The New Normal for Global Trade

 

With the significant slow down in the world economy and closing of borders by most countries, global trade is now going through a tough time. Primarily, importing countries are now also looking at contingency plans on how they ensure self-sufficiency without relying on other countries. 

 

State of the world economy for SMEs

One of the key opportunities in this emerging new normal, is the restarting of how global trade is done. The world needs global trade, but focus has generally been with large banks, large corporations exporting their goods around the world.  

SMEs play a major role in most economies, particularly in developing countries and represent 90% of all employment globally (World Bank).  These companies mostly find it difficult to raise finance from banks, but that doesn’t mean that they are not viable businesses.  Further, being able to export their products is inefficient and expensive due to not being able to access export markets easily. 

 

Banks focus on large clients and proprietary solutions

Banks generally focus on large companies, as their profits and revenues are mostly made from dealing with them. Smaller companies are not profitable for these financial institutions, and therefore, given that most financial institutions are not digitally savvy, these companies get little service. Digital transformation of banks, both internal and externally facing, have not seen much advancement in the past few years.  In the past 2 to 3 years, we have also seen numerous consortiums emerge, leveraging blockchain technology, but primarily driven by preserving the bank’s position in the value chain and enabling them to reduce costs, rather than any efficiencies in the value chain.

Furthermore, there is not a shortage of capital in the world. Investors, Funds, Family Offices, HNWs, Governments, NGOs all have large amounts of capital to deploy to help SMEs grow through debt, grants, equity, or trade finance products (e.g. Invoice Financing, Asset Financing). However, again, the deployment of that capital is not efficient, from initial credit assessment, deployment and ongoing management.

 

Changes in Globalization

With Globalization and COVID-19 has come the realization that international trade inefficiencies and national vulnerabilities. However, being able to still find products and services globally at reasonable prices is something that will not change. What will change is companies wanting to diversify their supply chains and suppliers to ensure continuity. Further, digitization of the whole process will also accelerate. Providing SMEs access to export markets, via Digital Applications and services, with cheaper ways of accessing these markets will driven further scaled adoption.

 

Serving SMEs 

How do we serve global SMEs better to enable them to access all the products and services they need to conduct their business globally? By dealing specifically with the issues of building out digital supply chain and financial services, together with marketing and distribution, and enabling more efficient supply chains. 

SMEs are crying out for simplified, digital solutions that can provide:

• Financing of supply chains, invoices and payments, that take new data into account when considering financing. Traditional banking provider credit risk models don’t meet the needs of SMBs. In emerging markets, this problem is severe.
• Access to overseas markets that can help them conduct business more easily.
• Marketing of products and services through digital channels with digitally vetted processes that can ensure a buyer is secure that the product or service can be provided.
• A Network of networks leveraging existing trade associations that provide support to SMBs in each country and can be a gateway to international markets.

To meet these needs (and many more), a different model to existing ones is needed. Most current platforms centre around banks and large corporates, together with proprietary closed networks that don’t service these customers well.

 

Key components of Trade Finance 

One of the biggest challenges for global trade is that most providers of services and generating revenues in traditional places: commissions, document digitization, verification (AML/KYC). 

The market needs a different approach to Global Trade in the New Normal.  The key components of making trade scale globally are reliant on a number of fundamental components.

• Data. All business requires data, without this data, business cannot be done. However, most companies don’t leverage their own data, or data available to them across the supply chain. 

• Transactions. All business is conducted through transactions, but these transactions rely on multiple third party services. For example, payments, financing, credit scoring, supply chain management, etc.

• Technology and Software.  Digital transformation of every industry is underway. However, technology should provide services rather than having to licence expensive software from vendors, and also increasingly from SaaS (Software-as-a-service) offerings. 

Together with providing capabilities like this, needs a different commercial model that will drive digtiisation as well as scaled adoption of global trade.

 

An Open Source Ecosystem and Platform Driven by Governance

We need a new way of bringing together global communities, especially SMBs that are keen to expose their products globally into the market.  The focus should be commercially changing the business model and approach to delivery. Key areas that will enable scaled adoption are as follows:

• Build a decentralized network where no participant owns the platform or the network that enables any relevant participants to join and provide services (under a governance framework (see below)
• Build a community of software engineers, enterprises, governments, business and trade associations who can contribute to the ecosystem and software development. 

• Create an open source stack and ecosystem that participants can implement without the danger of a single party with significant power (e.g. Technology company or Bank). The Open Source stack is mostly available already, with 80% of what’s needed to run the network and build applications
• Leverage open data standards and protocol,, implemented on the open source data stack to make it easier to conduct business and integrate with third parties.
• Foster the community to build applications and offer services into the network. This could include financial services, data services, transaction services etc.
• Create a non-profit Foundation composed of senior stakeholders from industry who will oversee proper Governance of the networks. Governance here includes, AML/KYC, onboarding, certification, dispute resolution and other centralized services. The Foundation operation will be paid for by it’s members. Large enterprises will pay more, and SMBs small fees to be members and gain value.

The key area here is to drive commercial adoption through non-banks, and work mainly with SMBs. Those that are badly served by large financial institutions and technology companies. 

 

Conclusions

The world is now in the new normal .A need to create a modern digital trade finance model, not driven and controlled by the large financial institutions or corporates, but through open source and open community based models. 

With a community based model, through business associations and non-governmental organisations, supporting global SMBs, we can build an open, and open source model for trade finance globally.