Supply Chain Trade Finance: An Industry View
The trade finance industry has been experiencing a difficult time due to the lockdown and global pandemic of COVID-19. It is a tough situation for both importers and exporters. There is no credit available for the buyers in the international market while suppliers are struggling with big complexities.
According to Tim Nicolle, CEO, PrimaDollar, “Asian suppliers are facing difficulties in three ways. In the first quarter, there were cancellations of orders along with the buyers even when the goods were ready to ship. The factories are running out of cash with the availability of goods. Secondly, it was due to lockdown. The third hit is buyers are asking for credit.”
But the providers of Supply Chain Finance (SCF) experienced growth as buyers and suppliers struggled to free up their liquidity in response to an unpredicted situation.
When the COVID-19 controlling measures were implemented in markets worldwide, the providers of SCF announced a flood in demand. Regardless of years of threat regarding the incapability of survival of supply finance programs in a financial downslide, it seems that funding remains favorable throughout last year’s emergency.
However, the providers of SCF only guide suppliers once the goods have shipped at their destination. Unlike letters of credit services, the purchaser provides no guarantee of payment and will have to wait until delivery before the approval of the supplier's invoice.
As per Tim Nicolle, chief executive of London-based fintech PrimaDollar, it creates an opportunity for the very popular “Supply Chain Finance”, a combined product where the characteristics from the traditional trade finance sector are combined with those of powerful technology-driven SCF.
In an interview, Nicolle explains that the regular trade finance instruments need up-gradation, demanding for a model that facilitates the exporters to be paid earlier at the time of shipment, instead of delivery - without the purchaser having to struggle with the complexity of a letter of credit.
1. You have demonstrated a letter of credit as an unpredictable item being utilized to help a relatively easier process. Why?
Nicolle - An extent of the global trade which is funded by letters of credit services has been dropped-off over the years, so there is something wrong with it. LCs work on expensive rates depending on our conversation with some clients dealing in import-export services. With all several fees, it costs around 2% or 3% of the face value of the trade or in some cases, more. Another problem is negligence on the part of importers and exporters as a product due to its complexities, various fees, and time-consuming process which make parties avoid the usage of LCs in trade finance for simpler processes. The main agenda of LCs is to avoid the risk of non-performance on the hands of exporters so that the buyer could pay them later, it all could be done more easily.
2. Since PrimaDollar’s services act as a combined product blended with LC’s features with SCF, how is it different from traditional supplier payment programs?
Nicolle - Traditional supply chain finance deals with approved documents like invoices which take place only after the arrival of goods while the tech-driven SCF platform cuts the time between the arrival of goods and presentation of documents by collecting the shipping documents from the supplier. We show it to the buyer, seek his approval and pay the supplier at the time of shipment instead of arrival/delivery of goods. In simple words, it is a big shift from how SCF used to conduct his activities. We collect all the information from the exporter instead of the importer.
3. Do you offer these products to both importers and exporters or would exporters be onboard after the purchasers have signed up?
Nicolle - We are providing our products to the buyer instead of the suppliers since they get the ability to pay later, access much more quality data on their supply chain, and by the cost savings available. Talking about suppliers, the buyers can ask their suppliers to join the platform. If the suppliers are willing to be paid earlier, they can do so, in our experience, once the platform is available to the suppliers from the importers, it can happen quickly.
4. You additionally approach supplier’s payments in a different way to many SCF providers. Does that mean you take on more noteworthy compliance responsibilities and if so, does that influence supplier onboarding?
Nicolle - We initiate the actual payments, and instead of the financier, the compliance requirement is on us. It is completely our call whether we should onboard a supplier or not. There is no shorter approach for compliance. We have on boarded and got as clients providers in 17 countries, with supply-side offices in six nations. It depends on our knowledge and expertise which means eliminating a one-size-fits-all compliance policy and using our experience operating in emerging markets. For example, you may face difficulties in getting a copy of a utility bill. Or you may also require to carry out sanctions checks by screening the vessel to ensure that the goods are on the boat or the goods mentioned in the agreement match with the goods on evidential documents, or the goods are at the correct market price and are the correct goods for the particular purchasers.
5. What level of take-up have you experienced till now?
Nicolle - Since it is a new product in the market and we have customers in 40 countries with lots of activities on the platform, so we are yet to see a major recognized name purchaser. As we were established in 2016, we have handled approaching half a billion dollars in operation across our platform. We have plenty of shipments on-going on the platforms and now we are focused on boosting our processes instead of dealing with the core functionality.