Nils Behling, founder and CEO of Tradeteq, explains how technology can help make trade finance more investable.
Global Finance: Trade finance providers faced a perfect storm in 2020, from liquidity issues to closed borders and lockdowns that affected companies’ ability to move goods from one country to another. What are some of the lessons learned?
Nils Behling: Governments look at ways to channel money to corporates in this environment, and they typically do this through loans; but loans are not necessarily a very effective way of getting money to corporates. People will take loans and hoard the cash or spend the money whichever way—you don’t really have a very good handle on where the money goes. These programs are not necessarily best suited to really stimulate growth and incentivize trade.
One thing that’s became really clear is that trade finance is an extremely efficient instrument for getting funding to corporates. There is a very tangible value creation related to trade finance programs. By funding receivables and setting up programs, there is automatically a real-world impact and a real economic impact. There is no chance that the corporate is hoarding cash; because to get access to those funds, it will have to produce goods, sell them and make more of them.
GF: How can technology facilitate investment in trade finance?
Behling: We see a drive to digitization in trade finance, where banks reach out to corporates in a more digitized form. Tradeteq comes in on the distribution side, where banks are selling trade finance to investors. This area needs automation, digitization and a reduction of manual processes to create efficiencies.
Traditionally, only banks have held world-trade finance, because it’s a very stable asset class with very low default rates. The catch is that it’s a short-term revolving asset that’s low yielding; these invoices can have just a few basis points of yield. To really invest in trade finance, you cannot rely on someone pushing a spreadsheet—there’s too much friction cost—so you need automation. We provide the automation for the whole distribution process, from the bank to another banking institution or to investors; and we transform assets from the invoice format to a note format that’s issued out of a special-purpose vehicle.
GF: How are these assets credit scored?
Behling: Effectively, we can allow investors to look inside the packages we create; and we tell them the risk. Traditional credit scores are very much driven by balance sheet metrics; but when working with small to medium-size enterprises, their audited accounts will often be outdated and stale. We look at nontraditional factors for the credit scoring, like relationships between corporates, how they trade across their supply chains, and how shock flows through a supply chain.
GF: Where do you see the biggest opportunities for technology within trade finance?
Behling: If you think back, the biggest improvement and the biggest innovation in trade in the 20th century was the introduction of the container. It really reduced loading times and reduced cost, and it made the whole process very standardized and automated. I think a very similar development has to happen with trade finance distribution, making it investable. Many investors and banks are asking how to get additional capital into the trade finance market and stimulate investment.
The “next container” will be the ability to have a central hub for trade asset distribution: really, selling trade assets from banks to the capital markets in a very standardized product. If you look at other asset classes and how they have developed over time—at one point, no one knew what exchange-traded funds were; they were a very niche product. Now, many equity investments come in this format and everyone owns them. Similar developments can happen for trade finance.