Financing of international trade is such a complex and cumbersome business that by some estimates there’s a gap of more than $1.5 trillion between demand and supply. A new wave of startups, many using blockchain-based technology are working to fill that gap, which could mean more transparent and reliable transactions for underdeveloped nations in places like Africa.
Mphasis Ltd., an Indian tech firm majority owned by Blackstone Group LP, has partnered with Bitfury, a blockchain startup, with the goal of streamlining trade financing. They plan to create either a token, which is a form of virtual currency, or a platform to automate the process of passing payments from buyer to seller.
While parts of trade such as document management, customer due diligence and some aspects of supply chain finance are being digitized, key aspects have not been updated.
“The systems that handle mission-critical activities such as settlement, liquidity management, and foreign exchange remain highly outdated, inflexible and disjointed,” the two companies said in a joint statement. “The result is a complex gridlock that limits visibility for all parties and hinders access to liquidity.”
Breaking the gridlock would enable smaller players, from local factories to agricultural cooperatives to finance their international sales and purchases with the ease of multinational conglomerates that have access to the world’s largest banks. According to Trade Finance magazine, 10 lenders account for 30% percent of all international trade finance lending, or about $96 billion.
Giving smaller players that ability could make a world of difference for Africa. Right now, the lack of finance is one of the greatest stumbling blocks to improving trade among African countries, Moody’s reported, after a landmark 44-nation African free trade block was established. The continent’s trade finance gap continues to exceed $90 billion annually, Moody’s said, citing African Development Bank estimates.
Central African firms are the biggest losers when it comes to accessing finance for regional trade on the continent, the report noted. Less than 5% of trade finance in Central Africa is related to intra-Africa trade, compared to Southern Africa, where the amount is almost 25%.
Small and medium-sized enterprises are the hardest hit in Africa, according to a report by the African Development Bank. “Given the real and perceived risks attached to them, the majority of SMEs face challenges in accessing bank-intermediated trade finance,” the bank wrote. “On average, only 28% of total trade finance portfolios of responding banks support SMEs with the remainder going to large enterprises.”
Mphasis and Bitfury have not released any significant information on how they plan to solve the liquidity issue, but any solution that offers easier access to smaller firms could vastly increase trade opportunities in Africa.
Bitfury, based in Amsterdam, develops blockchain solutions for private businesses and governments. It has raised a total of $170 million, including $80 million in a series C round last year led by Paris-based Korelya Capital.
Financing foreign trade, especially among parties that don’t frequently trade with one another, requires lining up letters of credit, guarantees, insurance, customs and tariff payments and the like. But in the wake of the 2008 financial crisis and a series of global terrorist events, regulations have prompted banks and companies to vastly increase oversight and financial controls, due diligence efforts and risk assessments, notes the World Economic Forum’s Francesca Bianchi in a recent paper.
Efforts to halt money laundering, evasion of sanctions and the financing of terrorist organizations have added to the piles of paperwork and the length of time needed to finance international trade deals.
“The increasing compliance costs and the inherent risks involved in cross-border trade, coupled with an ever-changing landscape of regulations has caused the cessation of many trade finance activities, including corresponding banking relationships,” Bianchi wrote.
FinTech solutions could solve some of the transparency and risk-related processes and transaction costs and fees associated with the due-diligence checks performed by banks by creating a trusted platform that would eliminate the masses of repetitive paperwork involved, Bianchi added.
Today, a trade finance transaction still depends on mountains of paper, and typically takes five to 10 days to complete, notes Henry Ho, a director at AMC Capital, a Hong Kong-based debt advisory firm. Simply waiting for envelopes of signed forms to arrive can delay transactions for days. Operating across countries and cultures, and often on different computing platforms, makes miscommunication common and the risk of fraud high.
In some cases, Ho wrote in a recent Medium post, the same batch of goods can be financed multiple times by banks that don’t share the same information. In other cases there’s a “domino effect,” when delays in processing documents lead to delays in delivering goods and spare parts shortages and financial stress for both buyers and sellers.
“Blockchain can replace the use of paper documents and ensure trust, security and overall transparency of the supply chain, thereby reducing processing time to a minimum,” Ho added. And “the risk of manipulation by participating members of the network will also be minimized,” he wrote.
Already two major players are attempting to digitize trade finance.
The Marco Polo Network is a joint effort by TradeIX, an open platform for trade finance, and enterprise software firm R3, along with some leading international financial institutions and their corporate clients. Launched in 2017, it uses Corda blockchain technology. Member banks include ING, Commerzbank, BNP Paribas, Anglo-Gulf Trade Bank, NatWest and Natixis.
We.trade is another international trade financing platform, whose members include Deutsche Bank, HSBC, UBS and UniCredit.
With the large number of banks already taking part in web or blockchain-based clearing platforms, it’s clear that the days of telexes, triplicate forms and transportation delays are numbered. The likelihood is that multiple finance and logistics platforms will streamline international trade in the very near future.
Whether that will help the little guys gain the access they need to compete with the big players, or just enable the big players to exploit the little guys is not clear yet. But with $1.5 trillion in pent-up demand, the first investors who identify potential winners may be poised to reap outsized rewards.
Peter Green is an award-winning business and investigative journalist based in New York.