Does Size Matter?
There is a fundamental shift in how trade finance is taking place, with the use of data-driven decision-making to support more democratic access, beyond company size.
Trade finance’s traditional focus has been that the larger the company, the easier the access to finance and borrowing terms based on balance sheets. This supported the growth of bigger companies and left smaller companies with fewer opportunities at higher rates, stymying their growth prospects.
Bigger isn’t Necessarily Better for Secure Trade Finance Deals!
The collapse of Hin Leong, an oil distribution company that fraudulently accessed tens of millions of dollars of trade financing, proves the need for better data and insight, and that size is not necessarily an indicator of fiscal prudence. A combination of hard and soft data is critical to ensure that appropriate trade finance deals are made, and executed diligently. Access to working capital is often a lifeline for any company, but doubly so for asset-intensive industries that require it for purchasing raw materials. Particularly in a low-interest environment, this access should not only be limited to large companies.
Trade Finance’s Innovation Gap
Compared to other areas of trading, trade finance for commodities is also an area that has lacked exposure and focus for the larger banks, as they tend to pool resources into more lucrative areas. As bankers’ bonuses are tied to the size of deals made, their focus is often dominated by larger-scale companies in trade finance eligibility. There is a gap for fintech innovators to create an impact in this field by diversifying it to enable better access for small and mid-sized companies. Particularly in the commodities market, fintech innovators are providing better data and insight for decision-making across the board. This can focus on two key areas: access to trade finance and mitigating the price volatility and associated risk.
Digitisation: Supporting Trade Finance in Commodities Markets
Digitalisation can support multiple facets within trade finance for commodities, particularly in more opaque markets, such as natural rubber.
- Due Diligence: fintech companies that have a strong understanding of the nexus of technology and market sector can provide more robust frameworks for due diligence and easy access to market participants. For example, Helixtap Technologies and its digital marketplace for the natural rubber industry.
- Speed to Finance: technology can speed up the disbursement of funds, along with better checks and balances in place to prevent paper-based fraud.
- Personalisation at Scale: digital transformation can ensure that each company, no matter its size, can receive products and services that suit its needs in a timely manner.
- Access for SME Markets: By lowering the cost of doing business and providing easy access to cloud-based freemium (pay-as-you-go) models, all-sized companies can gain access to services in a more timely way.
- Sustainability: If financing access and interest rate premiums are linked to initiatives such as sustainability efforts, this could encourage trade to positively impact the environment and unlock better deals.
- Managing Price Volatility and Risk: Recent events highlight how easily friction can enter the global commodities supply chain. The Evergreen running aground and blocking the Suez Canal for a week cost upwards of US$10 billion a day in terms of lost global trade. Technology and digital transformation can support the way deals are financed and structured, to take account of such inherent risks of freight, especially transporting commodity products. Improving the creation and trade of contracts, including access to these market products, is an important development for markets such as natural rubber, as well as other agricultural commodities, to reduce the price and risk volatility.