Will we ever bring SME Trade and Supply Chain Financing into the 21st century?

Everyone has nice things to say about small business. They’re a great source of jobs, innovation, economic resilience, etc. For years we also have known that those small businesses that are able to successfully trade across borders tend to survive at a higher rate, grow at a higher rate, and create more jobs than the sector as a whole. So why are the technologies we use to promote cross border trade so SME unfriendly?

No technological advancement for SMEs

Let’s start with documentary trade finance – it’s hardly changed since its invention in the Western world by 14th-century Venetian merchants.  The sealing wax may be gone, but the rest of the system remains dominated by ancient paper methods – complex forms that require careful, expensive attention…whether for the bankers, the shippers, etc… it’s one of the few areas where carbon paper may still be found (though I think they’ve now embedded that into the multi-colored forms). Worse, the forms vary from commodity to commodity, from customs authority to customs authority, and from logistics provider to logistics provider, and the systems are not electronically interconnected. 

How has the world coped, given the rapid globalization of trade? Large firms and large banks have basically found ways around the system, through open account arrangements, where they’re basically relying on copious public information about each other to provide enough trust to move the process along. Small firms, and small financial institutions, don’t offer that sort of public information and are denied access to this workaround. 

This is why, when large bankers and others talk about trade and supply chain finance and how active they are, they really have meant, up til now, that they are active with a very, very small percentage of the firms actually involved in global supply and distribution chains. These “Tier 1” suppliers tend to be fairly large companies, operating very close to the large anchor firms in the chains – with thousands and thousands of smaller firms, farther down the chains, until recently excluded from the process… without these smaller firms the products aren’t made or sold, but they have to fend for themselves, with global market price points moving downwards, quality standards moving upwards, and willing financiers few and far between. 

It’s estimated that over $15 trillion in receivables from blue-chip firms are pending for SMEs in this system at any given moment, yet most of them aren’t deemed creditworthy. The good news is that payments going across borders use a far more modern approach today – yes, they use 1920s telex technology that underpins the SWIFT system! Bizarre? Again, large firms have workarounds, and SMEs are left with archaic systems. Small wonder that we see increasing examples of compromises to environmental, labor, and other standards in trying to stay in the cross border business.

A silver lining for SMEs in 2021

Despite all this, I’m hopeful we will bring all this into the 21^st century during the next decade. Distributed ledgers, coupled with the internet of things, will enable goods to be verified and tracked in real-time, with all parties having instant access to this information. Atomic settlement of cross border payments also has arrived. The technology to change everything is already here. What’s not yet here is the institutional coordination to put this technology to work. 

Why is this the case? Without naming names, while today’s system is antiquated, horribly inefficient, and prejudicial against smaller transactors, it’s still making huge profits for a small number of large firms. Whether they are in logistics, finance, buying, or selling, these large actors have little incentive to invest in change that will make it easier for many others to compete in this space. These large firms are willing to invest small sums on measures such as compliance training, which look nice, but really don’t address the underlying issues). To date, they have not been willing to dig deeper and support fundamental innovations that would help all do better…

In the 1960s we saw a highly unusual moment when the bank that pioneered the mass marketing of credit cards decided to open up this technology to the whole market – that created VISA and ushered in a new era of consumer access to financing in which both First National City Bank (now part of Citi) and all other banks have benefited enormously. We’ve seen other “open access” initiatives since then, such as the Internet, Linux, and Elon Musk’s battery technology – but nothing of true significance from the financial sector, nor from the logistics sector, nor from large buyers/distributors. Will we have our “VISA moment”?  I think we’re due – digitalization of SMEs, of finance, of movement, is too far advanced. Either the big boys will open up soon to new approaches, or they’ll go the way of Kodak, Polaroid, Blockbuster Video and many others who dominated old ways, but wouldn’t move with the time – and they will be displaced by new disruptors, maybe even by some already in business today. SMEs have had a raw deal in trade and supply chain financing for too many centuries. I believe the 21^st century will be when they finally get their due.