“Many small businesses globally are suffering from a trade-finance gap in the wake of covid 19,” says Terigi. “Fintechs as a platform for investors to extend credit lines to businesses have a strong role to play in unblocking this access to financing.”

However, rather than competing for trade receivables investment as relatively small fish in a trillion-dollar global market, fintechs are sharing information with one another to enhance their offering as a credible alternative to banks, he points out.

Platforms as an alternative to banks

Fintech platforms that act as a marketplace for SMEs to access trade receivables financing have sprung up across the world in the past few years. They function by allowing investors to lend against the unpaid invoices of any given SME – territory previously the preserve of banks.

With the catastrophic events of covid 19 over the past few years, investor appetite for these platforms is growing all the more.

“We are seeing fintech platforms raising €50-100 million for trade receivables financing, essentially stepping into the role that would have once been occupied by banks,” says Terigi. “Luxembourg is a hub for gathering these funds,” he adds.

According to a market survey by consultancy PWC, published April 2020, the €297 billion Luxembourg securitisation market’s main assets are trade and lease receivables. 

Institutional investors, high-net-worth individuals and family offices are among those investing in this market. Through fintech platforms like Incomlend, they can extend credit lines to small businesses, thus providing a valuable source of alternative income.

The market for fintech platforms providing this kind of service has exploded since covid 19 disrupted global logistics. “The pandemic changed the entire logistics chain,” says Terigi. “Most notably, it has boosted the cost of transportation, so many companies face high costs for transporting really quite low-margin products.”

As non-financial entities, fintech platforms can act with greater agility than banks. “A bank will often look at recourse to the seller only,” says Terigi, “but when the international supply chain is shifting this approach no longer works.” Channeling investor funds direct to businesses through a platform means that recourse can also be made to buyers.

Fintechs sharing knowledge

Demand from corporates for trade receivables financing has however posed challenges for fintechs. “The amount of fresh receivables we can raise on a monthly basis is much larger than four or five years ago,” says Terigi. “This means larger credit lines, better digitisation of processes and most importantly more rigorous reporting for investors.”

Digitisation can help facilitate trade finance by improving processes, says Terigi. One example is the centralisation of know-your-customer databases. In a normal trade finance transaction, every provider would conduct a due diligence process for each client, increasing transaction costs and time. However, a centralised databases can provide the same information about a client to multiple finance providers. “Not every fintech has this expertise, so what fintechs are doing is integrating with one another rather than competing,” explains Terigi. “For example, when business models are similar, but let’s say I specialise in cross border transactions and my fellow fintech in domestic transactions, we’ll take their KYC info and in exchange we’ll take their overseas risk.”

The same can apply when improving processes around anti-money laundering, another time-chewing factor in trade finance. In fact, Terigi notes, Luxembourg is home to a number of fintechs specialised in improving financial services, including AML and KYC procedures, making it a useful location for fintech collaboration.

Fragmentation of digitisation makes co-adopting between fintechs all the more attractive, for example, digitising documents associated with different modes of transport as well as the different levels of development at country-level, including in the set up of the technological infrastructure.

In recent times, European regulation has demanded banks make their automated payment information available for fintechs to ‘plug in.’ One example is the first bank guarantee for trade finance issued via the API between ING and Standard Bank in 2019.

It may be unusual to cooperate, rather than compete with competitors in such a growing market, but Terigi believes fintechs are wired to take a different approach. “These are young companies, comfortable with technology and with less ego. It’s easier to get together,” he says.

There are even cases of fintechs sharing the financial risk together in order to ensure the financing goes ahead. The argument for this is the relative size of the trade receivables industry versus the credit lines that fintechs can currently provide. Any hope for dominating a chunk of the market rests in working together.

“The trade receivables industry is in the trillions of dollars. There is no sense in competing with another fintech for a transaction of €2 million when we could finance together and share the risk,” he says.

Terigi does however believe that in time the fintech industry serving trade finance will consolidate. What, however, of the banks that previously took on the mantel of lender and structurer? According to Terigi, the banks are still active. However, a newer development is taking place for those that chose to step back. “Some banks in trade receivables financing are instead maintaining their exposure to the market as investors in the same fintech platforms, Terigi points out.

“Banks are coming back into the market but this time as investors,” he says.