Trade is the lifeblood of any economy. However, many regions are still unable to reap the benefits that international networks of trade provide. Developing and emerging markets are often held back through lack of access to global trade finance infrastructures, as well as the associated high costs. These markets are keen to trade and engage with other economies but need the right foundation to succeed.
Despite the barriers these regions face, trade in developing and emerging markets is showing positive signs. In August, Reuters reported that Vietnam’s trade surplus likely widened to $3.5 billion, showing there is still room for export growth.
In Africa, the Eastern And Southern African Trade and Development Bank and the World Bank Group have recently penned two deals to boost trade and infrastructure finance in the continent. There are huge opportunities to be had, not only allowing businesses in these regions to profit, but for entire economies to be boosted through improved access to international trade.
Access to finance
The World Trade Organization (WTO) has highlighted the potential for global trade to elevate the poorest economies. However, challenges still remain; key of which is access. This is no more apparent than in trade finance.
In many of these markets, trade financing relies heavily on correspondent banking and, with global banks shedding correspondent relationships in recent years, markets have been the ones that have suffered the most, according to the International Monetary Fund. This, combined with the pre-existing challenges in trade finance – couriers transporting documents by hand and the need for ‘wet ink’ on the page – makes it extremely difficult for some markets to compete on the global stage.
These inefficiencies in trade finance mean that nearly USD $1.5 trillion of demand for trade finance is rejected by banks, according to the Asian Development Bank (ADB). The ADB further revealed that 60% of banks expect this figure to increase over the next two years. With over three quarters (77%) of export Letters of Credit (LCs) originating in Asia alone, it’s clear to see that developing markets can be severely hindered through these outdated processes.
The challenge of high-country risk
Those companies that do manage to make progress with banks for international trade can often be held back through their country’s high-risk profile – represented by low credit ratings. This is often identified by banks as a reason to provide less trade credit for transactions in developing countries and, with businesses that are initially rejected from seeking alternative financing, the ADB has found that almost half are typically unable to find anything appropriate to meet their needs.
The irony of this is that trade transactions represent a relatively low risk. For example, ADB’s trade finance business, which since 2009 has completed over 21,000 transactions valued at $36 billion –most conducted in Bangladesh, Pakistan, Sri Lanka and Vietnam – has never had a default or loss on any transaction. Instead, the real challenge developing and emerging markets need to overcome is the lack of a common, standardised network for trade financing.
In fact, financial institutions agree, with 43% of banks surveyed by the ADB feeling the lack of global, established standards are a key challenge to trade. This is where we come in. Contour’s mission is to build a new global standard by simplifying and removing barriers in the trade ecosystem, where all participants can collaborate seamlessly on one platform. We are not just another cost to bear, but a vehicle for the industry to use in order to establish long lasting and permanent change.
A technological solution?
It’s easy to say that technology is the solution to giving greater opportunities to developing and emerging markets, but many businesses remain concerned with 57% of banks surveyed by the ADB believing the perceived high cost to be a barrier to entry.
While it’s true that technology requires investment from the outset, unlike other costs for organisations such as real estate or labour, investment only ever decreases over time – you only need to look at how the price of a PC has decreased dramatically over the last 15 years for evidence of that fact.
With the right technology in place, greater access can be provided for businesses in developing and emerging markets – as the need for physical locations or documents will be reduced. With the enthusiasm that these markets are showing for boosting international trade, businesses within these economies should see digital transformation as a natural part of that evolution.
With the ADB reporting that 85% of banks are gearing up to serve the trade finance needs of more businesses through technology, addressing concerns such as inefficiencies and know your customer (KYC) compliance, there is clearly a demand for more efficient processes to be established. For developing and emerging markets, innovation in technology needs to be supported through a wider industry change, providing a standardised, interoperable and cost-effective solution for all participants.
However, technology alone will not solve the problems in these markets. A conscious, collaborative effort from all stakeholders in global trade including international bodies such as the WTO and International Chamber of Commerce, central banks, financial institutions and innovative fintechs is needed to reduce the friction in trade financing and provide an inclusive ecosystem for all regions of the world.
At Contour, it’s a key element to our growth strategy – with regional financial institution HDBank joining as well as ADB recently completing a pilot transaction on our network providing two examples of our focus on providing greater access to developing and emerging markets. As we continue to grow, we are always on the lookout to partner with innovative financial institutions serving developing markets to make global trade accessible, digital and secure for all.
Trade’s ability to drive growth can be a boon to these markets, but it needs the right infrastructure – supported by the appropriate technology – in order to be effective. It’s our focus at Contour to develop solutions that cater to all industries, of all sizes and from all walks of life. If you are interested in working with a developing or emerging market, or are a business based in one, we would love to hear from you.
For more information, get in touch today.