I sat down with Ernesto Vila. Ernesto is the CEO of A P Trade Finance, a leading global provider of alternative financing solutions for businesses. A P Trade Finance is also a member of the Trade Finance Distribution Initiative (TFDi). We discussed their financial services, emerging technologies, credit insurance, ESG, regulations and recent liquidity issues.
I note that AP Trade Finance is a subsidiary company of Accelerated Payments Limited. Can you tell our readers what services you provide and which geographical areas you operate in and how do they dovetail with the interests of Accelerated Payments Limited?
AP Trade finance offers cross border purchase order finance mostly of finished products. The financing is upstream in the supply chain, at the door of the supplier. Once the products are delivered to the ultimate debtor, Accelerated Payments Limited (APL) purchases the receivables to take AP Trade Finance (APTF) out of the position, extending the payment terms to an additional 30-90 days. That is how the combined service of AP Trade Finance and Accelerated Payments Limited provides an end-to-end solution to our clients.
In terms of jurisdictions, our mandate is debtors within the US, Canada and Europe; however, international trade is global by definition, so we work with suppliers worldwide.
You offer both supply chain finance and seller’s cross-border receivables finance, can you give typical examples of how both of these services work?
The term supply chain finance is widely used in different contexts, where typically supply chain finance programs are put in place by strong debtors to improve the liquidity of their smaller suppliers and thereby improving the resilience of their supply chains. Whereas, cross border receivables finance is initiated by a supplier looking to improve its cash flow through early payment.
It’s worth mentioning, that most factors require goods to have been delivered and accepted by the debtor before they can purchase a receivable. This is due to credit insurance limitations, as there are many risks associated with the international logistics process, where a successful delivery is not in all cases completed, putting at risk the factors.
At AP Trade Finance, we have a deep expertise in logistics and that is precisely the added value we provide, and why we are able to advance funds where many wouldn’t be able to.
You are a member of the TFD Initiative, how has A P Trade Finance sought to automate trade finance? What technologies are you currently using to this end? What has been your experience in using these technologies and what has been the reaction from your clients?
Contrary to receivables finance, trade finance transactions are all very different as there are many actors interacting with the transaction through the international logistics process. It is very hard to predict or automate some of the processes; however, we are experimenting with various technologies such as blockchain to tokenize the underlaying assets and smart contracts to settle the obligations to IoTs (Internet of Things) that provide eyes on the goods in real time. Moreover, blockchain and smart contract technology can be used in conjunction with electronic bills of lading to make the entire transfer of the title deeds faster and more secure. Lately, we have been looking at AI where we can train a model to help us with risk mitigation. However, all of these pilots and experiments are in their early stages. One major obstacle remains the regulatory environment, which in many jurisdictions remains unclear.
How relevant is credit insurance in your financing operations?
Credit insurance is paramount for our transactions. However, obtaining credit insurance on the trade finance transaction leg is very rare as the goods are still in transit. During this leg the responsibility typically rests with the seller. As long as the ultimate debtor is insurable, we are able to use our strength in logistics to take on that risk and deliver safely to the ultimate debtors in which case credit insurance kicks in through the receivables purchase.
What role, if any, do you expect blockchain technology to have in the future of supply chain finance?
I am a strong proponent of blockchain technology as there are many uses. There is the company called CargoX that developed the first “Smart BL” on chain that allows financiers to retain title documentation in a secure way, and to release the goods very quickly 24/7 and very efficiently upon satisfaction of terms. That alone will put the financiers in control of the underlaying assets and potentially lower the barriers to SME lending. There is a lot more that blockchain technology can offer: there are DeFi protocols whereby assets are tokenized and the funding is fractionalized amongst multiple founders. There are IoTs streaming immutable data about the condition and location of the assets in real time. And of course, there is the settlement aspect of blockchain, where the movement of payments are pegged to the USD by using Stablecoins such as USDC. This makes settlements extremely efficient; however, regulators need to provide more clarity for mainstream adoption of blockchain-based systems.
What are your thoughts about how AI will change the trade financial ecosystem?
AI is an old technology that has gained lots of attention lately through breakthroughs in machine learning. In the financial world, AI has been widely used for fraud detection in trade finance.
I am sure new models will be built around multiple risk mitigation verticals such as default prevention, fraud, political risk, supply chain disruption, counterparty risk and more. Wherever there is data that a human is not able to search, read and analyse at the speed a machine can, AI will be there. It will make trade finance safer, predictable and potentially make it more accessible to SMEs, as one of the problems large financial institutions have is the cost in servicing small transactions. If the machines are tasked with that role the cost should drop substantially.
I believe the next decade will be very transformational.
Have you incorporated ESG principles into your business model, and if so, how?
Yes, ESG is an integral part of our policies: from governance to the type of transactions we fund to the diversity in our workplace where minorities are represented in a balanced way within the organization.
What is the perspective in the USA about the recent developments in several countries regarding MLETR (Model Law on Electronic Transferable Records)? How will this affect your business?
The US historically has been a supporter of many UNCITRAL laws (United Nations Commission on International Trade Law) and I hope this time is no different. However, lately the US has been lagging in clarity in certain regulation areas such as blockchain that are of material importance for the proper implementation of MLETR.
If MLETR is widely adopted in the US and beyond, it would provide savings and efficiencies across the industry. Most importantly, it would reduce court disputes over registered debt; it would clarify what bundles of rights a party has over specific property; and, it would provide clarity and transparency over pledged inventory and transfers of titles.
What is your experience of digitizing trade documents in the context of cross-border transactions?
I have been an early adopter of blockchain technology. For example, I have been able tokenize receivables, purchase orders, bills of lading and data representing goods in transit.
I do believe in a future, whenever there is sufficient regulatory clarity, where blockchain technology will be present in all financial organizations, and all assets will be tokenized, governed by smart contracts, and operated by AI. I know that sounds like something out of a science fiction movie, but in reality, the technology to do all that is here; so that future might not be too distant.
How is the current geopolitical situation which is characterised by high interest rates and worldwide instability affecting your clients’ liquidity and your business? Are your clients showing a preference in these circumstances for certain of your services?
The Federal Reserve has been on a hawkish trajectory in order to fight inflation where interest rates are at an all-time high. Liquidity has dried up as investors have shown a preference for treasury bills that offer no risk and attractive yields.
While this situation is favourable for our offerings, it’s also riskier as many organizations have not been able to adjust to the current cost of funds where servicing their obligations is very difficult.
Finally, is there anything further you would like to talk about?
Sure, I would like to take this opportunity to invite some of your audience that might be in the Miami area on September 22nd to the Miami Internal Airport Hotel where we will be hosting an in-person workshop to discuss opportunities in logistics-based trade finance. There will be panelists and presenters such as Exim Bank, SBA, APL Miami International Airport and more. Here is a registration link, and remember this is for an in-person event only: https://forms.office.com/e/avHgrxr2qC
Special thanks to Ernesto for his insights into automation, regulation and a range of other topics connected to trade finance.