By Dr. Philipp Schönbucher, Chief Data Scientist at
Trade credit must be data-drivenSupply chains and the financial flows associated with them are at the heart of the economic crisis caused by the global Covid-19 pandemic. Disruptions and shutdowns propagate up the supply chains, and the financial and cash flow consequences threaten a credit chain reaction in the financial system. At the same time, massive but blunt central bank and government interventions are struggling to reach the recipients most in need of support.Going forward we need to add flexibility and resilience to the system so that shocks can be buffered and bridged. It is also of central importance that the new structures optimally support the rapid recovery of the economy after this crisis: We need to find much more efficient and scalable ways to finance economic activities.Even before the crisis, the system of trade- and supplier financing was not able to properly meet the needs of a growing, globalised and interconnected economy. Just for cross-border trade alone, the ABI identified a trade finance funding gap of $1.5trn for the year 2019, i.e. about 10% of the world’s trade did not receive sufficient financing. If one includes domestic B2B transactions, the size of the finance gap is even larger, by orders of magnitudes. At the same time, bank profitability was under pressure, interest rates were at record lows or negative, margins were very tight, and also institutional investors were desperately looking for investment opportunities with sensible yields at acceptable risks.So, even in a world awash in liquidity looking for ways to deploy funds, we had at the same time unmet demand for $1.5trn of financing. It is highly extraordinary that both demand and supply are massive in size and remain unsatisfied over longer periods of time. Unblocking these flows is a business opportunity of historical scale, and it would also massively boost global economic growth and recovery.Enabling the banking sector to bridge the finance gapHow can we bridge the finance gap? We believe that the solution to this problem is to combine the existing strengths of the banking sector with the scalability, flexibility and speed of a modern data-based platform. This will:
- Realise vast efficiencies and scalability using direct data feeds driving automated processing, scoring, risk management, settlement, and reconciliations end-to-end, and
- Add a badly needed layer of transparency through the use of objectified, quantitative, data-based scoring, and by removing less familiar risks such as dilution and fraud risk through insurance cover and other risk mitigation instruments.