TTP Breakfast Club

London

15th October

Panellists:

• Sarah Boyce, Associate Director – Policy and Technical, Association of Corporate Treasurers
• Matthew Cox, Partner, Sullivan & Worcester
• Ramadurai Krishnan, CEO, Global Credit Data Consortium (GCD)
• Alisa Rusanoff, CEO, Eltech.ai
• NLN Swaroop, Global Product Head – Innovation, Asset Distribution, FIs and Capital Management, Global Trade Solutions, HSBC

Moderated by: 

Geoffrey Wynne, Partner, Sullivan & Worcester

Written by: 

Joy Macknight, Transaction Banking & Payments Editor, Trade Treasury Payments

The trade finance gap stands at around $2.5 trillion, according to the most recent biennial survey by the Asian Development Bank. 

At a recent Trade Treasury Payments Breakfast Club, held on 15th October in London, panellists discussed the barriers to attracting more capital to trade finance and treating it as an asset class, as well as potential solutions to address the financing gap. 

Disputing the 2011 Wolfsberg Group report’s claim that trade finance is “inherently risky”, Geoffrey Wynne, Partner, Sullivan & Worcester, pointed out that “trade gets paid” – meaning that a trade receivable arising out of the sale of goods or services needs to be paid to complete a transaction. 

However, high-profile collapses among trade and supply chain finance providers, such as Greensill Capital, Stenn and, more recently, First Brands, has frequently knocked the wind out of investor appetite for trade finance assets.

Alisa Rusanoff, founder and CEO of Eltech.ai, which provides credit underwriting and fraud prevention tool for lenders, believes fraud is the biggest barrier to attracting more capital. In her opinion, trade finance has been held back from emerging as an asset class due to the lack of technology tools to properly underwrite and provide a 360-degree view of transactions.

“However, with the recent innovations in artificial intelligence (AI) and generative AI, I believe that it will be possible to develop a more efficient market for trade finance assets within a decade,” Rusanoff said.

NLN Swaroop, Global Product Head – Innovation, Asset Distribution, Financial Institutions and Capital Management, Global Trade Solutions (GTS) at HSBC and board member at the International Trade and Forfaiting Association (ITFA), agreed with Rusanoff as to the critical role technology will play in serving future needs in the emerging areas of trade, such as sustainable and embedded finance. 

“We need to use technology, whether its tokenisation, AI or data-driven underwriting, and to do larger, better and more origination,” he added. 

The ongoing digitisation wave in trade finance will help address the fraud issue, said Matthew Cox, Partner at law firm Sullivan & Worcester. “A digital instrument removes much of the fraud risk because it’s not possible to finance multiple digital assets in the same way as paper-based assets,” he said. “But an institution can’t go digital on its own. The whole ecosystem – shipping companies, financiers, insurers, port authorities, and so on – needs to move at the same time, which is challenging.” 

Cox added that many fintechs are focused on digitising trade finance solutions. He pointed to ING and Trafigura’s collaboration on a digital bill of lading in a borrowing base transaction. “It’s a small step forward, with the digital asset making the existing structure a bit more efficient, but it’s a real world transaction,” he said. 

Securitisation revival

Ramadurai Krishnan, CEO of Global Credit Data, a data consortium owned by 50 global banks, focused on the role that securitisation could play in making trade finance assets a more attractive investment. 

Despite being tainted by asset-backed securities during the global financial crisis, Krishnan believes that there is a case for the securitisation market, including asset-backed commercial paper (ABCP), to make a comeback.

However, the regulatory environment needs to change for this to happen, especially in Europe where the due diligence reporting requirements – both from an originator and investor perspective – remain onerous, despite a recent relaxation of reporting regulations. 

Multilateral development bank (MDB) and development institution guarantees for trade transactions, for example the International Finance Corporation’s collateralised loan obligations, as well as greater insurance sector involvement, will help the securitisation market rebound, according to Krishnan.

The corporate voice

On the other side of the equation sit the corporates, which supply the trade finance asset. However, many corporate treasurers don’t understand the benefits trade finance can bring to their operations.

Sarah Boyle, Associate Director – Policy and Technical, Association of Corporate Treasurers, said: “Often solutions like trade finance don’t even get a foot in the door because the treasurer’s perception is that it doesn’t solve their immediate problem.”

The knowledge gap must be addressed to scale trade finance as an asset class. Boyle said, “Banks and non-bank financial institutions need to educate corporates on why they should bother to create the asset. Essentially, trade finance needs to be positioned as a better solution than open account.”  

Like Boyle, Swaroop emphasised that trade finance should serve clients’ treasury optimisation objectives and working capital needs. “Industry bodies like ITFA have a role to play in educating regulators, to receive more guidance on the regulatory treatment,” he said. 

In his opinion, the conversation with corporate clients has been elevated in the past few years and many treasurers now see value in trade finance. “We used to be having discussions at the operating level, not at the strategic level. But working capital optimisation is becoming increasingly important for treasuries,” Swaroop said. “They are looking to use trade finance to improve supply chain resilience, bring the cost of capital down and drive growth.”

Closing the gap

The three main takeaways from the panel that would help position trade finance as a more attractive investment are: 

• Educating all ecosystem players, including investors, originators and corporates, as well as using standardised terminology when identifying trade finance tools.
• Leveraging digitisation and emerging technology tools, including AI, tokenisation, real-time monitoring and data-driven underwriting.
• Having the right frameworks in place, aligning controls, structure and purpose. As Swaroop said: “We need to create a good origination pipeline with the requisite controls, and a good understanding of structures and investment.”

He also pointed out that the trade finance universe is expanding with the roll out of new propositions, such as embedded finance. Connecting lenders directly to enterprise systems and e-invoicing platforms in the form of embedded finance will help to improve data quality and reduce fraud. 

In Rusanoff’s opinion, the future lies with embedded finance as a white label solution with a limited partner, asset manager or another lender in the back end. “Embedded finance will be a blended working capital solution. Through technological integrations, it will provide a better user experience and mitigate fraud,” she said.