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The industry’s unregulated nature renders investors vulnerable as revealed by a massive S$6.9m fraud case.
Investors are treading more cautiously after an unravelling $6.9m sham at a Singapore crowdfunding site laid bare the vulnerabilities and risks associated with an industry promising quick returns to growth-hungry SMEs.
The move comes as a local news report revealed that invoice financier Capital Springboard sold around 60 fake invoices worth $6.9m to investors from Vangard Project Management (VPM), an SME specialising in interior design.
As the lion city throws open its doors to SMEs with the hopes of driving innovation and attracting international talent, a number of financing methods have similarly cropped up to meet the various capital needs of growing businesses. Obtaining financing has been cited as the fourth greatest growth challenge hounding startups, ceding only the top spots to chronic manpower problems and limited market size, according to a report from NUS Enterprise.
From venture capital and angel investing to traditional business loans to various incubator and accelerator programmes, invoice financing has emerged as another viable funding method for cash-strapped SMEs.
Invoice financing enables businesses to secure cash by leveraging against the value of payments they are owed from their customers for an agreed return to investors, providing them with instantly available capital to pursue further growth opportunities. Investors assume the cost of between 70 to 90% of a business’ total invoices which works best for short period of time ranging from two weeks to a year.
Higher flexibility, easier access to funding and speedier funds provision as opposed to traditional banking loans are invoice financing’s greatest strengths, Dimitri Kouchnirenko, founder and CEO of online multi-currency invoice exchange platform Incomlend told Singapore Business Review.
“Businesses with tight cash flows due to large receivables or long credit terms from customers usually utilise this product. Historic or existing cash balances do not matter as much as repayments are secured via payment on invoice,” added Pawel Kuznicki, CEO of peer-to-peer and invoice financing platform Capital Match.
Whereas it would take months for a traditional lender to review a facility limit, invoice financing can disburse funds often within 24 hours and borrowers often have little to no collateral to provide, Kouchnirenko added.
“A rising rate environment also makes it difficult for SME’s to acquire funding through traditional methods such as the banks and the scrupulous vetting procedures generally expose fundamental flaws in the SME’s structure,” explained Oriano Lizza, a sales trader at CMC Markets.
This means that the method arguably carries less risk of default for lenders than short-term financing as the borrower has already delivered to its customers amidst reasonable expectations of being repaid.
However, the method is not entirely without risk as the unraveling fraud with Capital Springboard revealed, especially as VPM’s invoices with CS were non-notified in nature. An invoice financing of this type means that the SME did not inform its customers of its working relationship with platforms like Capital Springboard including the fact that it was tapping the financier for its funding needs.
This method of invoice finance inherently raises the risk premium, noted Kouchnirenko, as the lender is left with little option to verify the authenticity of the invoice as it is not able to confirm it directly with the buyer.
“Most often this could lead to the lender being exposed to fraud. Due to its highly risky nature, not only does it increase the probability of fraud but it also raises the risk premium hence the cost of financing for the borrower,” the Incomlend founder pointed out.
Capital Match’s Kuznicki similarly suggested that, whilst non-notified invoice financing is more troublesome in terms of verification, the platform is able to verify invoices as well as provide supporting documents including certified delivery orders and progress claims with the buyer to guarantee that the financing is backed by a legitimate invoice where the work has already been completed, although this is not necessarily practiced by all lenders in the market.
Regulation and risk management
The recent fraud that took place calls attention to the relatively unregulated nature of the industry that has allowed fraudsters to slip to the cracks and take advantage of a legitimate funding method that has provide the necessary financing fuel for countless businesses in the past.
Although demand from SMEs for invoice financing has not dampened significantly, investors are proceeding with more caution amidst calls for greater oversight to prevent similar lapses in the future.
“It could be argued that a Monetary Authority of Singapore regulated company would not have got[ten] this far or even set up in the first place,” explained Lizza. “The market is somewhat regulated but not completely so this leaves it open to exploitation and abuse.”
With this case as the catalyst, MAS could possibly proceed to reduce the number of new market entrants or intensify its regulatory reach and set more stringent risk management standards to set a precedent for similar cases in the future.
Although the number of approved funding applications may diminish in the short term as a result of intensified regulatory scrutiny, the industry is poised to benefit in the long run from common basic standards and practices in place to ensure the stability and transparency of the funding process, Kouchnirenko added.
Crowdfunding platforms are similarly doing their part by ramping up their risk management capabilities. Carrying out regular background checks on borrowers, scrutinising new applicants and creating a shared database of blacklisted borrowers between platforms and traditional lenders can also do wonders to avoid multiple finance for the same receivable title, he added.
“Different lending platforms are communicating, albeit unofficially, to ensure errant SME owners are blacklisted by the various credit teams,” said Kuznicki.
For Kouchnirenko, the case is not only a timely reminder of the pitfalls of investing but also an opportunity to improve funding methods for SMEs.
“We think that the industry will be called upon coming together to improve collaboration, risk management measures and common standards. This event is an opportunity for everybody to re-think and improve the industry’s working practices and we are confident this will happen.”
This article first appeared in Singapore Business Review.
From Global Trade Review (GTR) | By Sabrina Dougall
London-based Crown Agents Bank has hired Richard Weald as its first ever chief technology officer (CTO) as part of its strategy to digitalise its services as a transaction bank.
Weald was previously global head of IT operations and information security at Earthport, a forex and cross-border payment services provider in London.
He brings more than 20 years’ experience in financial markets to his new role in which he will oversee the bank’s use of technology to align and enhance operational processes, client due-diligence and on-boarding, risk management and product strategy.
He will be tasked with outlining a long-term technology roadmap for delivering the digital processes and solutions the bank’s stakeholders and customers require.
Weald says of his new position: “Digitalisation helps us achieve our goal of securely expanding our commercial and central bank clients’ access to global markets and developing greater connectivity within and across borders. I am excited to play a part in the bank’s ongoing transformation.”
The bank has recently joined CCRManager, the electronic platform for the distribution of trade finance assets. It has also rolled out EMpowerFX, which the bank’s CEO Albert Maasland says is “technology that allows us to offer currencies and FX payments in and out of a range of frontier and emerging markets quickly and efficiently”.
Of the CTO appointment, Maasland says: “With Richard’s expertise, we can improve the customer experience yet further, grow volumes, and improve operational efficiency and compliance procedures.”
Weald’s past experience includes a number of senior positions within technology and information Security at Newedge, a global multi-asset brokerage
The post Crown Agents Bank appoints CTO in bid to fully digitalise appeared first on Global Trade Review (GTR).
From Global Trade Review (GTR) | By Finbarr Bermingham
HSBC and ING have conducted their first live, commercial trade finance transaction on blockchain, for agrifood trading giant Cargill.
The deal was completed using the R3 Corda platform, with a cargo of soybeans exported from Argentina to Malaysia.
Cargill was the exporter and importer on a deal that saw Cargill Geneva selling soybeans on behalf of Cargill Argentina, and Cargill Singapore buying the goods on behalf of Cargill Malaysia.
It was done using the letter of credit (LC) module of Corda, which has been developed by 12 banks. This enabled the transaction time to be reduced from a standard five to 10 days, to 24 hours. The LC was issued by HSBC, with ING acting as the advising bank. The value of the transaction has not been disclosed.
While the LC was executed on blockchain, other elements of the transaction cycle – such as the bill of lading – were not.
Vivek Ramachandran, HSBC’s global head of innovation and growth for commercial banking, tells GTR that we can expect to see another few live transactions on this platform, as the bank learns how it interacts with the systems of other banks and corporations. However, the primary focus now will be on driving industry-wide adoption.
“We’ve still got a few more steps to do before we get to widespread adoption,” Ramachandran says. “A lot of people have been wanting to make sure that it works with a live transaction. That’s part of the reason this is exciting, to be able to demonstrate that a live commercial transaction with a flagship global trader and two global banks on each side of the transaction, actually works.”
While this is arguably the most advanced trade finance development on blockchain to date, the industry has a couple of years-long history of trialling the technology, with the hype at times reaching deafening levels.
In late-2016, Commonwealth Bank of Australia and Wells Fargo closed a US$35,000 transaction for two subsidiaries of Brighann Cotton, taking 88 bales of cotton from Texas in the US to Qingdao in China, using Skuchain’s Brackets blockchain-based solution.
Since then there have been a plethora of pilots, trials and proofs of concepts, but general frustration in the industry that nobody is bringing blockchain technology to operational trade finance. There have been signs over recent months, however, that this is getting closer.
Batavia, a blockchain-based trade finance platform developed by IBM and a consortium of five banks, completed its first live transactions with corporate clients in April and is thought to be close to commercial use.
we.trade, a European platform for managing, tracking and protecting trade transactions between SMEs, backed by nine banks, is aiming to launch to business clients in the third quarter of 2018.
In India last month, meanwhile, a government-backed invoice financing platform went live with a blockchain-based solution that allowed the various companies involved to share information to prevent double financing via blockchain. However, there is no financing element to this product.
The news comes two months after HSBC’s senior innovation manager, Joshua Kroeker, told GTR that the bank was ready to do live trade finance transactions on blockchain.
The bank had been involved in one of the earlier blockchain projects for trade finance when it worked with Bank of America Merrill Lynch and the Infocomm Development Authority of Singapore (IDA) on a proof of concept to mirror letters of credit using distributed ledger technology.
However, its work on the Corda platform has apparently accelerated beyond its other blockchain developments.
Corda is a platform owned by R3, a US company founded by David Rutter, with members including more than 200 banks, financial institutions, regulators, trade associations, professional services firms and technology companies.
In April, an application for syndicated loans called Fusion LenderComm became the first to go live on the Corda platform. The app had been piloted by banks including BNP Paribas, BNY Mellon, HSBC, ING, Natixis and State Street. It had been developed since early-2017 by fintech company Finastra and R3.
ING has also been heavily involved in the trade-based developments on blockchain technology. As well as being among the banks working with Fusion LenderComm, it was reported to be working with trading house Mercuria and French bank Société Générale to build a blockchain solution for oil trading, early in 2017.
The bank’s managing director for innovation in wholesale banking, Ivar Wiersman, says: “It’s exciting to see this transaction has been completed successfully with clear client benefits in speed and ease in execution.”
The post HSBC and ING complete live trade finance transaction on blockchain appeared first on Global Trade Review (GTR).
From Global Trade Review (GTR) | By Finbarr Bermingham
Economists at National Australia Bank (NAB) have downplayed the impact of trade tariffs between the US and China, saying instead that the key battleground will be technology and intellectual property (IP).
Tariff barriers may “shave a few percentage points off global GDP” in the very worst case scenario, but are relatively immaterial in the grand scheme of things, Christy Tan, head of markets for Asia at NAB, told a press conference in Hong Kong yesterday.
“The trade deficit and US$200bn [to be cut off the US trade deficit] by 2020 is just a number. At the end of the day, if China is not buying from the US, it’s buying from Brazil, or South Korea, for instance. If the US is not buying from China, it’s not going to just manufacture locally, it will shift its demand to India, Sri Lanka, etc. The key issue is technology and IP.”
China is looking to increase its role as an important player in tech industries such as electric vehicles and artificial intelligence (AI).
President Xi Jinping has clearly laid out plans for China to become a leader in innovation, spearheaded by the “Made In China 2025” initiative to upgrade the country’s industry. It’s been described by the Council on Foreign Relations as “the real existential threat to US technological leadership”, but according to Tan, it is “not up for negotiation”.
Meanwhile, the US has long harboured concerns over China’s alleged IP theft, as well as its heavy government support for such industries.
Dinny McMahon, a fellow at the MarcoPolo programme of the Paulson Institute and author of the recent book China’s Great Wall Of Debt, tells GTR that China will replicate the heavy subsidies it applied to traditional industries in the technology space over the coming years.
“China’s vision of how it becomes a rich nation, how it builds new drivers of growth, is a big bet on new industries: robotics, electric vehicles, semiconductors. It wants a forced march to become a global leader in those industries, and that requires the same techniques it applied to heavy industries in the past,” he says.
These opposing stances appear to place the superpowers on a path for further collisions.
The US has already hit Chinese smartphone maker ZTE with paralysing sanctions, barring it from importing from US companies. As a result, China’s second-largest telecoms company has this week been forced to halt major operations, after being banned from purchasing the Google Android software and Qualcomm chips on which it depends.
ZTE was penalised after breaking the terms of previous sanctions laid on after it was found to be shipping goods to Iran and North Korea, then subsequently lying about it.
Huawei, China’s largest smartphone company, appears to be next in the US’ crosshairs. AT&T and Verizon have already dropped plans to sell Huawei phones, amid allegations of stolen IP, while it is also alleged to be under investigation for flouting US sanctions on Iran.
The US government has also blocked the sale of a number of US companies to Chinese buyers, including the proposed takeover of Moneygram by Alibaba-owned Ant Financial.
If further sanctions are handed down, Tan expects an immediate retaliation.
“China responded immediately [to ZTE sanctions], by hiking the tariffs on sorghum by 178.6%. China is making its presence felt, sending the message clearly that if you hit tech and IP, there will be retaliation where it hurts quite badly, the US agri sector. Steel and aluminium are small issues in the grand scheme of things. Tech and IP is something that is going to be long drawn,” she says.
As it stands, tit for tat tariffs have seen the US government place levies on products ranging from washers and solar panels to aluminium and steel. In addition to the whopping levy on sorghum, a cereal used in livestock feed, China has retaliated with tariffs on products such as fruits, nuts and frozen pig parts.
In high-level trade negotiations which are set to resume next week, the US is demanding that China cut its trade surplus with the US by more than US$200bn – the logic of which was questioned by NAB analysts at the briefing.
“It’s hard to frame a trade negotiation in that way, trying to put a numerical value on reducing your bilateral trade deficit. They are pretty meaningless things, they’re a consequence of savings and investment decisions by thousands of people. So the idea that you can make it some numerical number by lowering it by US$200bn is not an economic reality. No economist would frame it like that,” said Peter Jolly, global head of research.
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From Global Trade Review (GTR) | By Elisabeth SpryIncomlend has become an affiliate member of FCI, the largest global factoring industry association, and the first Singapore fintech to join the association. FCI is the leading representative body for factoring and financing of open account domestic and international trade receivables, representing over 75% of the global factoring and receivables finance industry. FCI represents more than 400 top independent factoring companies in 90 countries around the world. For 50 years FCI has served as the voice of the global open account receivables finance association and network by facilitating and promoting factoring, invoice discounting and supply chain finance across regions. “Being the first Singapore fintech member of FCI is a great honour for Incomlend and a valuable recognition from the most prestigious and influential factoring body in the industry,” comments Dimitri Kouchnirenko, co-founder and director of Incomlend. “It is also a validation of Incomlend’s strategy focused on international receivables finance. The global factoring industry is undergoing a rapid technological transformation, where alternative finance platforms start coming forward to change the landscape and we are thrilled to be a part of the movement with the industry’s support.” “We welcome Incomlend to the FCI network and are glad to provide Incomlend with our worldwide support for receivables finance,” adds Peter Mulroy, secretary-general of FCI. “This is a landmark event confirming FCI’s commitment to growing digitalisation of global trade finance.” The post First Singapore fintech to join FCI appeared first on Global Trade Review (GTR).
From Global Trade Review (GTR) | By Finbarr Bermingham
Yes Bank has launched a solution that uses robotics to digitise part of the trade finance payments process.
The tool automates the submission of the bill of entry, an account of traded goods entering the port.
A robotics solution then verifies the documentation, which is submitted digitally, by cross-checking it with the Indian government’s Import Data Payment and Monitoring System (IDPMS) or Export Data Processing and Monitoring System (EDPMS). Payment is then released, with the bank saying it has the potential to reduce payment turnaround time by 80%.
Yes Bank plans to roll the solution out to 2,000 corporate clients servicing markets in China, the US, Singapore, Germany and Hong Kong. The plan is to eventually “extend to other segments as appropriate, eventually to all trade finance products wherever applicable,” Asit Oberoi, global head of transaction banking, tells GTR.
The development comes one year after the Reserve Bank of India launched the IDPMS and EDPMS systems to help digitise trade in India, a move which has been widely hailed as improving efficiency in India.
“This solution would not have been possible without the visionary introduction of the IDPMS and EDPMS by the RBI,” Oberoi says.
It also comes on the back of the biggest financial fraud in India’s history. At a branch of Punjab National Bank (PNB), fraudulent letters of undertaking (LOUs) were used over a seven-year period to skim US$1.7bn from confirming banks overseas.
The RBI has responded by banning the LOU, while the clamour to further reduce the dependence on paper-based solutions among India’s trade finance banks has grown. Oberoi declined the chance to comment on the PNB situation, but did note that “import finance from overseas lenders on an LOU for direct import is not available now”.
Yes Bank claims to be the first Indian bank to digitise this part of the trade cycle, but there have been moves from foreign banks to take advantage of the RBI’s digital agenda.
In October last year, Deutsche Bank launched TradePay, the first paperless import payment solution in the country. The solution uses IDPMS to verify import payments by checking them against details made available by the client on the system, eliminating the need for clients to share any physical documentation.
This followed Citi launching a solution which allows clients to share import payment information with the bank by quoting the RBI’s IDPMS number, without having to share documents. This was launched in April 2017.
In the wake of the PNB fraud, we can expect to see digitisation gain pace. International banks have been reluctant to accept guarantees from import financing Indian banks, which has been choking importers from vital capital.
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By Global Trade Review
Two former investment bankers have launched Tradeteq, a cloud-based platform that matches trade finance originators with institutional investors.
The platform went live this week after a soft launch in 2017, during which US$130mn of assets were processed, across seven international jurisdictions. During the soft launch, the originators were non-banks, typically factoring companies and corporate finance advisors organising funding for their corporate clients.
The company is based in London but will be opening a Singapore office later this month. The founders, Christoph Gugelmann and Niels Behling, worked together at Bank of America Merrill Lynch before they both joined Galena, the asset management arm of commodity trader Trafigura.
The pair then set up Thames Path Capital, a trade finance-focused asset manager, but found the market beseeched by gaps blocking wider distribution of assets. This is a problem Tradeteq sets out to address.
Tradeteq makes money from the platform by charging a fee based on volumes passed through the platform. There are also premium services such as credit analytics and reporting. Registration fees may be introduced further down the line.
Behling says he sees “tremendous demand for the platform, so we are in the fortunate position that both sides [buyers and sellers] are very interested”.
“We really have seen trade finance asset distribution from every angle, and we understand the investor side extremely well. This is what gives us the edge to distribute trade finance assets from banks to institutional investors,” adds Gugelmann.
The venture capital arm of GTR, GTR Ventures, holds an equity stake in Tradeteq
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By Finbarr Bermingham
HSBC is on the verge of doing live trade finance blockchain transactions with clients, with the bank set to announce a series of pilots in the coming weeks.
In a media call this week, senior innovation manager Joshua Kroeker revealed that the bank is “confident enough to actually do a live transaction” using the technology, having spent the past two years working through various teething issues.
HSBC was involved in one of the earlier blockchain projects for trade finance, when it worked with Bank of America Merrill Lynch and the Infocomm Development Authority of Singapore (IDA) on a proof of concept (PoC) to mirror letters of credit (LCs) using distributed ledger technology (DLT).
The bank has continued to work on this project since it was announced in August 2016, and it seems that this could be one of those to move into pilot stage. The intervening period has been spent improving the solution’s robustness and security, to a point at which the bank felt comfortable involving customers.
“Going from that PoC in 2016, we’re at the tipping point of getting our customers involved in live transactions in the coming weeks and months. The technology has come a long way, we’re much more comfortable with its security and scalability,” he told GTR and other media.
“That’s the stage we’re at now, we want to get the customers involved to do those [pilots]. The next stage after that, in getting it live into production, is a further amount of work around the application but more work on the network,” he added.
Kroeker was unable to divulge much detail about the specific pilots that are due to kick-start, but said that documentary credit will also be among the first areas of focus, with the bank set to test LCs on R3’s Corda platform this year.
“I’ve spent a large amount of time over the past two years speaking to lots of our largest trading clients. For the most part, they have worked very hard to streamline and digitise their operations where possible, but the product that gives them the most trouble is the documentary credit. This product is one of the first we’re going to pilot, which is going to be exciting,” he added.
It’s worth noting, however, that the technology is still a long way from commercial use, for HSBC at least. As well as developing the platform and the solution, a network must be in place so that the full transaction can be completed on the blockchain, which means on-boarding other banks, regulators, customs and all parts of the trade cycle.
“We see that developing throughout the year so that in 2019, around the same time, we should be in a position to have both the network of banks, corporates and others, and the app ready to use on a wider scale,” Kroeker said.
Meanwhile, the bank is hoping that its adventures in blockchain will leave it well-placed to cater for the “digital natives” in Asean, which is projected to be one of the world’s growth hubs for digital services over the coming years.
The press conference was called to discuss the bank’s digital agenda in the region, which is shaping up to be an online battleground in the years to come.
By 2020, Asean will have 420 million internet users, with an internet economy topping US$20bn by 2025. E-commerce, by the same year, will be worth US$88bn. There’s a sense that with 70% of the 630 million population across the Asean group of nations being aged under 40, banks and companies with strong online and digital presences could tap into a huge growth market.
“The OECD reports that the documentary costs and administrative procedures of lending can increase costs by up to 23%. Inefficient border processes add 5% to the cost,” said Ajay Sharma, HSBC’s regional head of global trade and receivables finance. “In Asean, they are removing barriers, simplifying and automating custom procedures, there are lots of things being done,” he added.
The post HSBC ready to do live trade finance transactions on blockchain appeared first on Global Trade Review (GTR).
By Sanne Wass
The group behind the Marco Polo blockchain trade finance project – R3, TradeIX and a number of international banks – have successfully carried out their first proof of concept and are now ready kick off the project’s pilots.
Launched in September 2017, Marco Polo is an initiative to develop an open account trade finance platform powered by blockchain technology, which aims to enable real-time connectivity between trade participants, improve visibility into trade flows and simplify access to credit and risk mitigation services throughout the trade lifecycle.
BNP Paribas, Commerzbank and ING have been the core banks taking part in the proof of concept throughout the second half of 2017.
According to Ivar Wiersma, head of innovation at ING, the technology “ran fast and smoothly and the positive results showed us we are on the right track and ready to take the next step by entering into a pilot”.
Other banks involved in the initiative since its launch in September include Bangkok Bank, Barclays, BBVA, Bladex, CTBC Bank, Intesa Sanpaolo, Shinhan Bank, Royal Bank of Scotland and Wells Fargo. Standard Chartered, DNB and OP Financial Group have joined the project more recently.
“The fact that more banks have joined illustrates the interest in this project and in the potential of distributed ledger technology in supply chain finance solutions,” says Jacques Levet, head of transaction banking, Emea at BNP Paribas.
The parties are now working with corporates and other trade finance players on internal infrastructure setup, preparing to enter into the pilot phase, an initial and limited roll-out of the system into production. Banks will complete different pilots depending on their specific focus within trade finance.
Initially the initiative is focused on three areas of trade finance: risk mitigation, payables finance and receivables finance, but will expand as the banks become familiar with the technology and infrastructure.
The solutions will be delivered via TradeIX’s TIX platform, an open platform providing trade finance specific tools, applications and APIs, built on R3’s Corda as the underlying blockchain infrastructure.
“The initial project is about connecting buyers, sellers, banks, trade service providers in the open account ecosystem, connecting them all on one single information layer that collects critical trade data around purchase orders, invoices, financing activities. Then solutions are built on top of that,” explained David Sutter, head of platform strategy at TradeIX, to GTR at the time of the project launch.
He also said they hope to on-board in total 20 to 25 banks by the end of 2018. The ambition is to expand the initiative to include third-party service providers, such as credit insurers, software companies and logistics providers. R3 expects to go into production in late-2018 or early-2019.
Marco Polo is one out of two trade finance projects that R3 is running simultaneously. The other, Voltron, was the first trade finance prototype to be showcased by R3 in mid-2017. Built together with CGI and a group of 11 global banks, the aim is to streamline the processing of sight letters of credit, and the parties are currently piloting the platform with the goal of making it widely available this year.
Speaking to GTR in September, Sophie Wiberg Holm, project lead at R3, said the two applications “complement each other nicely”, and that, down the road, the larger strategy is “to see how these different trade finance initiatives can merge into a larger ecosystem of trade products”.
The post R3, TradeIX kick off pilots for Marco Polo blockchain project appeared first on Global Trade Review (GTR).
By Sanne Wass
Ten international law firms have joined a new initiative by R3 to develop advice on the legal aspects of blockchain technology.
The enterprise software firm has launched its new so-called Corda Blockchain Legal Centre of Excellence with the purpose of bringing together law firms to collaborate on best practices, gather feedback from the legal sector and also help them to better engage with the new technology.
The law firms involved in the project from its outset include Ashurst, Baker & McKenzie, Clifford Chance, Crowell & Moring, Fasken, Holland & Knight, Perkins Coie, Shearman & Sterling, and Stroock.
The launch comes amid growing involvement of law firms in R3’s various blockchain projects. They increasingly work with clients to provide specialist advice on the legal aspects of the technology, such as structuring business networks and drafting smart contracts – a legal document written into code and stored on the blockchain.
Members will have access to R3’s research, monthly project demos to give a practical understanding of blockchain applications, as well as Corda training workshops that R3 has developed specifically for attorneys. These will help them advise their clients on legal and regulatory issues associated with R3’s open-source blockchain platform Corda.
“Lawyers hold a key position in the financial services ecosystem,” says Jason Rozovsky, senior counsel and head of the R3’s new legal centre. “Many of our clients are also clients of the world’s leading law firms, a number of which have joined our legal centre of excellence. There is an overall benefit to our membership and the Corda community at large to collaborating with these firms about Corda and its capabilities early on, and to obtaining their valuable insights into the legal and regulatory environments in which Corda operates.”
R3 is currently behind a range of blockchain applications, including two in the trade finance space. Voltron was the first trade finance prototype to be showcased by R3 in mid-2017, with the aim of streamlining the processing of sight letters of credit. Built together with CGI and a group of 11 banks, the parties are currently piloting the platform with the goal of making it widely available this year.
The other project, Marco Polo, is an open account trade finance platform developed together with fintech firm TradeIX and a number of global banks, which enables real-time, seamless connectivity between trade participants and simplifies access to credit and risk mitigation services throughout the trade lifecycle. The banks have just started the first pilot and R3 expects to expand the initiative in 2018 to include additional banks and third-party service providers.
The post Law firms join new R3 network to advise on blockchain appeared first on Global Trade Review (GTR).
By Finbarr Bermingham
The long-anticipated trade war between the US and China looks to be underway, with the Trump administration readying global tariffs on metals imports that would disproportionately target Chinese output.
Tariffs of 24% on steel imports and 7.7% on aluminium have been mooted and are under consideration after US investigations found that the imports of those metals are a threat to US national security.
In response, China said it had found evidence of dumping of styrene imports from the US, a chemical which is essential in the manufacturing of many plastics. The Chinese government has called for tariffs of between 5 and 10.7% on styrene imports.
Experts are warning that this could escalate very quickly and that there are infinite potential routes a trade war could take, including tit for tat tariffs, and countervailing duties relating to perceived government subsidies.
The US is also coming towards the end of an investigation into Chinese violations of the intellectual property of US corporations. The probe was launched last year after the invoking of section 301 of the Trade Act of 1974.
“The area I think is most worrying to most people is section 301,” Alexander Capri, senior fellow on trade and supply chains at the National University of Singapore, tells GTR.
The probe could uncover IP theft or infringement through the mandatory joint ventures that were a big part of foreign direct investment in China over recent decades, or through outright corporate espionage. Either way, to recover the perceived damages, the US reserves the right to slap tariffs on Chinese goods.
“It’s anybody’s guess, whether that becomes a flat tariff against all Chinese imports, or if they single out product groups. Will it happen? Nobody can predict anything that will happen with this administration, it’s totally mercurial. If it does happen, nobody would expect the Chinese to sit on their hands. They’d retaliate against probably US companies based in China. Either imposing taxes or whatever,” Capri says.
All of this could be bad news for US companies already in China, or those looking to enter the market. The escalation comes at a time when many fintech companies are looking to “crack China”, and the evidence suggests that these sorts of companies could get caught in the crosshairs.
Last month, for example, the US government blocked the US$1.2bn sale of MoneyGram to Alibaba’s Ant Financial platform.
“The geopolitical environment has changed considerably since we first announced the proposed transaction with Ant Financial nearly a year ago. Despite our best efforts to work co-operatively with the US government, it has now become clear that the Committee on Foreign Investment in the United States (CFIUS) will not approve this merger,” said Alex Holmes, CEO of MoneyGram, a money transfer and payments company.
Chinese telecoms giant Huawei also fell afoul of US regulators in January, when it was forced to scrap plans to offer customers Huawei handsets after members of Congress lobbied against the plan.
Eyeing developments carefully, no doubt, will be business leaders at Ripple, the blockchain-powered payments company, which this month partnered with LianLian, a Hong Kong firm, to offer cross-border payments into China.
The Mainland market is high on the Ripple agenda, with CEO Brad Garlinghouse telling GTR last year: “When I think about Ripple in China, we will almost certainly identify a partner and enter in conjunction.”
Hyperledger is another high profile fintech organisation attempting to make headway in China. In a recent interview with GTR, executive director Brian Behlendorf talked about the challenges of entering the market and appearing as an international firm.
“[We wish to be viewed] as a global organisation. If you look at our member organisations, we’ve got two of the 20 premier members based in Mainland China, Baidu and Wanda. I like to celebrate that,” Behlendorf said.
Should the US continue to block the expansion of China-based tech companies into its market, then it could realistically expect the same rules to be applied to US businesses in China.
“The Chinese have a certain advantage when it comes to their retaliatory measures in that they can weaponise democracy. They can specifically target firms from specific states and, depending on how much sway those companies have with their political representatives, that can influence politics in the US. Mexicans do that around Nafta by blocking some agricultural imports from certain states in the US,” Capri says.
He adds: “Here’s the bottom line, I think an escalation into a tit for tat is going to leave a lot of bloody noses anywhere. It’s not something anyone wants to see, and nobody can predict how far it will go.”
The post Could fintech be caught in crosshairs of US-China trade war? appeared first on Global Trade Review (GTR).
An increase in the accumulation of large datasets on agribusiness in Africa is proving crucial to the financing of a sector often overlooked by banks.
“We’re seeing the impact of the availability of data having a much more positive impact on access to financing,” says Antois van der Westhuizen, managing director of John Deere Financial, Sub-Sahara Africa.
He tells GTR that, over the last 12 to 18 months, data on Africa’s agribusiness sector has increased, which is bringing about a change in financiers’ opinions on financing smaller-scale farming enterprises.
The influx of data has been driven by companies such as John Deere, which collects and processes massive amounts of information on factors such as soil type, seed variety and weather by connecting its own pieces of equipment to one another as well as to owners and operators. In addition to working with commercial farmers engaged in precision farming, the company has also started gathering the same information from small-scale operators to calculate how they can achieve profitability, and, ultimately, bankability.
As the agri sector evolves, it continues to attract much attention from technology entrepreneurs keen on developing new big data platforms and solutions. Aerobotics, a South African-based startup specialising in aerial data analytics, is one such company.
“At the moment it’s very much a data collection play,” the company’s co-founder and CTO, Benji Meltzer, tells GTR.
Aerobotics’ current product is an “early warning” system which helps farmers discover problems early on, and provides them with an overall assessment of their crop. The company has developed a platform that identifies the data using drone and satellite imagery and then diagnoses it. The longer-term plan is to become more predictive and diagnostic; to be able to capture the data and use it for longer-term projects, says Meltzer.
Aerobotics’ focus until now has been on large-scale commercial farmers, given the logistical challenges such as access to technology and the internet that exist in more rural locations. It has been involved in some pilot projects with insurance companies but is now working actively with Nedbank on finalising an agri data-gathering partnership.
Banks favour a partnered approach
Despite the increase in information and recent advances in big data analytical and computational capability, commercial banks are reticent to go it alone when engaging with small-scale farmers on a bilateral basis. Partnerships with the likes of commodity trading companies and agricultural co-operatives, which can act as the obligor and facilitator, remain key.
This thinking is linked to strict compliance and regulatory requirements, says Zhann Meyer, head of agricultural commodities in Nedbank’s global commodity finance team.
“Engaging in input financing programmes with thousands of small-scale farmers operating on one hectare of communal land each makes effective management of production and delivery risk a cumbersome and expensive exercise. We definitely think that big data is a helpful tool, but we have to engage with a partner to make this work on a collective basis,” he says.
“Most of our finance products are based on derivatives of classic pre-export finance models where you would typically pay for roll out of inputs and then expect the crop to come back as repayment for these loans. For us to practically implement these structures in our footprint countries, we would require a partnership based on both a reliable aggregator acting as our obligor, as well as accurate datasets to make informed decisions about crop germination and yield estimates.”
He agrees that banks are becoming more comfortable with weather derivatives and index-based insurance products, which he says are becoming more predictable and accurate – purely because of the length of the period of data gathering and advancements in technology.
Banks aside, other, more specialised financiers such as leasing companies and hedge funds are showing increased interest in investing in the sector.
“They take big data a lot more seriously in terms of analysing affordability than what we see from the regional banks,” says van der Westhuizen at John Deere Financial.
What’s more, financiers of all kinds across the continent are coming round to the idea of using data when making business lending decisions.
“In Kenya and Tanzania, 72% of the population makes use of mobile banking, and only 8 to 12% use formalised banking systems. If you want to apply for a loan, you have to give bank statements, so the majority of clients won’t be able to do that,” he explains.
But, he says, this is changing as more banks and leasing companies are now prepared to use clients’ mobile money statements along with production data, provided by the likes of John Deere, to verify if they will be able to repay their loans.
“We’ve seen more and more loans being made available for those clients to start purchasing inputs as well as mechanised equipment,” he adds.
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Two former senior bankers have launched a new blockchain-powered auction platform for the distribution of trade finance assets, the first of its kind based out of Dubai.
Under the name TradeAssets, the online marketplace aims to put an end to banks’ current extremely inefficient process of buying and selling trade finance assets.
“Now buyers and sellers are doing it by means of phone, fax, email and Excel,” says Lakshmanan Sankaran, founder and CEO of Fintech Innovations International, the company behind TradeAssets. “So it takes around three to five working days for them to do one trade, because they need to exchange information, negotiate pricing and so on. Our platform will help banks to conclude a deal within a day. And after they all become familiar with the platform, it will be a matter of hours.”
This, he tells GTR, will bring “tremendous opportunities for banks”. He estimates that the platform will enable a bank to conclude on average three times more deals than it currently does.
Sankaran, former head of trade finance at Commercial Bank of Dubai, founded TradeAssets together with Sumit Roy, previously regional head of cash management for financial institutions at Deutsche Bank in Dubai. They differentiate their new platform by the fact that it is very simple – they have intentionally kept it purely for bank use.
The intention is to bring together a broad ecosystem of primary and secondary financial institutions and development banks in one place. In short, a seller bank will be able to list assets for sale, and buyer banks can place a bid and agree the price with the seller directly on the platform.
In the first two years, the founders target more than 100 clients and aim to reach US$1bn in transaction volumes. The platform will initially launch in the UAE and the wider Middle East, before expanding to selective markets internationally, the first being Bangladesh, and finally going global.
A beta working group of five UAE banks, an Omani bank, a Singapore bank and four Bangladeshi banks (who have not yet been named) have been testing a beta version of the platform over the past few weeks. The developer, fintech firm KrypC, is currently fine-tuning and refining the system. Pilots have already been conducted using dummy data, and the intention is to carry out official real-life pilots before the platform goes live in the first week of April.
For a start, banks will likely use TradeAssets to conclude deals with existing partners, but over time Sankaran expects them to gradually utilise the platform to build new relationships as well.
“The banks will get access to a full universe of participant banks from different regions, because now there are no barriers. Every day the system shows matching assets from different potential partners. Suddenly, the ecosystem has become much larger,” he says.
More choice and transparency also brings new opportunity for buyers to negotiate better pricing, he adds.
However, it won’t purely work as an open, transparent marketplace: seller banks will be able to define a positive or negative list – basically defining the group of banks invited to bid on a deal, or excluding competitors from viewing the information in it.
Similar platforms already exist in the US, Europe and Asia with the likes of Mitigram, CCRM and LiquidX gaining support. But according to the founders of TradeAssets, these have slightly different business models and ecosystems and have not penetrated TradeAssets’ target market.
And as opposed to other platforms in this space, TradeAssets is the first to use blockchain technology, making it more secure and transparent.
“Currently, databases are stored in central servers, so if something happens to the server, or if somebody is able to hack into it, then the data can be manipulated or stolen,” Sankaran says. “In a blockchain, the same database is maintained in three or four servers across different locations. It is extremely improbable that someone will be able to hack into all four at the same time.”
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Spend an hour any evening watching local television and you’ll soon learn that there is no shortage of money lenders in Hong Kong. From giant cats to tumbling skyscrapers, the commercials are slick and surreal, but the gloss masks the fact that the offerings are closer to payday loans than structured finance, which remains largely the preserve of Hong Kong’s many banks.
Over the last year or two, however, a group of digital marketplaces have got tongues wagging in the city’s trade finance sector. Taking advantage of technological advancements which allow for efficient client on-boarding and disbursement of funds, these platforms are seeking to match the chronically underserved, 330,000-strong SME sector in Hong Kong with a bunch of yield-hungry investors seeking a low-risk, regular return.
These invoice financing platforms are not reinventing the wheel: they’re offering products and services which are available in most places, but which have been strangely short on supply of late in Hong Kong, which is held up to be a premier hub for trade and finance.
Invoice financing allows businesses to borrow money against the amounts due from customers. The platforms springing up in Hong Kong and elsewhere allow businesses to list their invoices on a marketplace, where they are matched with professional investors, who pay the outstanding invoice at a discounted rate. The seller has had their invoice payment advanced, minus interest, while the investor makes a yield, with the going rate in Hong Kong anywhere from 8% to 18%, annualised.
“The basics of the concepts behind these platforms have been around forever. Whether that is in the form of factoring, invoice discounting or even supply chain finance. All of which tend to be offered by either bank or specialist factor,” says Jolyon Ellwood Russell, a Hong Kong-based trade finance partner at law firm Simmons & Simmons.
“However, it is no secret that banks are pulling back on traditional banking products as costs outrun the attractiveness of such products. So financing opportunities are opening up. Add this together with the use of technology and a platform that makes the whole process of listing and tracking an invoice far easier,” he explains.
As is often the case, the emergence of these non-bank financiers can be traced back to the global financial crisis and the subsequent capital holding requirements that were enforced.
That banks beat a hasty retreat from emerging markets post-2008 is well-known, but even in a developed market like Hong Kong, the crash starved SMEs of capital. Those that wish to take a bank loan are often asked to collateralise property in exchange: an onerous requirement in most places, but even more unrealistic in a place where the average new home costs US$1.7mn and where a workstation costs more than US$27,000 to hire per year. This is collateral that, for most small companies, doesn’t exist.
Furthermore, the barriers to entering Hong Kong’s market are enormous. As well as the exorbitant rent, much of the talent is absorbed by the monolithic mainstream financial sector. When Andy Chan and co-founder Winston Wong launched Qupital as graduates in 2016, Chan tells GTR that his meagre budget had him eating at McDonald’s every day. “We were lucky to find angel investors early on, but we were still living on a shoestring for the first 12 months,” he says.
Hong Kong fintech startups can only dream of the thousands of square feet in office space lavished upon their peers in Singapore by the government there, and while those that survive tend to be hardy and resilient, there are many more that don’t live to tell the tale.
It is interesting, then, that each of the four companies interviewed for this story has senior staffers that have previously worked at much larger companies in the sector.
The Hong Kong fintech scene is unforgiving, but these companies are attempting to fill a gap in the market that is as lucrative as it is gaping.
When he worked in banking, Anson Suen could see the levels of indifference towards SME customers first hand.
“If I am on-boarding you as a client and you’re requiring a HK$10mn line, the frontline staff don’t have a lot of incentive to expedite the process, because they have larger clients to take care of. The layers of approval process and inefficiencies in the banks don’t allow SMEs to enjoy bank services. Collateral is one issue, but also ticket size. For an invoice as low as HK$100,000, the bank would tell you to go somewhere else,” he tells GTR in an office tucked up on the 11th storey on a busy downtown street.
At Fundpark, he finds himself with a different set of issues. Whereas “Hong Kong Bank”, as locals call HSBC, is a household name, populating an invoice financing platform requires a lot of groundwork. Small businesses have to be convinced that this is a viable way of raising money, while investors have to be sourced to fund the invoices.
“There’s a lot of money on the street but trade and invoice financing is not something they’ve known here. The reason it is not established as a market is the education of the SMEs. Traditional SMEs, when they think of financing, they think of banks. They see financing in general as a package from banks. But we now see the second generation of companies, new entrepreneurs coming up in the trading sector. The internet of things, consumer electronics, marketing companies, they’re more open to this kind of idea,” he says.
Currently, the platform has more than 130 SMEs listed, and while Suen is not keen to disclose the total volume of invoices financed, he says the company is growing its turnover by 80% a month. Fundpark has enlisted Alan Lee, a senior commodities banker who led teams at HSBC and Standard Chartered, as senior trade consultant and with this team in place, Suen says their strong suit is attracting SMEs to the platform.
Suen adds: “We don’t have a strong capital market background, but we’re strong in the deal flow pipeline, we speak the same language as the SMEs. So we’re stronger on the supply side, but of course we are continuing to grow our funder base. We started with individual funders and now we have more corporate funders onboard. We have more assets than funders, the funding was the bottleneck in 2017, but starting in 2018, we are getting more traction.”
Over a coffee in Qupital’s headquarters in Lai Chi Kok, north Kowloon, Andy Chan also discusses the lack of awareness of the product they are offering SMEs. “A lot of people didn’t know they could use their invoices to get financing. I feel like it wasn’t a product that was pushed a lot by the banks,” he says.
As with the other companies interviewed for this article, Qupital works only with professional investors, which is part of what separates these platforms from the crowdfunding craze in Mainland China. In Hong Kong, this means individuals with HK$8mn (about US$1.02mn) in a portfolio, and corporations with over HK$40mn in assets.
Qupital acts as the escrow agent in the middle of a transaction, holding the invoice in trust while the seller (a company) finds a buyer (an investor). “The funders bid on the invoice. If it’s a HK$100 invoice, some may be willing to pay HK$96, some HK$98. The HK$98 will win, then they transfer the money to Qupital, which will transfer to the seller,” Chan explains. The seller is able to set the desired price of the invoice, but must be realistic, otherwise it will have an unsold option.
In 2017, Qupital made headlines when it became home to the first fintech investments in Hong Kong from both Alibaba Entrepreneurs Fund and MindWorks Ventures – big names in the Asian venture capital scene. The US$2mn equity stake allowed them to build the team. But the stream of Hong Kong-based sellers on the Alibaba platform was arguably even more valuable.
While Alibaba expanded its TMall e-commerce platform to Hong Kong last year, its flagship lending arm, Ant Financial, mainly services Mainland Chinese companies. There are, therefore, huge numbers of Hong Kong-based trading companies without access to the same kind of finance as their Chinese peers.
“A lot of Alibaba’s products are tied to the Mainland. We can bring quick growth, that we’ve proven, in a niche market. They’re probably looking at bigger things in e-commerce and payment solutions, rather than trade finance for small businesses with less than US$20mn turnover,” Chan says of the e-commerce giant’s interest in Qupital.
In under two years, nearly HK$300mn of invoices have been funded on Qupital’s platform, with an average margin of 12%, annualised. The company is growing well, but this is only a drop in the ocean compared with the amount of SME financing required across the market. For this reason, Chan thinks that further competition in the space would be healthy.
“It’s been the same two or three [in competition]. But more would be good, we need to educate the market. If you’re the only one selling the product, maybe it’s only you that’s interested. Look at the example of Tesla: it allows everyone to know how to create electric cars, they open source their engineering. That allows the market to gain more knowledge and it helps everyone to move from gas to electric,” Chan says, suggesting that by working independently to fund SMEs, the erstwhile competitors will help the market grow.
Over the space of a quarter-century, Robert Lin has been borrower, lender and facilitator, in his roles in trading, banking and fintech. Now, after all his years in trade finance, it is finally attracting some mainstream attention.
“Definitely over the last two, three years, there’s been more interest from the investor side. Everybody is looking for yield. Trade and receivables finance has got more of the spotlight. People see it as fairly low-risk, non-correlated to the markets, and yet with reasonably attractive yields. With inflation becoming a hotter topic, trade and receivables are Libor adjusted, it stays up with inflation,” he tells GTR in a phone interview.
Seabury TFX provides an entry point for investors who wish to access this market. The biggest challenge to entering has been scale, Lin explains. As an investor looking to deploy US$10mn, you would have to trawl through 400 invoices just to find the ones you are willing to finance, given that the average cross-border invoice size is around US$20,000. Technology provides a solution to this and allows for these invoice financing platforms to collate.
“We provide a bridge for investors to get access into trade and receivables,” he explains. “A traditional hedge fund investor doesn’t have the operation to take on that, or the relationships. Working with originators like ourselves can accomplish that. Most of the companies we work with have about US$20mn and up in sales. We have some multi-billion dollar corporates on the supply side. Where technology exists we can comfortably tap into their transaction data.”
Lin launched EastWest Capital in 2012 as a supply chain finance provider, which operated SCFExchange.com. Barely a year later, it was bought by Seabury Capital, a US company specialising in capital financing, particularly aviation. The rebranded Seabury TFX has a bigger book than its competitors and is targeting US$500mn in volume this year. The average value of a financing (as well as invoices, Seabury funds the pre-shipment stage) on the platform is US$25,000, with company limits range from US$50mn to US$500mn.
“Trade has always existed and yet when you talk about receivables funding, invoice discounting, it’s not something most are familiar with. The interest really started after the financial crisis when the banks pulled back. But for the SME sector there’s been a difficulty in obtaining finance. People are looking for other solutions,” Lin says.
Vittorio de Angelis, the co-founder of invoice financing platform Velotrade, suggests that the market wasn’t stagnant solely through a lack of funding. It’s a widely-held view that “factoring” was considered a dirty word in Asia until very recently. Even now, old habits are dying hard.
“We’ve noticed an attitude shift in the short time we’ve been in the space. Before it was like: ‘Oh my god they’re painting my door red because I owe money to people.’ Now it’s just one of the tools that SMEs can use to get finance,” de Angelis tells GTR in his office at Cyberport, one of the few facilities in Hong Kong which offers concessionary rates to fintech companies.
De Angelis and his partner Gianluca Pizzituti ended up in the trade finance space almost by accident. An investment banker by trade, he was head of the equity derivatives desk at Louis Capital Markets in Hong Kong before somebody approached him with a proposition.
“I didn’t have a clue,” he says when asked what his impression of trade finance was 10 years ago. “Investment banking is a very intensive job, you spend 12 hours a day in front of your screen trading and seldom have the opportunity to step back and look at the bigger picture. This all happened by chance, we bumped into somebody who introduced us to the world of trade finance, we stumbled upon it.”
The initial business model was to use their own capital to purchase goods from China and then sell the goods to western buyers. That helped acquaint them with the space and made them aware of the potential market there was for invoice financing in the region.
“Gianluca and I come from an investment banking background, and we were pricing deals for clients at 10-15 basis points per annum. All of a sudden we found wholesalers in Europe ready to pay 5% to 15% rates in order to secure funding. We realised there was a big market dislocation. We knew where the money was, and it couldn’t be placed at any meaningful level of yield because of quantitative and other economic reasons. On the other side, we see a very solid transaction because it’s insured, there’s recourse to the seller, there’s a whole set of safety nets in place that made the trade a good asset,” he explains.
Arguably, the advantage Velotrade has on rival firms is the access to institutional investors, borne out of years working in that sector.
“The interest is massive. Our ambition is to create a new asset class. Everybody is craving yield and this is an asset class that’s been monopolised by traditional financial institutions for 2,000 years. Because of fintech, our ability to process deals in a more efficient manner than other players, we can open this asset class to new investors,” he says.
Traydstream, a UK-headquartered fintech company whose platform digitalises and automates trade finance, has hired Jayan Menon as its new country head for India.
The official appointment of Menon follows the firm’s announcement in January that it had opened its first subsidiary in Mumbai.
In his new role, Menon will be in charge of building a team of trade specialists who will help expand Traydstream’s fintech platform. He will work closely with the company’s vendors in India and Ukraine to ensure consistent global client delivery as the firm begins to onboard new clients and carry out more pilots. He will be a director of the Indian operation and be part of Traydstream’s wider management.
Menon brings more than 25 years of experience in the banking industry, particularly in trade services and treasury. He joins from Tata Consultancy Services, where, as director of operations, he headed the trade operations of a large UAE bank. He previously worked for ICICI Bank and Yes Bank, among others, in India.
Launched last year, Traydstream’s fintech solution digitalises trade documents and automates regulatory compliance screening using artificial intelligence (AI) and optical character recognition (OCR) technology.
The company is currently in varying stages of discussions, including undertaking pilots and proofs of concept, with almost 50 banks and corporates around the world. Around 15 of them are based in Asia.
“The application of the functional knowledge in trade to transform the trade services in banks with the latest technology applications is what excited me to join this fantastic team,” says Menon in a statement.
According to Achille D’Antoni, Traydstream co-founder and chief sales officer, the company has been targeting Menon “for a while”. He adds: “We are delighted to have Jayan on board. Our goal is to keep attracting first-class professionals who relish the challenges of product innovation as well as effectively managing global client delivery in a new innovative environment.”
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Could technologies such as blockchain and AI bring greater diversity to the trade finance industry?
The technologies that are changing the way trade finance is delivered could level the playing field for both those women who deliver the funding, as well as those receiving it. Or could they? Speakers at the third London-based GTR Women in Trade Finance event in December debated the issue at length.
It’s no secret that there are currently fewer women than men in top trade finance management positions. But the advent of fintech could mean that women have a real opportunity to become leaders in the space because it’s not yet an entrenched “boys’ club”. Technological disruption may indeed be necessitating the importance of driving more diversity into the trade finance space – because a new way of doing business demands fresh talent to drive the change.
What’s more, in the relationship-centric world of trade finance, which frequently excludes women, technology could attenuate the importance of these interpersonal relationships.
In the video, we caught up with Louise Beaumont, co-chair of techUK’s open bank working group, Alisa DiCaprio, global head of research at fintech firm R3, and Beatrice Collot, head of global trade and receivables finance at HSBC France, to find out how technology can – and cannot – drive gender diversity in the industry.
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At GTR‘s China Trade and Commodity Finance conference in Shanghai, experts discussed the Global Trade Connectivity Network (GTCN), a Hong Kong-Singapore blockchain collaboration.
The GTCN will tie in with the targeted go-live dates of the Hong Kong Trade Finance Platform and the Trade Finance Modules on the National Trade Platform in Singapore, both of which will look to digitise trade finance in their respective jurisdictions.
It is understood that there are multiple banks involved in the development on the Singapore side: local banks DBS, OCBC and UOB, along with MUFG and Standard Chartered. On the Hong Kong side, BEA, HSBC, Hang Seng and Standard Chartered (again) are working on the development. Technology companies such as R3 and IBM are also involved on the tech side.
Meanwhile, the platform is expected to be rolled out to other markets relatively quickly. Japan is in line to be next, with South China to be connected via Shenzhen, while Thailand will also be included before long.
This speaks to the connectivity of the two host jurisdictions: Hong Kong provides a gateway to North Asia, with Singapore holding the keys to Asean.
The early work will look to use blockchain technology to restrict duplicate invoice financing, a problem which has long plagued the trade finance sector in Asia.
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Singapore bank OCBC is trialling the use of deep learning satellite technology in a bid to reduce risks in the financing of crude oil.
The bank has engaged specialist data analytics firm ImageSat International (ISI) to estimate crude oil levels in tanks stored in undisclosed locations in Asia, using optical images collected via satellite. Data taken from the images, collected over a period of time, help build an algorithm which gives OCBC a 90% accurate gauge of the oil it has financed.
Since the information is linked directly to the commodity rather than the terminal at which it is stored, it eradicates the potential for fraud and inaccuracy in the reporting of the bank’s collateral position, the bank says.
GTR can reveal that OCBC has successfully completed a proof of concept with ISI and is looking to trial the technology further in other commodity verticals, where the bank provides storage and project financing against an underlying collateral position.
Phase two of the pilot, which will commence shortly, will add additional infra-red satellite imagery to boost the accuracy of readings to 95% since infra-red satellites can penetrate cloud cover and therefore sidestep potential adverse weather conditions.
“The first phase focused on oil inventory in Asia, looking to see if we could get an accurate independent estimation of oil in tanks that the bank is financing. That took some time, we had to identify where the bank would want to do this, and decided on a location in Asia. We worked with ISI over the course of months and came up with an accuracy level of 90% on the oil inventory we financed. We closed that off in January 2018. After this phase, we’re going to look at the second and third phase, focusing on metals and agricultural products,” Barend van IJsselstein, head of energy commodities at OCBC, tells GTR.
OCBC claims to be the first bank to apply this technology to the commodity finance sector. However, it has also been deployed to analyse oil inventory stocks by organisations including hedge funds. For instance, funds are using it in Cushing, Oklahoma – a major oil trading hub – to help predict the price of crude.
This technology combines advancements in satellite and smart technologies. Using shoe-box satellites, which come at a fraction of the cost of traditional, more cumbersome satellites, ISI takes pictures of the co-ordinates provided by OCBC, from space.
The company then uses its deep learning software to analyse the images. The algorithm scans the oil inventory for storage tank depletion, looking at the sinking level of the lid and the shadow cast by the sun on the inside of the tank. Detecting these patterns allows analysts to estimate how much oil is in the tank.
Furthermore, using bandwidth purchased from infra-red radar satellites, then analysing those images, the company can gauge the contrast in the temperature between the oil stored inside the tank, the tank itself and the gas-filled spaces in the tank to predict the volume of oil stored in the tank.
“We are providing the ability to monitor areas or locations from space,” Liron Vine, head of marketing at ISI, tells GTR. “We then apply our comparison analytics in which we identify the changes spotted in the area since the last picture that we sampled and over several periods of time. This enables us to assess the status of the pictured area. For example: if it’s a site – is it active or not, or are construction works progressing and what phase they are in? Another example: we can provide precise volumetric measurements of crude oil tanks with floating lids. By measuring the lid height – that is changing according to the oil volume – we can calculate exactly how much oil is in every tank.”
One of the main purposes of this sort of technology is to reduce the risk of fraud, which continues to plague certain commodity markets in Asia. High-profile cases in recent years include the Qingdao metals fraud, which exposed many banks to fraudulent warehouse receipts, obtained multiple times against metals stocks which may not have existed.
Last year, ANZ was exposed to a warehouse receipts fraud in the nickel sector, worth more than US$300mn. The bank was left with ownership of 83 fraudulent warehouse receipts which pertain to cargoes of nickel stored at Access World warehouses in Singapore and South Korea.
These instances, combined with the multitude of fraud cases that go unreported every day, have left banks looking to fintech for answers. One of the most frequently-cited pluses of blockchain technology is that it can help eradicate double financing, since data entered onto the blockchain cannot be altered. Other tools such as LMEshield are geared towards stopping warehouse receipt fraud.
Satellite technology that is able to track and monitor commodity stocks offers some assurances to banks that these cargoes do, indeed, exist and that they are what they claim to be.
“To my knowledge there hasn’t been a fraud case in oil in Asia for quite a long time. However, fraud in general in commodity finance remains a big risk factor, especially as the dollar amounts in oil and energy are quite large,2 van IJsselstein says. “Anything a bank can do to reduce risk in financing is something that’s very useful. We see this as one of those additional tools. As we go along the process we are discovering extra benefits, such as reducing travel costs and CO2 footprint. These are side benefits, but the main benefit is that we can enhance our risk management and mitigation process.”
ISI says the technology is “highly scalable” and can be used across commodities, tracking ship traffic and following the stocks through the entire supply chain.
“We can quantify everything that is visible from containers, cars in parking lots and finished goods in factories and through that, create customised indexes,” Vine explains.
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Businesses across the UK can look forward to better access to financing and other financial offerings now that the country’s open banking reform has come into effect. Incumbent banks, on the other hand, are warned of increased competition from alternative lenders and the risk of redundancy.
It’s fair to say that open banking wasn’t off to the best start. Although January 13 was the day the reform came into force, all but three banks (Allied Irish Bank, Danske and Lloyds Banking Group) missed the deadline to develop solutions in line with the open banking standards.
Despite these initial challenges, the official beginning of an open banking regime in the UK could mean huge changes for both consumers and businesses.
Driven by a new EU directive, PSD2, and an order by the UK’s competition and markets authority, open banking aims to boost competition and choice in the banking sector. The legislation covers nine of the major banks in the country, although other banks have opted in to the UK’s standard and more are expected to join.
Specifically, the new regulation means that customers can now allow third parties to access their financial data – data that banks have historically kept under lock and key. For non-bank business lenders, this opens up a whole new world of opportunities.
“It would put us and other lenders on a level playing field with the banks,” Christoph Rieche, CEO of iwoca, tells GTR. “Open banking is an opportunity for alternative finance lenders to compete head-to-head with the banks, who currently enjoy the lion’s share of the £164bn SME lending market, by unlocking data that only the banks could access until now.”
iwoca is a UK-based fintech firm that offers small business credit facilities. The company was recently awarded a £100,000 prize by Nesta, an innovation foundation, as part of its Open Up Challenge, a contest for fintech firms to take advantage of the new opportunities that the UK’s open banking initiative will enable.
Before open banking, iwoca had various, rather old-fashioned and cumbersome ways of obtaining financial data from their customers. Screen scraping methods, for example, involves companies having to share their online banking login credentials, a method that is both inconvenient and insecure.
Now, this data will be shared via a secure API (application programming interface). In practice, this means that iwoca can ask businesses for consent to digitally “plug in” their bank account to its lending facility, giving iwoca access to past and current cashflow data.
Rieche explains that the access to more data and longer transaction history, as well as the ability to see this information on an ongoing basis will improve the firm’s underwriting and credit decisions, allow it to easily reapprove customers, and become more competitive on its loan terms. It will also make it quicker and more straightforward for its customers to apply for a loan.
As a result, iwoca expects to grow its customer base, while also expanding the products it offers. But it’s not merely about picking up the many SMEs that have been neglected by their banks, he explains.
“We are in a better position to gain market share and get some of the businesses that the banks currently have. That will also help create a much better awareness of alternative lenders in the market, which then in turn helps to attract more customers. Open banking is helping with that,” he says.
Banks as high-cost utilities?
It is still too soon to tell what exactly the future open banking ecosystem will look like. Rieche expects that in three to six months’ time, it will be clear how new players have decided to develop their apps and products as a result of the reform.
But it may well take years before major changes will be seen in the market.
Nevertheless, the new competition is something that incumbent business lenders should take seriously – or they risk being left behind.
As reported by GTR in its latest feature on open banking, the challenge faced by financial institutions can be compared to those encountered by the telecommunications industry in the 2000s, when alternative providers such as WhatsApp, FaceTime and Skype began to take market share from traditional mobile network operators.
Drawing that parallel, Louise Beaumont told GTR that banks will face the risk of becoming mere financial utilities – providing only the essential infrastructure that enables high-value experiences offered by others – which is just what happened to the phone companies. Beaumont is the co-chair of the open bank working group at techUK, a trade association for the UK tech industry, and sits on the UK’s Open Banking Implementation Entity.
“There is a very real risk that those banks which do nothing other than minimally viable compliance find themselves as a high-cost utility,” she said. “And being a high-cost utility is not a smart place to be. There isn’t too much space for those in the marketplace.”
At a Baft event this week, Tracy Clarke, Standard Chartered CEO of Europe and Americas, said in her opening address that banks’ ability to extract value from data will be “crucial to remaining profitable” in future. She noted too that a move into data analytics will open up “new opportunities in transaction banking”.
While the banks that GTR has spoken to all said they welcome the legislative changes in the UK and EU, it is unclear whether they would have embraced open banking without lawmakers’ intervention. After all, it’s not for nothing that the regulation has been introduced. Yet, there is general agreement amongst various sources that open banking also means the opening up of new opportunities, which will allow banks to thrive.
Beaumont, for one, is hopeful that the changes will push traditional banks to rethink and improve their products and services.
“It’s changing their mentality to recognise that data has value and to do something with that data to the benefit of their customers,” she said. “The innovation in terms of new services will filter back into the banks and they will be able to deliver modern real-time flexible services, rather than push old-fashioned products.”
The most exciting outcome, however, could be the opportunity for old and new players to drive innovation together.
Natalie Willems-Rosman, head of payables and receivables, Emea, at Bank of America Merrill Lynch, told GTR: “By the industry adopting a new way of sharing data – through APIs – it ultimately speeds up and increases the sharing of information and facilitates the opportunity to work with other parties in the chain – this could be fintech companies, new entrants or other banks.”
No doubt, banks, fintechs and other third parties will have operational challenges to overcome as this new legislation takes them into unknown territory. Some may lose out, others may find a new role in the market. Ultimately, the biggest winner will be the customer – and rightly so.
The post Open banking: Banks will face “head-to-head competition” from alternative lenders appeared first on Global Trade Review (GTR).
Traydstream, a UK-based fintech company that aims to digitalise and automate trade finance, has opened a new office in India, its first global servicing hub for its trade, technology and client service operations.
The entity will house experts in the disciplines of trade and technology to support the ongoing development of Traydstream’s proposition, as well as servicing clients around the world.
Launched last year, the fintech firm’s solution digitalises trade documents and automates regulatory compliance screening using artificial intelligence (AI) and optical character recognition (OCR) technology.
Traydstream’s CEO, Sameer Sehgal, tells GTR the company has been talking to a number of industry seniors and is looking to announce its director of operation and the office’s executive team soon.
He says the creation of an India entity was a “natural decision” for the company.
“Over the last few decades India has firmly established itself as a leader in the tech and software industry and as a primary offshore processor for trade for organisations around the world. It’s got a deep bench strength of trade and banking professionals focussed on operations, something which we found extremely attractive,” he explains.
Based in Mumbai, the new entity will be able to serve clients 24/7, together with the office in London, Sehgal adds.
Traydstream’s solution consists of three key modules: an OCR engine, which uses AI to read, scan and instantly structure and store paper-based information digitally; a rule-checking function; and a compliance engine that utilises machine learning algorithms to verify and scrutinise for compliance with international trading rules and regulations.
The company is currently in varying stages of discussions, including undertaking pilots and proofs of concept, with almost 50 banks and corporates around the world. Around 15 of them are based in Asia.