The collapse of Greensill Capital was an uncomfortable finding for the trade finance industry. While the downfall of the supply chain finance company can be attributed to several factors, including a reported lack of transparency within the organization, it is also a testament to its true technological capabilities and financial health.
But this case also raises concerns for the trade finance industry as a whole. Greensill’s downfall is not only bad news for the company itself, its lenders and insurers, but also for its corporate clients who now depend on supply chain finance to fuel global commerce. For some critics of the finance tool, the Greensill saga reveals the potentially damaging effects of relying on supply chain finance, rather than timely supplier payment practices, to support operations and cash flow. .
Yet especially for small and medium-sized businesses facing an estimated $ 1.5 trillion shortfall in available trade finance, an injection of capital at some point in the supply chain is crucial to maintain fluidity. Exchanges.
“The financial sector will learn from this,” he said. “Better business systems made possible by technology that enables transparency, verifiability, authenticity checks and traceability are the way forward.”
A challenge of transparency
While Greensill may be an example of the rare “bad apple” in the supply chain finance space, it does reveal the consequences of a lack of transparency in a trade finance business model.
Recent Bloomberg Reports, citing anonymous sources, pointed to claims that Greensill was not talking about his true technological capabilities, relying on spreadsheets and third parties like Taulia to connect businesses to finance, despite his vocal promotion of proprietary technologies.
Greensill’s issues are not necessarily representative of all players in the industry, but as James noted, many of the biggest problems in trade finance today can be resolved through greater transparency and greater accountability. technology.
Trade finance fraud is a prime example of an industrial threat that can strike anywhere.
“If we look at some of the more recent fraud cases in traditional trade finance loan cases, this is where companies have funded the same commodity transaction multiple times, using false or copied documents. “, did he declare.
Much of this fraud is allowed due to the paper and manual nature of this space. Manually identifying a fraudulent invoice or cross-checking data in spreadsheets is far from the most effective way to combat trade finance fraud. James highlighted the digitization of key business documents such as bills of lading, which is essential to ensure data integrity.
New business models
Greensill’s troubles also highlighted concerns about the use of credit insurance by the trade finance industry. As The New York Times recently reported, the withdrawal of Greensill’s insurers, which insure the company’s clients who are buyers in the supply chain, led one of the company’s main financiers, Credit Suisse, to freeze $ 10 billion. dollars of funds.
The case could prompt a reconsideration of the way in which world trade is financed. Today, there are many trade finance products in which the buyer or supplier funds an unpaid invoice, with the financiers making a profit by keeping a percentage of the payment of that invoice once it is finally paid (the supply chain financing involves the financing of an invoice and the matching of suppliers with an advance payment).
Credit insurance has historically played a crucial role in covering losses in the event the bill never actually gets paid.
For TradeFlow, embracing a business model that eliminates the need for insurance means mitigating the types of risks that led to Greensill’s downfall. The company retains ownership of the product while it is being shipped or stored and therefore uses an asset-backed strategy to fuel the trade.
“We are able to do transactions that banks are not able to lend directly against,” James said. “We are not in competition with the banks, but in fact, we complement traditional forms of trade finance lending and therefore help close the growing trade finance gap.”
Other companies don’t seem daunted by the collapse of Greensill, Australian FinTech Accountancy MYOB launch planning its own trade finance tool later this year. The company will deploy an invoice financing model directly targeting vendors, using technology to connect businesses to equity within 48 hours.
James highlighted other technologies that can promote transparency and mitigate risk in trade finance, including blockchain which can accelerate the movement of funds across borders, as well as the ongoing digitization of key documents in the trade. International trade.
The use of trade finance is unlikely to ever go away completely. But if the Greensill Saga brings lessons to the industry, it could spur new business models to finance trade and support buyer’s and seller’s cash flow. Whatever technologies are used, what is clear is that the trade finance arena needs to explore new avenues to enhance reliability and strengthen its role as a responsible vehicle for fueling global trade.