Taking Trade Finance to SMEs

trade finance SMEs

The financial crisis of 2008 led to many developments in fintech generally and alternative lending specifically. We’ve heard many of those stories before. One of the problems the crisis revealed is the restriction of capital, particularly among international small- to medium-sized enterprises (SMEs). Another problem was the massive proliferation of mobile coupled with the “digital […]

trade finance SMEs

The financial crisis of 2008 led to many developments in fintech generally and alternative lending specifically. We’ve heard many of those stories before. One of the problems the crisis revealed is the restriction of capital, particularly among international small- to medium-sized enterprises (SMEs). Another problem was the massive proliferation of mobile coupled with the “digital self” that allowed lenders to identify the types of businesses people engaged with. Digital data became a game changer for a lot of companies employing new technologies. One company got the bright idea to solve both of these problems with a single solution aimed at SMEs making their first entrance into the online ecoystem.

Who Are Kountable, And Why Do They Count?

Kountable saw its genesis in 2013 with CEO and Co-founder Chris Hale getting together with co-founders Craig Allen and Kathy Numera.

“We looked at trade finance in a different way,” Hale said, adding that one of his co-founders spent 30 years doing trade financing at the institutional level. Typically being an instrument extended by banks, Kountable puts the emphasis on the finance rather than the trade part of the equation. The financial crisis, Basel III, and other regulations that followed handcuffed banks in their ability to extend capital to SMEs. Kountable stepped in to fill the void.

By using a cloud-based platform for the import and export of goods, Kountable gives SMEs access to trade. By outsourcing third-party logistics and bringing curated transactions so deals get institutional level treatment, the company helps SMEs sidestep problems they would typically have accessing top tier products.

Currency management is one area that requires Kountable’s due diligence. As they buy in one currency and deal in another, there are commercial terms, such as paying suppliers, during negotiations.

The company is successful when it simplifies the translation between big and small. Hale said, in most trade finance deals, you have big-to-big (that is, enterprise-level business trading with enterprise-level business). For example, Cisco might sell a network bridge to a multinational corporation. But when you have a small business involved (Cisco selling to a bank in East Africa, for instance), Kountable ensures that everyone gets the same retail treatment. By bringing users together in a mobile app on a cloud-based system, the company makes it seem institutional to both parties.

“The asset is a trade receivable,” Hale said. For example, an alternative credit fund that extends a $150M line of credit. “We align ourselves with the success of the transaction by pricing our service like a margin-sharing arrangement.” The four-step process includes:

  1. Kountable collects directly from the end customer
  2. The bank buys new servers from Cisco
  3. The reseller negotiates the margin for the procurement process, importation, and installing services
  4. Kountable takes a portion of the margin for the trade services it provides.

The Three Components of the Technology

The technology includes three key components:

  1. Identity management—The small business reseller downloads a mobile app and shares his or her data with Kountable. That includes social media, business registration, and personal info about the owners and shareholders. Kountable builds a “robust profile” on the SME and runs Know Your Customer (KYC) and Anti-Money Laundering (AML) processes for validation. The company also looks at supply, and, if it’s a private business, customs. The company looks at trade as a network. The more transactions they do, the more the network effect creates a safe environment for more transactions.
  2. Cloud-Based Control Management System—This digitally manages assets on the operating side and the financial side of a trade transaction. Hale said it’s tricky because there’s not a lot of financial data inside the transaction. Most of the info is operational. That is, goods are paid for and shipped–in transit, through customs, etc. Traditional financial institutions aren’t set up for this. This system manages the operations and payment of this trade asset. The reason it’s important to have collaboration taking place between the reseller and the in-country partners (who help with the documentation of the banking relationships, clearing customs, and more) through the mobile app with the Kountable team in San Francisco is that they all plug in to make sure transactions go smoothly. These two elements combine to create a financial asset.
  3. Trade Accounting Service—The investor who extended the $150M line of credit (LOC) is consuming trade receivables as collateral. The trade accounting service will be able to report on the synthesis of the financial and operating information in order to report the portfolio value to the investor.

Not being a formal venture fund, Kountable is a “traditional single family office with a portfolio of private companies with double bottom lines.” The company has raised $15M, 85% of which came from the family office with capital added from other investors. These are for-profit companies, of course, but the business focus is on the “larger good.” The concessionary returns the company receives by leaving some of the money on the table to make a significant impact is a part of the reward.

Kountable Key Differentiator and KPIs

“Our committed focus is to the SME,” Hale said. This led the company to build a network of enterprise-level participants and a technology platform to cater to that user. “Most other trade platforms focus on digitization of a two-party trade,” but it’s all “enterprise to enterprise.” Kountable was created to help the global SME population. “That focus on the SME as the user has created an ecosystem unlike any other platform I’m aware of.”

Kountable has about 5,000 SMEs registered and moves $3 million per month in trade transactions. That’s in two countries–Kenya and Rwanda. Interest from 40 other countries has led to building a platform to address the market demand.

“We have a line of sight to profitability just by working within these two markets,” Hale said. “[We’re] building
global expansion to go outside of the family office this year.”

SMEs in Kountable’s two markets buy goods from the U.S. and work with U.S. supplies to sell to customers in East Africa products they wouldn’t have access to otherwise. In the year ahead, Kountable plans to work with U.S. SMEs on similar transactions.

Kountable’s Competition and the Future of Trade Finance

Kountable’s competition consists of large procurement companies, groups like Tradeshift, and financial relationship companies. On the other side, there are e-commerce platforms, like Amazon, that are more consumer focused.

“There really isn’t a competitor that fits together a solution targeting our market specifically,” Hale said. The competition is mostly peripheral.

Hale believes the future is going to see trade financing dramatically influenced by digitization across the board. “The players are focused on enterprise-level digitization, where invoicing becomes an Application Programming Interface (API) and customs brokerage becomes digitized. As that continues, the nature of trade financing will evolve toward a a focus on operations.” He sees this evolution ultimately leading to the incorporation of the blockchain. “The elements of smart contracts and the distributed ledger are very well suited to the network approach to trade facilitation.”

Kountable’s near-term plans are to continue demonstrating the universality of its solution. Hale said they have significant demands in many regions of the world, including the U.S., and the goal is to plant some flags in some specific markets. Along with the U.S., he mentioned Southeast Asia and Latin America as potential growth regions. “There are many elements of our transactions that are replicable across different verticals and different regions,” he said.

Conclusion

The company is looking to internalize its engineering team and build its other respective teams. They have a number of product launches in the next quarter and a half including a redesign of the mobile app. Beyond that, Kountable is focused on growth capital for market expansion, enterprise sales, and putting in place the legal and financial structures needed to move into Southeast Asia markets like Vietnam, Thailand, and Malaysia.

By focusing on the double-bottom line, Kountable not only has a bright future in the spaces of trade and trade financing, but the company is also doing its part to improve the quality of life in areas of the world where goods, services, and technology would be otherwise less accessible. And while it isn’t evident if the company will ultimately succeed, it’s certainly evident that it should.

Authors:

Written with Paul Keenan.

Allen Taylor

A Distributed Ledger For Alternative Lending, KYC, Digital Identity

SAP blockchain solution

SAP’s website is asking us to “Imagine people, businesses, machines, and algorithms all communicating in a frictionless way—where data sharing is fast, open, yet completely secure for all parties.” That’s what the company is seeking to offer its customers with the incorporation of blockchain technology to its Leonardo IoT (Internet of Things) portfolio. The early […]

SAP blockchain solution

SAP’s website is asking us to “Imagine people, businesses, machines, and algorithms all communicating in a frictionless way—where data sharing is fast, open, yet completely secure for all parties.” That’s what the company is seeking to offer its customers with the incorporation of blockchain technology to its Leonardo IoT (Internet of Things) portfolio.

The early evidence shows that isn’t such an unimaginable thing at all. In the middle of last month, the company joined with the Alastria Consortium and the Blockchain in Trucking Alliance (BiTA) bringing 27 customers and partners with a total market value of $819B. The partnership is evidence that we can imagine a seamless future in the lending industry and beyond.

And what are the benefits that the members of these consortiums believe in so much?

Benefits of Blockchain

The blockchain, a true P2P network, will reduce alliance on some types of third-party intermediaries such as banks, lawyers, and brokers. The transactions not being limited by office hours, the blockchain can speed up process execution in multi-party scenarios. The fact that all of the information is viewable by all parties and cannot be altered promises to reduce fraud and create trust. The use of the distributed ledger technology (DLT) will provide quick ROI by helping businesses create leaner and more efficient processes, which will make them more profitable.

The distributed and encrypted nature of the blockchain makes it difficult to hack and promises greater IoT security. The blockchain is also programmable making it possible to trigger actions, events, and payments once conditions are met.

Our interview with Nadine Hoffman, innovation manager for SAP Financial Services, and Juergen Hofman, the company’s social manager for financial services, sheds a light on the benefits to business and industry and why SAP is a fitting company to grow these advances.

SAP’s Application of the Blockchain

While using the company’s hyperledger as a base structure, Nadine tells us that having encountered so many potential partners who want to add to the existing product has led the company to being what she terms as “tech agnostic.” She expands by saying, “We offer infrastructure to connect existing technology and advantage to combine with other technology, using machine learning to take the best of all worlds specifically for process and use.”

She says the DLT will help companies discern what the best technology is for their needs, with a focus on lending.

The full life cycle of lending is a slow and complex process because there are so many parties to cooperate with. Nadine tells us that onboarding can make it seamless with the use of the DLT. The blockchain customer owns their own data and is in charge of how and with whom it is shared, which leads to greater transparency. The ownership of a “single source of truth” will allow customers to reach real digitalization.

Juergen chose to focus on two examples of the benefits SAP has already seen, one in the area of bonded loans and the other as pertains to KYC (know your customer).

In the case with bonded loans, as SAP exhibited through its partnership with Deloitte, the bond comes with a bond and a loan aspect, but since it isn’t dealt across a stock exchange, it isn’t subject to DOC rules. Also, we once again see speed and efficiency as an upside. With the exchange and confirmation of information and requests for changes, the process of issuing bonded loans manually is more time consuming. What’s more, if a customer later wants to sell his or her share, banks might not be aware of it, which creates KYC issues.

The Deloitte blockchain solution creates a digital asset and different investors buy a piece of it. It serves as a marketplace, a shop window, and source of P2P transactions. The offering can be made to all of the peers in a network and to a specific network.

When it comes to KYC benefits, it’s really pretty simple. Juergen gives us this example: You walk into a bank you want to do business with. You have to provide them with all of your information. Then, you want to do business with another bank, and you have to do the same thing. The distributed ledger solution is to store a customer’s ID and link it to their personal documents, which are not stored on the blockchain. Once the transaction is cleared, the link is established and the documents are accessed to prove identity and the onboarding process continues. In this, SAP provides a solution to KYC issues, with running proof of identity.

In terms of regulation, Juergen says the data of a trade must be tamper proof, and the SAP DLT can be advantageous to those ends in that it records transactions as a “single source of truth,” which is tamper proof and contains info that is easier to access in real time.

SAP’s Blockchain Application Over Its Competitors

Nadine tells us that SAP has the edge over its competition because the company is active in 25 industries, not only in lending cases, but in all of its DLT cases. She reminds us that, quite often, the company is doing work that spans multiple industries. The SAP DLT breaks down former silos and gives a 360-degree view of a chain. Working across industry lines in this manner helps to create the ease with which parties from all industries can integrate.

Juergen underscores this, adding that, in the case with bonded loans, the company’s advantage is that it has strong capabilities with its other solutions.

Still, the technology being what it is, and the company’s tech-agnostic stance, means that there really is no competition. Yes, there are similar offerings from other large software companies, but there’s a lot of space in the market for more than one company to find the right footprint.

SAP Blockchain Performance Benchmarks

The technology is still evolving. It is not yet mature, which means we have no history of performance to report. Currently in the pilot phase, the technology will go live and be available soon.

When it does become available, SAP’s DLT will become so for everyone, and Juergen tells us that there won’t be a typical customer. From small firms to major banks, the broad range of companies in business with SAP, along with the global reach of the company, help to create a blockchain that will benefit fintech companies as well as traditional companies as the technology changes how everyone does business.

SAP’s Fit with the Direction of the Industry

Nadine assures us that SAP is pleased with its tech progress and that they have multiple use cases ongoing in every industry–public sector, telecom, and healthcare; and that every industry is working on blockchain topics but not limiting technology. Through the IoT, machine learning, and DLT, the company is furthering its investigation into and introduction of new products for customers.

Nadine also sees the advantage of the openness of the market. “There are a lot of players approaching lending, not only banks. Industries are creating their own banks and creating alternative lending markets. We’re investing in all of this.”

When asked what the company is looking for right now, she assures us that SAP is “very good” when it comes to the tech side. The hurdle to face now comes from the legal and regulatory side. That is on its way she tells us.

Conclusion

It seems only rational to think that we are going to get to the point where the blockchain is in place and well-functioning in accordance with the SAP vision. This is the latest and most adroit technology when it comes to the streamlining of data sharing and acquisition, and it’s just human nature to go down new avenues and do what comes next. We learn beyond what we had previously known and we use it to make our lives better and easier, and that’s what we’ll do with the blockchain.

Is there any reason to think that SAP won’t be one of the companies at the forefront of this application? Not at all. With the company’s vision, establishment in all industries, and existing IoT and DLT structures, they are a safe bet to be among the leaders paving the way into this seamless version of what’s next.

Author:

Written by Paul Keenan.