The COVID-19 pandemic has had a devastating effect on the global economy and led to paralyzed supply chains, export restrictions and closed borders. This shock brought about several significant changes to a number of industries and accelerated existing trends such as automation, digitalization, supplier base diversification and supply chain operational efficiencies. Cross-border trade is at the center of everyone’s attention.

Logistics in trade has undergone a significant change in the last decade with innovative technologies as machine learning, artificial intelligence, the IoT (internet of things) and neural networks gaining prevalence. By tracking traffic patterns, weather forecasts, ESG (environment, social, governance) factors, regulations and more, manufacturers and their customers can leverage AI and predict within a certain confidence interval the risk of goods going bad or being damaged, equipment failure, port delays, etc. This advanced analysis will help mitigate operational risks, avoid major delays and spoilages, and reroute the goods if necessary. These layers of analysis also add extra transparency to the process.

The investment community and the financial markets are highly focused on disruptors trying to solve these operational complexities - a great example is a software company C3.ai, one of the most successful IPOs of 2020whose stock price jumped as much as 174% on the first day of trading. The company uses AI analytics to help enterprises manage operations more efficiently and cost effectively in such fields as data integration, security services and management, inventory and production optimization.

The core concept here is Big Data, and this trend is also becoming important in trade finance. Data is growing exponentially and is becoming a crucial input into predictive models for risk analysis and optimization. This has given a boost to a new wave of startups modernizing the old-school trade finance industry. These new technology-focused companies are in a newly defined space known as Tradetech (the term itself was first established by the World Economic Forum in 2018 to describe the innovations and software in Trade Finance). There are several goals: decrease compliance and operational costs in cross-border transactions, improve transparency for stakeholders, consumers and authorities (for example, electronic invoicing system in many Latin American countries) and boost financial margins (for example, by obtaining working capital and increasing inventory turnover and sales volume). This is especially crucial for small and medium enterprises (SMEs) because they do not have economies of scale or access to cheaper capital. Technology will democratize and modernize the way we underwrite these companies, manage the operations, automate collections, and streamline payments – and, ultimately, increase liquidity in the trade sector. Following are a few of the major ways technology could reshape the trade finance world:

1. Underwriting

Machine Learning and Artificial Intelligence could analyze a huge volume of data inputs, and be trained to improve underwriting methods, outline potential default rates and mitigate overall risk. This process should increase predictability and will help lenders feel more comfortable in providing services and liquidity to smaller and traditionally underbanked businesses. This fairer access to capital should contribute to broader social good and help to address the rising inequality gap as well as allow us to do analysis and numbers reconciliation, track trends and forecast cash flows live.

Upstart Holdings is another recent successful IPO that is disrupting the traditional, conservative FICO-score driven underwriting model for personal lending and instead uses over 1,600 data points to better underwrite the risk and attempt to provide cheaper credit options. Even well-established existing frameworks such as Z-score bankruptcy model (developed in 1967 by Pr. Altman) and the statistical Beneish model ought to be revised to include external data and qualitative information like social media patterns, politics, macro, behavioral finance trends, ESG etc. Pr. Altman himself realized the necessity of these changes and founded the company Wiserfunding to account for some of the data points mentioned above, which led to a significant accuracy increase in the underlying risks in the SME world. The Tradetech trend is likely to continue give the complexity of international trade, customs, legal regulations, cross-border movements and involvement of several parties in one financed transaction.

2 Operational and Authentication Efficiencies

Recent technologies, such as Internet of Things (IoT), Robotics and Blockchain (distributed ledger platforms) should transform processes to authenticate goods and shipments, track storage and customs information, verify goods’ legal ownership and more.  They should help to digitize and automate the enormous amount of documentation and paperwork in this niche industry: contracts, purchase orders, invoices, shipping documents, warehouse receipt, and many more various items to keep track of. AI and neural networks can help cut manual labor, increase accuracy rate, run KYC and AML searches, make verification process easier and accelerate the speed of all this.

 

3. Digital Payments, API’s for credit cards and other methods of providing liquidity.

Trade finance is heavily focused on collections and payments - the prevalence of lockbox structures and overcollateralization are proof of this. Small businesses prioritize speed of cash flows and velocity of transactions and this could be revolutionized via advanced digital payment systems and open banking API systems.

Most of AI and ML companies today target large enterprises because that is where the large contracts are. SMEs are less of a focus, despite the fact they create jobs, account for 99.99% of total businesses in the U.S., and are generally major drivers of economic growth. The lending community needs to pivot towards serving disadvantaged small businesses and Tradetech will help them achieve this is an efficient and profitable manner.

At Marco Financial we believe in the opportunity for Latin American markets to grow and succeed. and are focused on making it a more efficient and accessible importer and consumer. It is time to think if we’re prepared and equipped for the 4^th Industrial Revolution.