How fintech can bridge the $3T-trade finance gap among MSMEs
With a strong tech foundation, fintech lenders can do what large banks and financial institutions cannot. That is, provide swift access to finance without demanding too much by way of collateral from the MSME borrowers.
With rapid advances in technology, artificial intelligence (AI), and machine learning (ML) no longer a dream, fintech companies are better placed than before to help digitise their clients in multiple ways, even attempting to bridge the $3 trillion global trade finance gap.
More than enough has been written about the prospect of a global economic meltdown after the COVID-19 pandemic struck. But one year on, countries, particularly India, seem intent on proving all those pundits wrong.
Currently, the stock markets are booming in India, exports are buoyant again, and the country believes that the worst of COVID-19 is possibly behind. That said, there's a long way to go, especially for MSME exporters, who are the backbone of the economy.
Experts have spoken about the need to bolster this segment of the industry across several platforms. And one of the most prominent supporting actors, so to speak, is the fintech sector, which provides MSMEs with much-needed access to funds.
With a strong tech foundation, fintech lenders can do what large banks and financial institutions cannot, that is, provide swift access to finance without demanding too much by way of collateral from the MSME borrowers.
The widening gap
India isn't the only nation facing this widening gap problem. On the other hand, according to the International Chamber of Commerce (ICC), a $1.9-5 trillion capacity in the trade credit market is needed to return to 2019 levels.
This, along with the existing 2019 trade finance gap ($1.5 trillion), Standard Chartered in a report said, we now need between$3.4 trillion and $6.5 trillion to be able to meet the United Nations Sustainable Development Goals (SDGs).
Trade finance is just one of the issues that MSMEs have to grapple with. Because of their small size and relative lack of connectedness to the global economy, MSMEs are often not in a position to predict where demand will come from and what global issues may affect trade. This, of course, is a minor problem than access to credit, but it's a definite lacuna.
Enter fintech companies, which use technology as an efficient and effective tool to rid MSME exporters of their biggest problems. One way fintech companies can help MSMEs is by leveraging technology and electronic data across the entire trade cycle to predict market outcomes for their clients.
Fintech to the rescue
The pandemic-triggered lockdowns were responsible for widening the trade finance gap, and global issues such as climate change have also worsened things. As well, companies are worried about demand plateauing and the international monetary system changing.
The Asian Development Bank recently conducted a study on the widening global trade finance gap. The answer the study suggested to bridge the gap was digitisation, in the shape of fintech. So, here's how fintech can help MSME exporters.
One, because all transactions are digital, there's no room for the inefficiencies that plague a system that relies on paper-based documentation.
This also means that these transactions are way more transparent since everyone has access to the same data. And finally, because of technology, the borrower and the lender can extract the same information or share it to help the borrower make informed decisions.
Fintech lenders leverage technologies such as blockchain, AI, big data, and machine learning to improve efficiencies at several stages of trade. Blockchain, for instance, can be used to facilitate swift and efficient payment, while AI and ML can help in the due diligence and underwriting process.
Conclusion
It may sound futuristic, but all these technologies are applied as we speak. Of course, we are all still learning, and technology is not a static thing. But there can be no argument that technology is helping exporters and thereby assisting fintech leaders in narrowing the vast trade finance gap.
Edited by Saheli Sen Gupta