Banks and companies in the trade finance sector are increasingly using digital solutions to address companies’ significant and unmet financing needs. Yet the global trade finance gap—estimated at $1.5 trillion, with approximately 40% originating in Asia and the Pacific—persists in a stable state, with emerging economies and small- and mid-size enterprises (SME) bearing the brunt of financing shortfalls.
More than half of the 1,336 firms surveyed by the Asian Development Bank (ADB) in its recent Trade Finance Gaps, Growth, and Jobs Survey said they didn’t look for any alternative sources of financing when a transaction was rejected. The survey found that approximately 36% of rejected trade finance transactions were considered viable, but were rejected because of low profitability (15%) or the need for additional client information or collateral (21%). “These types of rejections, however, may be fundable by other financial institutions such as fintech firms which have different requirements,” the report’s authors concluded. Close to a third of rejections were due to Know Your Customer (KYC) concerns: “ … anecdotal evidence suggests that in most cases banks were not willing to expend the cost and effort to conduct KYC, particularly for potential SME clients that would not generate much profit.”
As fintech and digitization remain a focus of a potential solution for SME financing needs, data continue to show “ … few firms are familiar with fintech solutions to finance, and digitization of trade finance processes in banks are not reducing rejection rates for SMEs,” the ADB report found. About a fifth of firms surveyed said they used digital finance platforms, with peer-to-peer lending remaining the most-used platform.
And while 66% of the 515 banks surveyed by ADB reported that digitization is expected to enhance their ability to assess SME risk, and about 70% of firms said they expect technology platforms to reduce trade finance gaps, rejection rates of SMEs remain high. “The data challenge the assumptions that cost reductions alone will automatically reduce market gaps, particularly for SMEs. Indeed, there is no evidence to suggest this is happening.”
The report’s authors suggest that digitization and fintech “ … must be used to make due diligence on credit risk, performance risk and KYC more efficient, cost-effective and reliable.”
Courtesy of the National Association of Credit Management – Nicholas Stern, managing editor