Barriers facing trade finance have only been exacerbated by the pandemic as well as the upcoming Brexit deadline. By embracing automation to help establish a new technological infrastructure for trade finance, governments can support banks both big and small, as well as SMEs trading across borders.
Tradeteq CEO and co-founder, Christoph Gugelmann, has noted the recent criticism against the UK’s trade institutions and thinks that many of these issues are deeply rooted within the industry. Having spent many years working across asset management and banking, Christoph has identified a number of infrastructure gaps that AI and automation can help with. As a result, he co-founded Tradeteq in 2016 to use these cutting-edge tools to make investing in trade finance accessible and efficient for institutional investors and originators.
Here he shares his view on how upgrading the UK’s trade finance infrastructure can improve global trade.
It’s been a tough year for international trade. 2020 began with tariffs and trade wars and ended with a global pandemic and many parts of the world in lockdown. Governments have done their best to mitigate the effects on cross-border trade during these very difficult circumstances, but with mixed results.
Instead of focusing on these shortfalls, however, it is important to look ahead and identify innovative ways to tackle these issues. The UK Government will always support international trade, but it needs help from the wider industry. By working with banks and technology providers, they can tackle traditional blind spots relating to trade finance, upgrade the existing infrastructure and considerably improve how the trade ecosystem operates.
Tackling traditional barriers to access for SMEs
Trade finance is the lifeblood of international trade – without it, cross-border trading activity would seize up. But this is harder to access for small businesses, as they often lack a long trading history and cannot showcase their risk profiles accurately. Even when it can be established, regulatory restrictions on banks have made trade finance provision to SMEs more expensive.
SMEs cannot be left to weather this storm alone – these companies represent more than 99% of the UK’s businesses and two-thirds of employment. Their stagnation would be felt in every region and across every industry.
It’s here that the DIT and UK Export Finance can take positive action. In the same way that the Government provided direct funding through short-term business loans and covering employee wages, there needs to be a direct injection of capital specifically to support cross-border trade.
Of course, any serious government needs to ensure debt levels, which have already jumped to record highs, do not get out of hand. This is where the Government can work with banks and fintech companies to upgrade the trade finance infrastructure and transfer these assets to willing buyers.
Utilising technology to balance stimulus and debt
The low-risk profile of trade finance and its ability to provide a tangible return on investment is widely acknowledged. This presents a compelling multi-trillion-dollar investment opportunity. By encouraging banks to distribute their trade finance assets to investors, just as they do with other instruments such as mortgages, financial support from governments can go further and fund a greater number of SME transactions. In doing so, institutional investors gain a return on their investment and government debt levels remain sustainable.
Banks and fintechs have worked together to develop the technology and infrastructure needed to parcel trade finance instruments into investable assets. Crucially, by using modern, scalable hosting infrastructure such as cloud computing, it can be deployed into the UK’s existing trade ecosystem within weeks.
An improved trade finance ecosystem
The benefits to the wider trade ecosystem are immense. Traditional paper-driven methods of trade finance hinder efficiency as data is handled and transferred through physical paper, fax machines and spreadsheets. Processes are slow and there is no transparency, standardisation or interoperability.
Incorporating new and modern infrastructure means more automation, less friction in the international trade process and reduced costs. Legacy issues no longer exist, and the entire trade financing process runs more smoothly and efficiently.
Equally, banks will be able to work their balance sheets harder, allowing them to issue more trade finance without taking on additional risk, and remain compliant with international regulatory frameworks.
Successful cooperation could herald a more upbeat and positive environment and create new momentum for UK SMEs and their international counterparties as we enter 2021.