There are many takeaways from the recent review, led by Ron Kalifa, highlighting how the UK can establish its world-leading fintech sector as a strategic asset. One of the more interesting points was the recommendation that fintech form an integral part
of trade policy.
This comes at a time when governments around the world are looking to reinvigorate cross-border trade and economic growth. The recovery efforts put in place following COVID-19 have been considerable and have softened the economic blow. However, they are
somewhat short-term and do not address the underlying symptoms.
Businesses - and SMEs in particular - cannot be left to weather this storm alone. These companies represent 90% of the world’s businesses and more than 50% of employment worldwide, and their stagnation would be felt in every region and across every industry.
So, how can trade finance fintechs work with governments to support this objective?
It is no secret that even before COVID-19, businesses and their supply chains were under pressure. This is, in part, due to the longstanding barriers that have limited SMEs from receiving the finance they need. Many of these issues are deeply rooted, and
they have been exacerbated by the pandemic - making any pain points even sharper and longer-lasting.
Take, for example, access to trade finance. This is the lifeblood of international trade – without it, cross-border trading activity would seize up. It is an industry that traditionally has been held back by physical paperwork, manual processes and slow
information sharing. It is crying out for an injection of automation and digitisation – and fintechs are ready to step up.
Government support to boost global trade
Prior to the pandemic, there was a USD1.5 trillion shortfall in the amount that businesses needed to fund their trading activity. This has only gotten worse in 2020.
It’s here that governments can partner with fintechs to upgrade the UK’s trade finance infrastructure. In the same way that the government provided funding through short-term loans and by covering wages, there needs to be a direct injection of capital specifically
to support cross-border trade and long-term economic growth.
Technology will be crucial to achieving this. Artificial Intelligence (AI) and machine learning techniques are already being applied in innovative ways to improve access to trade finance for SMEs in ways that were not previously possible. Digitising Letters
of Credit (LC) speeds up the approval process and offers all parties involved in the transaction greater visibility on the required documents needed to issue an LC.
But utimately, this direct injection of capital into the trade finance market can act both as a lifeline to help SMEs thrive following the pandemic and maintain sustainable debt levels. More importantly, it will provide lasting positive economic effects
that would be felt in the years to come by supporting local jobs and the supply chain. The positive knock-on effects can re-instil much-needed business confidence.
Technology can maintain a balance between stimulus and debt
Of course, any serious government must ensure debt levels, which have already jumped to record levels in some countries, do not get out of hand. This is where deeper participation from banks, institutional investors and fintechs within the international
trade ecosystem can help.
The low-risk profile of trade finance as an asset class is widely acknowledged. It is based on tangible flows of goods and services, making it less susceptible to bouts of volatility observed in other financial markets. Furthermore, default rates for trade
finance products are lower, and the time to recover in case of default is much shorter than for other products and asset classes.
This presents a compelling multi-trillion-dollar investment opportunity. By distributing trade finance to institutional investors, who will gain a return on their investment, debt levels remain sustainable while SMEs get the vital funding they need.
The technology and market infrastructure to parcel trade finance instruments into investable assets already exists. By using modern, scalable hosting infrastructure such as cloud computing, it can be deployed into the UK’s existing trade ecosystem within
A public-private fintech partnership can be a springboard for growth
To date, the UK government, its national regulators and regional bodies have won international acclaim for supporting numerous companies and initiatives that have sought to improve legacy processes in finance. This has helped it to gain its crown as the
pre-eminent fintech hub.
It must now build on these efforts to cement its reputation as a fintech leader for decades to come by addressing the long-term challenges that businesses face. Of course, it cannot do this alone; it needs support and participation from the wider industry.
By working with banks and fintechs, the government can tackle traditional blind spots relating to trade finance, upgrade its existing infrastructure and considerably improve how the trade ecosystem operates.
Successful cooperation could herald a more upbeat and positive environment and create new momentum for UK SMEs and their international counterparties.