The Workshop in Helsinki
The Finnish Fintech Ecosystem (www.fintechecosystem.biz) organised a compelling workshop day on how to modernise one of the world’s oldest and largest financial markets that can best be described as one of the few business activities that has remained the same for years!
Not that much has changed since biblical times when olives and clay pots of wine were traded across continents! Today, cars, mobile telephones, laptops, televisions, tools, ships, glass, aircraft, oil, food, and one million more things are traded every moment of the day in every part of the globe.
Together trade finance is said to have an estimated annual value of €9 trillion. The money involved in financing trade makes it one of the biggest parts of the financial markets. It feeds banks with huge profits from currency transactions, payment fees, guarantee fees, and short-term financing opportunities.
This vast and complex network has developed over thousands of years between hundreds of countries, rich and poor, involving banks, governments and many vastly different operators and traders.
Most of the processes involved in financing trade are still handled by bits of paper involving huge amounts of manual work because there are so many small and large disparate companies involved in some very far flung places. It has been almost impossible to modernise trade finance systems.
How change is happening in Trade Finance
Change is coming very slowly. Big companies have set up supply chains that allow them to reduce inventories to lowest levels, while ensuring through their banks that regular suppliers are systematically financed in a cost efficient manner. However, these systems have only worked for the big companies and their big banks because they involve global networks. Smaller and medium-size companies, that make up the majority of traders, have seen less access to trade finance.
This has been partly due to new banking regulations that have reduced banks’ appetites for trade finance because they must “know their clients” (KYC), along with the demands from supervisors for more capital when exposed to smaller borrowers.
Consolidation in banking has also challenged trade finance. We now have a smaller number of even bigger global giants leaving a large number of much smaller domestic banks to fend for themselves in their own national markets. Both groups are faced with legacy IT systems which is just a fancy word for old and inefficient software. These systems are costly to replace and both types of banks prefer to pay bonuses and buy back their own shares rather than invest in new software.
Given this state of affairs, it is not surprising that new companies, outside the banking sector, have entered these markets to make huge initial strides to improve the efficiencies of trade finance. The basic idea has been that if the banks and their traditional partners cannot upgrade their software and trade finance systems, then smaller more agile experts and specialist companies can jump in and do the work for them.
This is what Kirsi Larkiala and colleagues from the Finnish Fintech Ecosystem together with André Casterman from the International Trade and Forfaiting Association (ITFA) and Chair of Fintech Committee, succeeded in doing by organising the workshop in Helsinki on how to modernise Trade Finance.
The workshop was planned to bring a selection of the most important international Fintech companies to meet with the Finnish banks, large and small companies as well as our emerging Fintech companies.
André Casterman introduced international companies that produce software solutions like Intix, Traydstream, Mitigram and Tradeassets, as well as trade finance shared platforms TradeTeq and Levantor.
These companies are very specialised in their main strengths and use granular data from existing legacy systems of banks and companies to create new standards or ecosystems. They do not demand capital expenditure from banks but are pay as you go models. This means that they are very different when compared to the traditional vendors of banking software.
Each of these companies made short pitches by to the workshop audience so they can discover how they may take advantage and develop new solutions in a cost efficient manner by taking advantage of existing solution from the main financial centres where it is clear that banks and fintechs are increasingly collaborating for the benefits of banks’ own clients and counterparties.
The main foreign Fintech companies
Here are short descriptions of the main foreign Fintech companies who gave presentations at the workshop:
Joshua Cohen, Managing Director, Mitigram – The company as born in Nordics 3 years ago as a communications tool for trade finance and handles transactions €1.5 billion each month. Mitigram is a global online platform for funding and hedging the risk of trade. Adopted by multinational corporations, leading commodity traders and many of the world’s largest banks, they offer a collaborative and efficient way for corporations to securely interact with their financial institutions in the negotiation of trade finance, bonding & guarantees and risk mitigation. They also allow banks to collaborate with each other and with non-bank financial institutions in the exchange of information to allow for trade finance needs to be effectively communicated and redistributed.
Nils Behling, Co-founder and CFO, Tradeteq – The company is only one year old and based in London. Their system allows banks to sell their trade finance risks and exposures to non-bank investors. Trade finance is very stable because it has low credit defaults compared to ordinary lending and the bond markets. Their system provides such access to trade finance for investors because prior to this self-liquidating and revolving market was almost impossible to access. Tradeteq provides tools for investors to assess the risks and invest in these markets using machine learning.
David Frye, Principal, Levantor – This company is 2 years old and enabling SME’s and large companies to increase sales by making selling easier using supply chain finance. Up until now standard payment terms from the large companies do not match the longer term financing needs of smaller companies. However, small company credit risk can be reduced by supply chain financing and by creating diversified credit portfolios. Their systems allow smaller local banks and credit insurers to have access to good local clients while larger buyer companies no longer have credit risk on their books. It is an efficient way to distribute credit risk while fitting into existing data systems – www.levantor.com.
Uzair Bawani, Co-founder and COO, Traydstream. They started this platform in 2016 to help implement better decision making for trade finance by extracting data from existing legacy systems of banks. One example of their approach is the checking of Letters of Credit. A normal physical check can take up to 2 hours, but their system can automate the same standard check in just 45 seconds. The clients can also implement a bespoke checking based on their own requirements as well as implementing data connections with SWIFT and other data suppliers/banks/corporates, etc – www.traydstream.com
Sumit Roy, President and CMO, TradeAssets. This system is powered by blockchain and launched out of the Middle East. TradeAssets as one of the first trade finance e-marketplace of its kind for banks. Launched earlier last year, the system was built to create efficiency and transparency in the traditional deal-making process. It is aimed at increasing connectivity between institutions globally, make trade finance more accessible, and improve profitability for clients. The platform has been tested by 15 banks in the Middle East and improves the manual process through a single digital platform. Price discovery, communication and distribution of risk in the system presents huge time savings – www.tradeassets.online
André Casterman, CMO, INTIX. Intix is a technical tool to extract data from the existing data systems of banks working as a search engine in the same manners as Google for tracking data. Intix accesses and collects data from internal legacy systems without having to make changes to these traditional operating systems. IBM, Oracle, SAP are partners for data collection, indexing, reporting on trades and warning of problems. INTIX is a suite of modules that breaks down the organisational silos that typically exist within financial institutions and corporations to provide a complete picture of an institution’s financial transactions across a myriad of data sources and data formats – www.intix.eu
One of the take aways from this workshop was how technology can enable easier access to trade financing for SME’s and mid-caps, whether acting as suppliers or buyers.
The financial gap in access for trade finance for SME’s compared to that for large companies is huge. There are also major challenges with the risks and the lack of information about the tools used in trade finance. Low value tickets for SME’s demand higher volumes with much better cost efficiencies than is currently available through traditional banking systems.
It is well-known that banks have been shunning trade finance for SME’s. This is now changing with the efforts of these new Fintech companies like Levantor who are able to offer a limited service for SME’s through banks and non-bank investors. It appears that non-banks are so far investing around €250 billion in trade finance according to Tradeteq. Fintechs are in fact strengthening the hand of the bank with clients and not interfering with bank client relationships. This is confirmed by the banks who were participating in this panel discussion – OP Group, Standard and Chartered, SEB, Nordea and Danske.
There was a clear consensus at this workshop that these Fintechs are offering a cost efficient service for banks in many ways.