TRANSACTION BANKING: TRADE, TREASURY & CASH
Trade and supply chain financing as an activity is complex, in part due to the multiple parties involved, each with their own paperwork and regulations with which they must comply.
Coupled with the variability of currency exchange rates, the need to comprehensively screen transactions to comply with anti-money laundering (AML), and know-your-customer (KYC) requirements, this end-to-end financial transaction has become a source of higher operating costs and multiple pain points for the trade finance intermediary.
As such, financial institutions are constantly looking for solutions in trade, treasury and cash management, to improve their margins on trade finance lending, while achieving portfolio optimisation in terms of trade asset exposures.
As a financial activity estimated at US$ 16 trillion annually, our view is that bank led trade lending is here to stay. We therefore maintain an investment focus on innovation and opportunities in this space, including solutions which mitigate fraud and ease regulatory compliance.
WHAT WE LOOK OUT FOR
The delta may be in innovation around services associated with trade lending, enhanced by technology, marketplaces, and innovation.
In this respect, GTR Ventures seeks to invest in founders and tradetechs who demonstrate a solid understanding of trade and transaction banking processes, who are able to cost effectively bridge the gap between treasury and trade for clients, and who are willing to partner with financial institutions to solve traditional trade lending pain points, including helping them achieve distribution efficiencies in their portfolio and risk management of trade.
RISE OF NON-BANK LENDING
Certain regulations, like Basel III, have increased banks’ cost of capital for trade and supply chain lending, resulting in shrinking appetites and balance sheets for trade finance assets.
In turn, this has given rise to of trade and supply-chain lending from non-banks such as trade finance funds and digital trade lending platforms. These structures allow for private-accredited investor groups, family offices and hedge funds to partake in the returns from trade finance. According to a International Chamber of Commerce report from 2016, the default rate on trade finance instruments such as export letters of credit (LCs), can be as low as 0.04% (see below). In addition, due to the short-term nature of trade financing cycles, investments into trade finance are fairly liquid.
|Asset Class||Default Rate by Exposures (%)||Expected Loss (%)||Time to Recovery (Years)|
|Loans for Import/ Export||0.21||7||0.4|
We believe trade finance lending can be considered as an alternative asset class for investors looking for portfolio optimisation and low volatility returns akin to investment grade bonds.
Besides specialist trade finance funds and trade lending platforms, we see corporates and marketplaces already involved in some form of trade lending activity. Amazon and Alibaba for example, have extended financing to their merchants; while Maersk as a shipping line, has set up a separate unit to extend trade finance to its customers.
WHAT WE LOOK OUT FOR
We invite you to get in touch with us and explore how we can work together, if you are a fund, a family office, or an investor, interested to find out more about opportunities from trade and supply chain lending.
If you are part of the physical ecosystem of trade (e.g. shipping line, airline, freight forwarder, logistics company) and wish to explore how providing trade finance may enhance your revenue base, get in touch with us.
- Tradeteq: Making trade finance investable
- Trade finance distribution platform to expand AI capabilities after US$6.3mn investment
- Details of Hong Kong’s blockchain trade finance platform revealed
- First four banks go live on we.trade blockchain platform
- TradeIX to “aggressively” grow blockchain ecosystem after ING investment
- Blockchain-based certificates of origin come to Kenya
- Investors: how will you leverage the expected growth of the trade finance market?
TRADE INSURANCE & RISK MANAGEMENT
Credit insurance is a common tool used by trade financiers to mitigate against buyers’ insolvency risks. Trade credit insurers play an important role in unlocking greater liquidity for trade, especially for small and medium enterprises (SMEs).
Other types of insurance in the international trade world include political risk insurance, cargo, shipping and marine insurance, currency insurance and product liability insurance.
Faced with the evolving needs of global trade, shipping lines, freight forwarders, and exporters, insurers are now stepping up their game in terms of 1) offering more sophisticated trade services, 2) investing in innovation and product development, and 3) improving their interaction with customers.
Insurers also need to tap on solutions and processes that enhance their risk management models.
WHAT WE LOOK OUT FOR
Insurtechs for trade who help insurers and insurance brokers operate on a lean model of minimal infrastructure, heightened differentiation, and smart automation of time-consuming processes such as underwriting and claims processing.
Solutions that enhance lending processes through APIs for example, or enable better risk management and analytics through data and aggregation are also keen areas of interest for us.
SME FINANCE & SUPPLY CHAIN
Securing sufficient working capital, and managing outstanding invoices are the top concerns of almost any firm (see chart below), particularly for small and medium-sized enterprises (SMEs). Existing solutions in supply chain finance offered by banks such as invoice discounting or those offered by factoring firms, have partially alleviated the burden.
WHAT WE LOOK OUT FOR
Tradetech solutions that can liberate liquidity within supply chains, lower credit risk for suppliers, and improve firm efficiency by bettering their abilities to forecast future cashflows, and providing great access to credit.
We are also keen on credit enhancement solutions for SMEs and databases or tools which allow banks or non-banks to cost-efficiently underwrite trade or invoice lending.
TOP 5 SME PAIN POINTS
1. Cost Containment
2. Maintaining Adequate Cash Flow
3. Falling Demand for Products and Services
4. Efficiency in receivables management
5. Collection of outstanding invoices in emerging markets
- GAC hires Euler Hermes underwriting head to lead new special risk division
- R3’s KYC blockchain app completes fourth trial, but will remain a prototype
- EBRD’s growing focus on SEMED: “Economic reform enables us to invest more”
- essDocs to launch blockchain solution in early 2019
- Africa’s floating LNG projects set to disrupt global gas trade
- TDB rolls out SME programme for women-led businesses in six African countries
- GTRV Portfolio Company, Culum Capital, Onboarded to the NTP
Anything and everything physical that supports a trade flow, from chambers of commerce, shipping firms, freight forwarders, trade brokers, customs authorities to seaports and airports, are important nodes which impact trade transactions just as much as its financial aspects.
We therefore keep a keen eye on trends and innovation in this space as non-bank corporates themselves embark on new ventures and partnerships to improve existing processes and operations.
What we look out for
GTR Ventures supports the overall trend towards digitalisation, automation, and virtualisation of trade. For example, tradetechs which improve operational efficiency, be it in freight, contract management, or optical character recognition (OCR), are some of our targets.
- GTR Ventures在新加坡金融科技節上宣佈達成三項新交易
- New app to help UK exporters through regulatory changes
- Forget tariffs, tech will be the key battleground in trade war
- Evergreen goes paperless as first shipping line to adopt Bolero’s e-bill of lading
- Singaporean entities complete blockchain for supply chain trial
- Could fintech be caught in crosshairs of US-China trade war?
- Big data drives more finance to African agribusiness
With the trade finance market seeing a constant stream of new entrants, from invoice financing platforms to blockchain-based technology consortia, this showcase competition brought various start-ups together for the chance to “pitch” their business models, strategies and activities to a panel of expert judges. Strong emphasis was placed on innovation, efficiency and providing greater access to finance particularly for the underserved SME market.
Host: Jolyon Ellwood-Russell, Partner, Simmons & Simmons