade relationships, with Asia often at the center of the disruption as the world’s largest contributor to trade volume growth in 2017, according to the World Trade Organization (WTO).

Trade disputes and higher costs are only part of the pain felt by global exporters in Asia, however. The Asian Development Bank (ADB) estimated the global trade finance gap to have reached $1.5 trillion in 2017. So, as costs rise, companies are finding it harder than ever to access the finance they need to continue doing business.

However, in an ecosystem of disruption, opportunities abound, and the gaps in trade finance availability become an attractive target for alternative finance players.

One of them is Hong Kong-based Velotrade, which, last month, became the first accounts receivable (AR) financing (also known as factoring) company to secure a Type One Regulated Activity license by Hong Kong’s Securities and Futures Commission. The license adds confidence for investors interested in diversifying via AR financing, often considered too risky a space, the company said in its announcement. In addition, small and medium-sized businesses (SMBs) can gain from having an alternative to traditional bank loans, and trade financing to fulfill their global trade needs.

Research from East & Partners Asia, released in 2015, found that over one-tenth of Asian companies had utilized AR financing in the past 18 months, more than doubling the tool’s adoption rate from 5.3 percent in January 2014. At the same time, however, E&P Asia found that satisfaction levels among users of AR financing had declined. Analysts said the trend should be a wake-up call for banks to improve their trade finance offerings.

Velotrade Chairman and Co-founder Vittorio De Angelis, though, told PYMNTS that traditional financial institutions (FIs) may not always be the best source for businesses interested in AR financing, particularly in today’s climate of trade disputes.

“Traditional financial institutions are slow at identifying geopolitical risk and, once identified, [they] tend to overreact, just opting for the easy, do-nothing approach,” De Angelis said, adding that this effectively shuts off the valve of capital for trading businesses. “It is in situations like these that corporates need to have access to alternative sources of liquidity.”

The alternative finance sector is often more agile to identify and mitigate risks like trade disputes and other geopolitical factors, he continued, while also providing the speed associated with digital-first financial service providers.

The opportunity for companies like Velotrade is significant. According to World Bank Group data, Hong Kong exported more than $549 billion worth of goods in 2017. However, the ADB warned in its September 2017 report that alternative finance has yet to make a significant impact on the global trade finance gap, pointing to a relatively small market outside the U.S. as one likely reason why adoption remains muted.

FinTech, the ADB added, is often used to supplement traditional financing and diversify access to capital, while products like factoring can provide access to capital without the balance sheet implications that loans impose. According to De Angelis, this diversification is an important strategy to help fuel the market, not only for users, but for institutional investors, too.

“AR discounting should be seen to complement other investment assets,” he said. “For most investors allocating a certain percentage of their portfolio to AR, [it] represents a value-enhancing diversification. In the [case that] the investor has access to excess liquidity for [a] short duration, AR represents an ideal place to ‘park’ liquidity.'”

In times of volatility and eroding margins, he added, AR financing can offer the flexibility necessary to manage changes in trade volumes and costs.

An oft-cited benefit of the broader alternative finance space is its ability to quickly develop proprietary underwriting and risk mitigation technology, and to continue building out that technology. De Angelis noted that this often happens more quickly than can occur within large FIs that have held back from trade finance, especially for SMBs, amid tightening regulations.

Data is essential for risk mitigation technology, though, and adoption is essential to grow databases, so the effectiveness of any alternative finance firm’s proprietary risk analysis tool depends on more users from which to draw data. With adoption of alternative trade finance products like AR financing limited, the opportunity for growth is significant, but so are the challenges ahead.

Velotrade is banking on its recently earned backing from Hong Kong authorities to heighten trust and interest among investors, as well as trading companies, that can no longer afford to wait months for their invoices to be paid. With Asia an enduring heavyweight in the global trading markets, the region shows promise for De Angelis.

“The AR financing market is growing at high single-digit[s], low double-digits in Asia,” he said. “As more corporates embrace what, for them, is a rather new source of funding, the market growth will accelerate as Asia catches up with regions where factoring has been prevalent for longer. There is, of course, a learning process that is underway.”