By Sanne Wass

New technologies such as machine learning and blockchain could help solve the de-risking problem among banks globally and widen access to trade finance in emerging markets.

That’s according to a new study by Centre for Global Development, which assesses six new regulatory technologies – machine learning, biometrics, big data, know your customer (KYC) utilities, blockchain and legal entity identifiers (LEIs) – and their potential to address the de-risking problem.

De-risking has hit many emerging economies since the financial crisis. Amid fears of heavy penalties for breaching anti-money laundering (AML) regulations, the rising costs of conducting the requisite due diligence and the lack of confidence in the respondent banks’ risk control, financial institutions, particularly in the US and Europe, have pulled back from what they consider to be high-risk markets.

According to research by Accuity, a provider of compliance software that helps banks to reduce exposure to AML risk, the number of worldwide correspondent banking relationships, which are critical to cross-border financial transactions, has been in steady decline from 2009 to 2016, falling by 25% overall.

De-risking has had unintentional and costly consequences, especially in Africa, Central and Eastern Europe, and Asia Pacific. Among the biggest losers are small businesses that can’t access working capital or trade finance. As correspondents depart, they’ve left holes in the funding space, cutting credit lines and withdrawing finance.

The African Development Bank (AfDB) now estimates unmet demand for bank-intermediated trade finance of between US$110bn and US$120bn in Africa. De-risking is one factor behind the problem.

“Some policies that have been put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky – in part due to the high price of compliance,” says Vijaya Ramachandran, senior fellow at the Centre for Global Development and one of the study’s authors.

But, pointing to the new study, he says “regtech may be the solution to some de-risking woes”.

“What we’re seeing is that even as these policies are having an impact, financial institutions are coming up with solutions in the form of new cutting-edge technologies to help them comply better and faster with AML regulations,” Ramachandran says.

KYC utilities, for example, can reduce the amount of time correspondent banks spend on repetitive due diligence processes. Blockchain can improve the KYC data storage security.

Big data and machine learning can enhance correspondent banks’ ability to assess and manage risk through more sophisticated customer typologies and more accurate transaction monitoring. And biometrics can enable faster and more assured identification of individuals.

Over time, the study concludes, these technologies may alleviate some of the pressures on banks and “make holding correspondent banking accounts with clients in poor countries more likely”.

This enthusiasm about regtech is not new: GTR has previously reported on ways regtech can help the industry optimise compliance – a task that is still largely dominated by manual and mundane processes. A recent study found that banks could save £2.7bn a year by adopting machine learning and big data technology in their AML systems.

However, the argument that new regtech like machine learning and blockchain will bring banks back to de-risked markets is met with scepticism elsewhere in the industry.

“I don’t think technology is going to solve the problem. It’s a people’s, education and timing issue,” says Sean Norris, head of sales at Accuity.

He points to the fact that many of the de-risked countries, mentioning the likes of Afghanistan, Malaysia, Indonesia and Vietnam as examples, “haven’t got processes right for very basic things yet” and are still “far behind” when it comes to prioritising and implementing the Financial Action Task Force (FATF)’s guidelines and best practices for AML.

“When you’ve got a bank in Jakarta that is still relying of self-declaration of a person in a KYC process, how is that going to be acceptable for a western bank? I don’t think technology is going to solve a behavioural problem and different attitudes to AML controls,” he says.

Norris doesn’t deny the power of technology – after all, Accuity itself is a provider of AML software and is also exploring the use of machine learning to minimise the number of false positives. He also argues that de-risking is in fact driving the acquisition of better technologies by banks in Africa and Asia to upgrade their AML processes.

For example, more banks are looking to adopt Accuity’s sanctions screening solution to demonstrate that they are able to meet global standards of compliance and improve their ability to strike up new business relationships with financial institutions around the world.

But talking about the adoption of artificial intelligence and blockchain within banks in de-risked regions is “a stretch”, he argues, adding that the technologies being adopted are those that “have been around for a long time”.

“It’s really just to comply with the core aspects of AML,” he says. “Sanctions screening, for example, is something that England and the developed markets have been doing for the last decade, which they have now started to implement or operate in the emerging markets.”

New or old technologies, the industry may have to wait a bit longer to see the positive impact on the de-risking problem. But one thing is certain: those banks who take AML seriously have the best chance of re-establishing their broken relationship, Norris explains.

“The western banks are going to be a lot more comfortable when the banks are taking this seriously,” he says. “Compliance should never be a competitive sport, but when you’re talking about de-risking in these emerging markets, a lot of them are over-banked and so it becomes really hard for western banks to pick the right partner. They are going to pick the partner that is taking it seriously.”

Read the full study Fixing AML: Can New Technology Help Address the De-risking Dilemma?

The post Could regtech bridge the trade finance gap in emerging economies? appeared first on Global Trade Review (GTR).

One of the world’s largest business networks has teamed up with a fintech startup to develop a blockchain-powered marketplace for supply chain finance.

OpenText, a Canadian firm that operates a business network of more than 600,000 companies, has partnered with UK-based BlockEx, a provider of a blockchain-based digital asset exchange, to explore the use of blockchain technology across the supply chains of the OpenText network and how it can help facilitate firms’ access to finance.

“Our partnership allows some of the world’s largest supply chains to simply opt-in to blockchain-based trade finance,” says Adam Leonard, CEO of BlockEx, calling the move “truly exciting”.

Also commenting on the new partnership in a blog post, Mark Morley, who is director of strategic product marketing for business network at OpenText, says the two parties will jointly develop solutions to provide increased visibility of the end-to-end supply chain information flow, which can help lenders monitor supply chain events, such as disruptions or late delivery of shipments, to evaluate vendor risk more effectively. Lenders will also be able to identify when assets have been pledged as well as extend their offering to pre-delivery financing. Finally, a blockchain-based solution can prevent fraudulent invoices from entering the supply chain.

“Blockchain is ideal for traceability use cases within the supply chain, especially where raw materials need to be tracked from source to final destination,” Morley writes. “Born out of the financial services sector, blockchain stands to transform the way in which companies engage with trading partners across a supply chain.”

As previously reported by GTR, blockchain is well suited for tracking and tracing the physical supply chain. The technology ensures that records cannot be duplicated, manipulated or faked, and because it allows data to be entered, shared and viewed across the supply chain, the goods’ journey from farm to plate is immediately visible and transparent to all parties. Some fascinating developments are already underway, including projects that use blockchain technology to trace diamonds, wine, coffee beans, cotton, avocados and fish.

The ability to monitor goods securely also makes blockchain technology ideal for managing the end-to-end supply chain finance process.

“Supply chain finance is a great use case for blockchain as the process needs to effectively manage the orchestration of transactions between buyers, suppliers and lenders, as well as other businesses such as third-party logistics carriers involved with shipping goods across the supply chain,” Morley continues. “It brings a new level of transparency to supply chain processes, something that lenders have typically struggled to achieve to date, especially for shipments moving across multiple country borders.”

BlockEx’s platform allows for digital asset creation, issuance and trading. The startup works with trading firms, institutions and governments, providing bespoke blockchain implementations and proof of concepts.

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New fintech startup Populous is introducing smart contracts, blockchain technology and digital tokens to the invoice financing space.

Having raised more than US$10mn in crowdfunding in just five days, the company has now started piloting its new platform, which lets firms and individuals sell or buy invoices globally.

The early support has been overwhelming, Populous’ founder and CEO Stephen Williams tells GTR. “We’ve been getting a lot of interest from other invoice factoring firms and financial firms that are not on the blockchain, wanting to join the project, including banks as well,” he says.

The platform is much like a conventional invoice marketplace, but the underlying blockchain technology brings a range of advantages, such as cheaper transaction fees, more efficient and faster processing, as well as improved transparency and security.

Williams says the startup aims to lower the barriers to entry for investors, allowing for far more accessibility to the invoice finance market. And with lower costs, it will bring increased liquidity to companies looking for financing.

Built on Ethereum, the platform takes advantage of smart contracts and a decentralised network, but none of its operations use or rely on cryptocurrencies like bitcoin or Ethereum’s value token ether, which are often described as volatile. Instead, it uses Populous’ custom stable tokens – called Pokens – being stable in that they are pegged with fiat currencies around the world (although they can also be bought with other cryptocurrencies).

“With the smart contract, we have created our own tokens, our own currency in a sense, which the contracts accept,” Williams says. “For example, a guy from India wants to finance an invoice from Sweden, so he would place his money into the platform, and it will get converted into kroner Pokens via the smart contract.”

When an auction is live, investors can bid on an invoice within a timeframe of 24 hours. Their tokens are held in the smart contract until the auction has concluded, after which the contract executes itself depending on the pre-defined criteria, and the invoice seller automatically receives his tokens. These can again be redeemed in any fiat or cryptocurrency.

The whole process, however, isn’t completely autonomous, as the platform administrator still needs to carry out know your customer checks, and approve and manage clients’ accounts and actions.

The use of stable digital tokens, Williams says, is more straightforward, quicker and cheaper than conventional methods, especially for cross-border activities.

“If you think about the complexity around different currencies and settlements and consolidation of payments, it’s a much more efficient strategy to use tokens, and it opens up the market to the rest of the world,” he explains.

Initial coin offering

Having lined up clients, Populous started piloting its platform this week and will release the beta version in November, before going live in January next year.

The final steps were made possible after having received an unexpected level of support as the company was about to launch an initial coin offering (ICO).

An ICO is an alternative way for a startup to raise funds – as opposed to seeking investments from venture capitalists or banks – by issuing digital tokens. It is similar to an initial public offering (IPO) in that a stake of the company is sold to finance new projects, but in an ICO it is – like a crowdfunding process – open to any supporters keen to invest, and funds are typically raised in cryptocurrencies like bitcoin or ether.

Early backers are usually motivated by a prospective return on their investment, as a startup’s success would often translate into a higher token value.

In Populous’ example, US$10mn+ was raised in ether by issuing so-called platform tokens – these are different from Pokens and are classified more as an asset. While Populous had announced it would issue these asset tokens in an ICO on July 16, it never got that far. Having initiated a pre-ICO a week earlier – in which the token was first offered to a limited number of potential backers – Populous sold out after just five days.

Williams says most investors were high-net-worth-individuals, who were especially keen on the innovative approach to traditional invoice financing. “A lot of the people have not invested in cryptocurrencies before and haven’t participated in any ICO before,” he says.

Ultimately, the big beneficiaries are the invoice sellers, primarily SMEs around the world, who will soon have yet another way to improve their cash flow, now with blockchain and digital money.

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African Capital Investments (ACI) and the African-focused asset manager Barak Fund Management have entered into a strategic partnership to expand their financing offerings for African SMEs.

ACI is a boutique merchant bank that helps raise equity capital for African companies, with offices in London, Dubai and Cape Town. Since being founded in 2013 it has closed over 14 individual transactions, resulting in more than US$300mn of investment into Africa.

Barak Fund Management, based in Mauritius and Johannesburg, manages a portfolio of six funds, which over the past eight years has expanded from short-term trade finance to the longer-term asset-backed lending space to fill the funding gap left my Africa’s commercial banks.

The new alliance will see the two parties co-locate in their representative offices in London and Johannesburg to collaborate on projects that can leverage Barak’s lending expertise and ACI’s equity know-how to offer a wider suite of services to their respective clients.

“ACI has built a sterling reputation in the African advisory world,” says Barak founder Jean Craven. “We want to leverage ACI’s expertise, origination capabilities and UK presence to achieve our goal of becoming a multi-billion-dollar asset manager in the next five years.”

ACI founder Rob Hersov adds that the collaboration kicks off a “new chapter in ACI’s story”.

“Barak’s track record speaks volumes,” he says. “They offer a creative approach to lending and provide African entrepreneurs with a viable and fast-moving alternative to commercial bank debt. Together, ACI and Barak will offer a suite of services that will give us an edge over the competition.”

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