International trade is an important engine in driving inclusive economic growth. But the reality is that many small and medium-sized enterprises (SMEs) have trouble accessing affordable trade financing. With ESG at the forefront of everyone’s minds, making a societal impact that prioritises people and ensuring that entrepreneurs in developing countries are not left behind is important in creating a sustainable future for trade.
by Carl Wegner, CEO, Contour
Trade finance facilitates the import and export of goods, a crucial part of how international trade and commerce happens. But for small and medium-sized enterprises (SMEs)—among the major contributors to jobs creation and economic development—this is where it gets complicated.
The biggest challenge to SME growth is access to finance. Addressing this is an important piece of the puzzle when it comes to closing the $1.7 trillion trade finance gap, a gap that is even wider in developing markets. The availability and cost of credit make it hard for SMEs to finance their future, especially for those that are involved in international trade.
Women-led SMEs have an even harder time accessing trade finance. The International Finance Corporation (IFC) estimates a $1.5 trillion finance gap for women-owned businesses in emerging markets. The IFC’s Banking on Women business has deployed scalable solutions with partners to enable the financial sector to better serve women-led SMEs. As of June 2021, it has mobilised and invested over $3 billion in financial institutions specifically to finance women-led businesses.
Larger global banks have traditionally looked past the SME segment, as the economics did not make sense. But this is changing: fintechs are making trade finance easier and more efficient, by simplifying, streamlining, and synchronising the data.
Advancing the digitalisation agenda for SMEs
The following are three ways that fintechs help advance the digitalisation agenda for SMEs.
First, for SMEs which need to import or export raw materials or finished products, there is an advantage in automating this process. Whether it’s the cost of acquisition of a customer or processing of information, fintechs can help consolidate and digitise the data for the bank to decide on risk levels.
As a fintech, we can get data into the bank more efficiently, allowing the bank to execute more transactions. If you think about it, the paper process for a $5 million transaction is almost the same as that of a $5,000 transaction.
For example, the Letter of Credit (LC) is one of the most traditional and complicated parts of the trade process. With four to seven players involved in the transaction, there are stacks of documents involved and a lack of transparency in the way LC transactions are conducted. By automating the process, the barriers to entry are lowered for SMEs and local banks.
Second, the accuracy of data is increased when the entire transaction is electronic. From the financier’s perspective, it provides better clarity on the documentation details. In addition, when this is done on the blockchain, the information can be verified earlier and consistently in the process, thus lowering the risk as well as the cost of processing.
Finally, internet accessibility is a way of democratising the data flow to banks and the financial system. With internet access already a key target for economies to achieve, unbanked SMEs or micro-SMEs can enhance their efficiencies by going online.
Designing a more equitable future
When it comes to the future, fintechs continue to innovate to ensure their ecosystem remains efficient for SMEs. There are existing services that can be digitised, as well as different services like guarantees and standby LCs. In addition, there are opportunities to pioneer new ways of managing data.
Designing the trade finance network of the future is a challenge but ensuring that SMEs are included is a crucial piece of the puzzle to help them be part of a future where they can survive and thrive.