Large multinational companies may soon find their commercial customers and suppliers flush with more capital, potentially increasing demand for their products and reducing payment frictions. This is the result of global banks pursuing an initiative to draw more capital-markets investors into the trade-finance market.
A multinational packaged-food company, for example, may find some distributors short on cash and seeking additional invoice financing, while suppliers complain about the company aggressively extending payments to them. Techniques have been around for years, including invoice factoring and discounting along with supply-chain finance, to provide members of the chain from first suppliers to the end customers with a financial cushion to ease the process. The trade banks providing the financing, however, are typically capital constrained and tend to extend it to only the top 20% or so of customers and suppliers in terms of size.
Seeking to extend trade finance to the remaining 80% along the chain, often small and midsize enterprises (SMEs) in greater need of the financial flexibility, 14 global financial institutions announced April 1 the launch of the Trade Finance Distribution Initiative (TFDI). Those banks include ANZ, Crédit Agricole CIB, Deutsche Bank, HSBC, ING, Lloyds Bank, Rabobank, Standard Bank, Standard Chartered Bank, and Sumitomo Mitsui Banking Corp.
The TFDI anticipates using technology and standardization to distribute trade-finance assets beyond the banks to institutional investors seeking to diversify their portfolios.
“Banks do about $9 trillion in trade finance, and nonbanks $250 billion. So, there’s a huge discrepancy,” said Nils Behling, co-founder and CFO of Tradeteq, a fintech that is providing the technology platform and developing the legal framework to securitize the trade-finance assets to sell to investors.
The banks will retain some trade-finance assets while also originating those assets to be fed into Tradeteq’s “securitization-as-a-service” technology platform that will package them into notes that institutional investors understand and can easily digest. Christoph Gugelmann, the CEO of Tradeteq and also a founder, noted that large companies have ready access to inexpensive liquidity, but only about 6% of SMEs’ funding comes from trade finance and the rest from more expensive overdraft lines, loans and equity financing. So the TFDI should be a significant benefit to those firms, as well as the large multinationals, such as the packaged food company.
“If a large supplier can sell many more goods to its distributors, then it’s much better off,” Mr. Gugelmann said. “They have a particular interest in ensuring their distribution channel is working very well.”
Mr. Behling added that a large corporate buying supplies typically wants to pay later and has the clout to extend payment well beyond the typical 30 days, especially when dealing with smaller suppliers. On the other side, it may demand quick payment from customers. “With this kind of financing, for buyers it means payment terms can be extended and for suppliers shortened, because suddenly there is real cash available,” he said.
Tradeteq was founded in 2016 and went live in March 2018. Its technology has already been used in the nonbank originator space, bridging factoring companies originating the trade-finance assets with capital-market investors.
“The goal is to go into the banking space with the large transaction banks as originators [of the trade-finance assets], and work with top capital-markets players that want to deal with the large banks and not compete against them,” said André Casterman, chair of the International Trade and Forfaiting Association’s (ITFA) fintech committee and a member of Tradeteq’s advisory board. “Some are already investing in trade assets because the large banks have had securitization program in place on a one-to-one basis.”
Most US-headquartered multinationals are likely to be using one of the 14 current TFDI bank participants that Tradeteq signed on during meetings it held in December and March. Although no US banks have announced joining the consortium yet, several members such as Deutsche Bank have offices in the US. Mr. Casterman added, however, that the trade-finance issue is very familiar to major US banks, including Citibank, Bank of America, BNY Mellon and JP Morgan.
“We can expect more banks to join TFDI more formally in the coming months,” Mr. Casterman said. “The message to treasurers at large corporations is that their current banking partners will be able to seek more liquidity in the capital-markets world, where there’s lots of liquidity and a wide variety of risk appetite.”
Noting Tradeteq is already live with factoring originators, he said banks will be testing the platform, and Tradeteq, along with the ITFA and the TFDI, will be developing the platform’s legal and operational framework, bridging the trade banks and capital markets investors.
“That’s where the multi-banking set up is quite critical, to establish standards and a foundation around the legal and operational aspects,” Mr. Casterman said. He added that most of the challenges in the year ahead will concern banks’ “digital readiness,” and being able to connect their internal trade-booking systems for trade-finance assets, so they can be delivered to the Tradeteq platform, where investors can choose which ones to buy.
Mr. Casterman anticipates bilateral relationships between trade-asset originators, including banks, to increase throughout 2019, and in terms of transaction volume of the platform, “We could see some banks going faster in production by late 2019.”