Trade finance has been all over the news from the start of this year, but only for the wrong reasons. And these “wrong reasons” are causing significant impact on corporates as they balance their use of supply chain finance as a tool to support suppliers through the covid-19 times, whilst preserving their own working capital. This negativity around trade finance has been perpetuated across sectors- the downfall of large dominant Agri players like Agritrade, Phoenix Commodities; the fall-out of oil & gas majors like Hin Leong, and the revelations surfacing for health care conglomerate – NMC Healthcare.
This has led to large dominant lenders like ABN AMRO, one of the pioneers in trade finance, to exit from its trade finance commodities business. This was followed by other large banks like BNP Paribas, Société Generale, ING and Rabobank all announcing that they would take a cautious approach and are now re-evaluating their lending strategies in the markets across Asia, Middle East & Africa.
However, this is not surprising for a market segment where profit margins have significantly reduced due to operational costs, pressure on interest rates and growing compliance costs. In 2019, the total revenue pool for commodity trade finance was $4.7 billion, down from $6.3 billion in 2015. However, due to Covid, banks globally have suffered losses to the tune of $9 billion over the course of this year.
With losses and profitability in commodity finance at debilitating levels, financiers are looking at trade finance in general and trying to establish the drivers for these losses, and what if anything can be done to recover the position, or if they should continue to service the market.
Trade finance was considered amongst the safest businesses for banks at one point in time. The trades were contract backed, pre-sold in nature, backed by letters of credit, thus with limited credit risk.
These tightly controlled and monitored trade financing lines have been increasingly replaced with open account terms, structured facilities, syndicated loans, revolver facilities etc, and the entire lending sector has seen paradigm shift in the modalities of lending, exposing financing banks to increased price and credit risks.
In parallel, supply chain finance has become an increasingly popular solution where a financial institution pays the company’s suppliers upfront at a discount, before collecting the full amount from the company later.
What went wrong
While lending patterns saw a paradigm shift, poorly designed supply chain finance solutions have given rise to new modalities not envisaged.
Invoice fraud - became a real concern, with companies providing forged documents and fake invoices towards financing, underneath dummy sales/purchases.
Accounting treatment - where companies removed the debt liability from their balance sheet for supplier debt when supply chain finance was used. This led to lenders having no clue of the actual borrowing levels of companies.
Double-financing - became another major issue in trade financing. In fraudulent cases, it came to light that borrowers pledged the same collateral or inventory to multiple banks at the same time.
Absence of regulatory disclosures - While most trading companies operated on thin margins, having opaque business model, it became easy for them to conceal losses in derivative assets, inventory, receivables etc.
Protection of funds - As has been highlighted in the case of Wirecard, corporate funds which were not subject to 3rd party protections became vulnerable to misuse and fraud.
Road Ahead - Crossflow
Crossflow’s platform has been designed to provide funders with the confidence to continue to provide trade finance ensuring that corporates and their suppliers remain supported, which is even more crucial through Covid.
This has been achieved through Artificial Intelligence (AI) backed processes developed by Crossflow as follows:
InvoiceProtectTM Pending protects not just the invoice process element of the transaction but also controls the payment and data connections with the corporate and the supplier. This fully automated, end to end approach to ensuring transaction authenticity, flags suspicious transactions providing confidence to funders such as banks that the underlying transaction are genuine.
FundsProtectTM Pending is a further integrated part of Crossflow that ensures that funds in each funders account remain under the funders control and are segregated with the benefits of statutory protection. Disbursement of funds once approved by the funder is automatic, with the bank account details of registered funds recipients, which had been verified through KYC/AML and are then unchangeable without repeating the KYC process. Additionally, the corporate who becomes liable for the repayment of this financing, is notified of each transaction providing full transparency.
AccountsProtectTM Pending is integral to the flow of transactions on Crossflow and ensures the debt obligation remains on the corporates balance sheet, until payment is made to either the supplier for unfunded transactions or to the funder of the supply chain finance transaction.
Combined together - InvoiceProtectTM Pending, FundsProtectTM Pending and AccountsProtecTM Pending provides a solution which is robust, cost effective, and designed using the latest technology, with all checks and controls in place.
This ensures that Corporates have access to a solution that supports the continuity of trade finance from multiple funders as a tool to support their supplier financing and business overall, whilst funders such as banks can have confidence that the transactions they are funding are genuine and funded within existing accounting parameters.
For further information, please don’t hesitate to contact Crossflow on firstname.lastname@example.org
Magda Rozczka is COO at Crossflow. After completing her postgraduate MBA, Magda led product development within the insurance sector at ING and Zurich. Magda represents Crossflow on the Bank of England decision maker panel, which influences UK interest rates, and has represented Crossflow as part of HM Treasury’s Women in Finance initiative.