We frequently hear that small and medium-sized enterprises (SMEs) are the engine of the economy. Looking at ASEAN’s member states, SMEs make up between 89 per cent and 99.9 per cent of businesses, as well as employing between 52 per cent and 97 per cent of workers. With countries and their people relying so heavily on these businesses, their success is fundamental.
Despite this, many SMEs are struggling to grow because of access to the right financing options. Businesses in ASEAN are bearing the brunt of a supply chain finance industry where conflicting interests between banks and their customers are contributing to a global trade finance gap which The Asian Development Bank (ADB) estimated to have reached US$1.5 trillion last year.
New research by Finastra, Mind the gap: Building effective working relationships between corporates and banks, has uncovered a disparity between banks and what their customers want, along with a market perception that financial institutions do not fully understand the needs of their corporate clients. This is leading corporates to look away from banks to alternative sources of funding.
On one hand you have banks (and their shareholders), which have been under increasing regulatory scrutiny since 2008, affecting their risk appetite and requirements for working capital, which often can’t be met by SMEs. Banks are offering ‘vanilla’ lending products, such as overdrafts and term lines of credit, as supply chain finance solutions – often because it is simpler and safer to do so. On the other hand, businesses are looking for more innovative products that offer them flexibility and will help them grow.
Funding ASEAN’s trade engine: Technology and collaboration
However, times are changing. Technology in particular is playing a key role in the development of supply chain funding solutions. Fintechs – characterised by agility and a focus on operational and technology-enabled solutions – have recently entered the working capital market, bringing with them innovative products and improved features such as better interfaces and simplified onboarding and implementation.
Banks are realising that through collaboration with fintechs, they can offer a greater range of products, which is key for their customers. As one Group Treasurer of a US$10Bn Singapore-based light manufacturer said, “The key attributes in a supply chain finance solution we look for, other than the obvious of cost, term and drawdowns, is really flexibility. Ideally we’re looking for a smorgasbord of specific financing products that supports our business in a natural way.”
In 2020 we will see a stronger emergence of a three-pronged partnership model between ASEAN’s corporates/SMEs, banks and fintechs as the industry realises the process will be best driven by the right partnerships.
In fact, every bank we spoke to in Southeast Asia and China is working on APIs, which allow third parties such as fintechs to gain access to bank data, while two thirds of banks globally report that they are already working with technology vendors to deliver solutions. A further 30 per cent said they are planning to do so in the near term. In parallel, corporates are not waiting for banks, with nearly half already working with third-party technology vendors and a further 46 per cent preparing to do so.
Cloud to lead the way to ASEAN’s funding solutions
As global economies are becoming more integrated and interdependent, trade supply chain financing needs demand the replacement of legacy systems with more intuitive and nimble platforms.
This is where the benefits of cloud-based solutions are having a real impact. These benefits include scalability, redundancy, security, easily accessed data, reduced costs, and agility. In the near term, businesses in the region are looking forward to achieving scale – with 92% of ASEAN banks surveyed choosing scalability as the most important benefit, echoing their customers’ aspirations as Southeast Asia continues to rise as a global economic powerhouse.
As it stands, banks and corporates are still engaged in traditional trade/supply chain financing products. However, there is a clear misalignment between banks and corporates with banks focused on risk and governance, while corporates look for broader relationships and sector understanding from their financier. Both parties are looking for something different and something extra.
Ultimately, banks will unlock new revenues and market share by partnering not only with their corporates but with technology-based players in global supply chain management and funding. As technology partnerships and cloud-driven solutions breathe new life into the region’s trade finance offerings, ASEAN’s businesses can look forward to more nimble, flexible solutions to meet their supply chain financing challenges in the year to come.
The writer is head of Trade & Supply Chain Finance, Finastra (Member of the World Trade Organisation).