Christoph Gugelmann, co-founder of Tradeteq, highlights the role technology plays in securitising trade finance for profit and success

Access to liquidity is becoming more important than ever; many businesses – both large and small – need support in order to maintain exporting obligations. However, even if the global economy was not currently wrestling with the impact of Covid-19, there would still be a US$1.5trn trade finance gap between what banks can loan versus what businesses need.

Overcoming this gap requires the market to be more accessible, giving access to smaller investors in order to decrease the gap and provide more funding to businesses. This is easier said than done, with some existing challenges preventing non-bank financial institutions from accessing the appealing asset class.

Recognising challenges
Fundamentally, the sheer variety of assets involved in the trade finance sector makes establishing risk, gauging return and ultimately knowing whether the asset is worth investing in difficult at best. With the underlying asset ranging in risk, compiled with the different businesses that may be part of the transaction, it is far from simple to know how reliable the investment is.

While the number of counterparties in each transaction makes using standard methods to assess risk nearly impossible, trade finance remains an attractive asset class for investors. As it is based on the tangible flow of goods, has a short yield period, but a higher risk-adjusted yield than equities, investors can easily be lured to trade finance investments. What stops them is the difficulty in accessing assets in a suitable package and format.

Securitisation of assets
Simply put, trade finance needs a solution that can parcel up the complicated risk associated with individual transactions and offer them to investors in an easy and accessible way. Technology is vital in making this happen and using machine learning will help analyse the various risk factors, and provide accurate figures for investors to take part in.

Even with the risk properly calculated, access will need to be the next step in order to give other financial institutions the ability to trade these assets. A neutral market for these assets to be accessed needs to exist. If this happens, the increased trading will help close the gap within the sector and help grow international commerce – strengthening other economies in the process.

Supporting growth
With the initial hurdles needing to be overcome, it can be easy for investors to distance themselves from the trade finance industry – the challenges may simply be too great. However, increased investment in the sector is vital for the national as well as the global economy, not to mention the opportunities for substantial profit along the way.

Should the trade finance gap continue to widen, vital businesses that require support as part of their exporting priorities will struggle – and, in some cases, close entirely. This can cause a severe knock-on effect for economies as industries may find themselves without partners to do business with. Combined with the upcoming Basel 4 rules, this means that banks will have even less capital for these businesses to access, only hastening the potential repercussions for the sector.

There is no doubt that the trade finance sector has challenges. However, with the lucrative investment opportunities present in the market, there is a huge potential for gains to be made. To do so, the assets available need to be accessible for those unfamiliar with the trade finance sector – both in establishing their associated risk and trading them with other parties. With the trade finance gap continuing to widen, and upcoming regulation putting further pressure on financial institutions, opening the market up for other investors needs to be a priority for the industry.