GCEL

As noted by Dr. Donald Johnston, the importance of SMEs’ contribution to economic growth should not be underestimated. It is imperative to ensure that the world’s SMEs have access to the credit they deserve to expand their business. Increasing the inclusion of SMEs in global value chains (GVCs) was highlighted at the 2017 G20 Germany Leaders’ Summit and remains an objective we must continue to pursue.

However, can you imagine then that among our financial institutions throughout the world, many of them are letting go of their SME customers since they find that it is too expensive to continue doing business with them?

The irony is that the rules and regulations set forth after the Global Financial Crises to strengthen the foundation of the financial industry have placed huge constraints on our banking institutions to provide the necessary funding to our SMEs.

The World Bank’s estimate of the SME credit gap is approximately USD 5.2 trillion, about 3% of the B2B market. However, this financing gap only recognizes the gap in SME trade financing compared to the actual applications made – many potential borrowers do not apply for financing due to current regulatory requirements and strict lending criteria.

Therefore, the question still remains, how can financial industry transform itself to deliver what the SMEs demand to achieve the economic prosperity required to reenergize the global economy?

The advent of the FinTech industry is but one example of the attempts to maximize on the power of today’s technology. However, while many new technology-based competitors have entered the financial services marketplace over the last decade, few have survived. According to McKinsey & Company, “In the eight-year period between the Netscape IPO and the acquisition of PayPal by eBay, more than 450 attackers — new digital currencies, wallets, networks, and so on — attempted to challenge incumbents. Fewer than 5 of these challengers survive as stand-alone entities today. In many ways, PayPal is the exception that proves the rule: It is tough to disrupt banks.”

These failures illustrate that such applications fail to address the comprehensive needs of all trade participants within the supply chains, and these FinTech platforms represent another form of a fragmented vertical solution.

The lack of real-time shipment information and timely data of buyers, sellers, and the movement of goods results in high underwriting costs, perceived credit and transaction risks, as well as an ongoing burden of regulatory requirements, limiting the ability to expand trade finance, particularly into the SME sector.

These findings were evident through the G20 Nations Case Study of trade efficiency conducted by 90 G20 ministries, industry associations, academia and private sector experts following the collection of 1.2 million data points through face to face interviews. The results indicated that 90.4% of B2B participants have no integrated system and 94.5% want the Digital Economy Platform to reduce their trade and operating costs, ease access to finance and better connect with global markets to increase their trade.

The results also showed that the banking industry rated among the least integrated of the 19-industry clusters involved in the global value chains. The financial services industry has poor visibility over physical trade activities and has to rely upon non-validated data to base its underwriting decisions.

The solution of an open access Digital Economy Platform, deployed by the world’s leading technology firms provides an ecosystem of seamlessly integrated e-commerce, e-finance, e-insurance and e-logistics tools to the B2B marketplace, at no cost to the end users.

The main benefit of such an ecosystem allows the creation of the smart E-Finance matrix that will provide the dynamic scoring level needed to:

Mitigate Trade Finance Risk – by minimizing underwriter risk based upon borrowers’ historic and future global trade finance activities.

Minimize Transaction Risk – by maximizing lenders’ capability to electronically direct loan proceeds to the borrower’s preapproved sellers of products and services.

Reduce Asset Recovery Risk – by ensuring the capability to seize assets in the trade pipeline for rerouting or liquidation to minimize asset impairment losses.

All of the above will expedite trade finance, enabling new global market expansion for the SMEs of the world.

The use of a Digital Economy Platform will reduce additional pressures that are stymieing growth. Such a platform will afford financial institutions with the opportunity to participate in a new USD 2.4 trillion e-finance industry providing:

Greater Visibility. Seamless integration into the dynamic global trade financial activities and new market opportunities for banks, particularly SMEs in high, mid and low-income countries.

Improved Risk Management. Real time and dynamic transaction monitoring resulting in better-informed decisions to manage the asset portfolio and achieve higher Tier One capital asset ratios.

Trade Finance Program Efficiency. Access to a wide range of relevant trade information thereby mitigating credit and transaction risks to increase trade finance activity, job creation and “Aid for Trade”.

THE BANKING INDUSTRY RATED AMONG THE LEAST INTEGRATED OF THE 19-INDUSTRY CLUSTERS IN THE GLOBAL VALUE CHAINS

Global Deployment of Supply Chain Finance. Dynamically linking to the global supply chains, including the state of shipments within the trade pipeline, customer forecasts, pricing, raw materials and market demands.

New Products and Services. Expanded service revenue streams such as freight finance, inventory finance, receivables finance, bill consolidation, and foreign exchange-driven profitability.

With SMEs struggling to access the financing they deserve, it is therefore incumbent upon policy makers and business leaders to adopt a paradigm shift and listen to the voice of the B2B participants on the ground to help get the financing of trade humming again.

Through a Digital Economy Platform, financial Institutions can integrate far more deeply within the B2B marketplace to link banking services dynamically to the physical movement of the product and all associated documents efficiently, thereby tapping into the power of SMEs.

The Digital Economy can promote an ecosystem that permits global integration of product and service offerings with the intelligent proficiency to match to targeted buyers. This environment must be based upon dynamic, validated real time information accumulated and continuously updated through the normal course of trade activities around the world and not based on unsubstantiated reviews and incomplete documentation currently in use today.

The rise of the Digital Economy is the fourth industrial revolution, paving the way for the rise of a completely new era of trade finance, powering greater prosperity today and in generations to come.