I recently interviewed Pablo Terpolilli, founder of vabble.io , a technology platform that facilitates cross-border trade between producers in emerging markets and customers in developed markets. vabble is also a member of the Trade Finance Distribution Initiative. Below is the interview.
So, Pablo, can you tell our readers a little bit about what vabble does?
We do something that is very simple if you think about it but when you dive into the execution of it, it gets complicated, particularly for non-bank, institutional investors. We aim to simplify it, and democratise it. What we do can be done manually and on paper and in person, however by leveraging currently available technology, we are aiming to put that process into a platform and scale it. Such that everybody can access it, real-time, simply and online and all digitized.
We identify and onboard companies in emerging markets that hold receivables payable by companies in developed markets. So, if you’re a company in emerging markets and you produce widgets and those widgets are well liked by a good company in developed markets. And by that, I mean mainly the northern block: the US and Canada; and Europe and the UK, with a little bit of Asia as well. So, a little bit of South Korea and Japan.
And what we can do is: we can quickly evaluate the risk of those developed companies paying for supplies that come from emerging markets. And we can anticipate the funds to the emerging markets exporters. So that’s basically what it is.
And the way we do it is we essentially buy a hundred percent of the receivable. And we back-to-back resell it to institutional investors that have a risk appetite and an allocation of cash to invest in these assets.
So behind us and behind the infrastructure that we have built, we’re working with asset managers that manage yours and mine and, you know, European’s and American’s pension money or premiums from insurance.
We go straight to these guys and we give them a hundred percent traceability and transparency as to the asset that they are buying. And we have invested in the technology to facilitate and to enable that. Mainly a technology that is geared towards the emerging markets export companies to be able to use it as a sort of a Revolut type of platform: you know, it has a consumer feel; it doesn’t have the feel of a treasury program or something like that. It’s an application that can be ubiquitous on your mobile phone and that it can be easily used: where you can not only onboard yourself and your buyers, but you can also upload the receivables and where we can evaluate them in the back.
And then on the side of the investors, and I know that you’re going to have a question about it, we use Tradeteq as a platform because of several reasons.
The first is I have known the founders of Tradeteq for more than 15 years. The second is I was an advisor to Tradeteq for about 10 months until it dawned on me that this was a massive opportunity that nobody was exploiting, and that we should build it out.
And since I’m mentioning partners that we have, so Tradeteq is essentially the entity that provides the regulatory umbrella where there are regulatory touchpoints, be that in insurance or be that in reporting to the institutional investors, to the insurance companies about exposure, NAV (Net Asset Value) etc. And, then we looked at the past and mistakes that other others made in the past. Hence, in full transparency, we segregated the payment side of the business from us. And we looked for a top partner to essentially affect the payments to the sellers, the exporters in emerging market.
And then to essentially help us in the collection of those receipts from the buyers; we had several proposals, but we decided to go with JP Morgan. We opened accounts with JP Morgan and we have integrated their payment infrastructure into our platform, so that we don’t even need to leave our platform to see all the payment activity and collection activity reflected on an invoice per invoice [basis].
So, as I said, at the beginning – very simple. We connect those assets with the buyers of those assets. We run no credit risk. We have no balance sheet. We have no FX risk. So, in that regard, we’re not a fund; we’re not an investor: we’re purely a technology enabler. And we provide that infrastructure for the benefit of investors and emerging market exporting corporates alike.
We invested in the software, and we also invested in the legal infrastructure. [This is] very, very key in order to be able to carry this trade.
And so basically, if you cannot buy these assets on a ‘true sale’ basis, then you can’t really operate. So, we worked and we retained the top firm, Sullivan and Worcester Law. They were the ones that drafted the global Master Receivables Purchase Agreement (MRPA), the standard that is used by all banks and all asset managers buying these. They are our advisors and they developed our legal infrastructure around the standard. So, we’re very standard as it relates to our legal infrastructure. It’s just adapted to the mode of operation with institutional investors in the US and in Europe.
Okay. You mentioned ‘true sale’. And I think I’ve read somewhere on your website that it’s securitization. So, my question: is that fundamental to the structure of your company? Do you feel that it wouldn’t work under normal agreements about trade receivables where you tie them into a contract, essentially, rather than buying the receivable? You feel that this is the safest way – to use a Special Purpose Vehicle to remove the investor from the risk essentially, because you unmoor the asset from the seller with securitisation.
It always seems really expensive to securitize things: you’ve got an army of lawyers, and these securitizations normally involve millions of dollars over a period of time. This seems to be a different type of securitization.
Yes, that’s a great question, but let me unpack it a little bit. So, one is, we always thought about what is the path of least resistance, or how can we best enable these buyers of assets to actually buy the assets? So that was the premise with which we started to work. Once you work on that premise, then you also think about who the participants in this market are.
Trade finance is mainly a market that’s dominated by banks; and it has been so for many years. Definitely tens of years, but maybe even hundreds of years. So, it’s a very old way of operating and financing and enabling trade. We all know that trade has grown massively. And the resources or the ability of banks to supply financing to that growth has been limited.
So, banks have been steadily increasing capability and sometimes retrenching when they have encountered a bad experience. And there were a few of these [retrenchments] in certain parts of the world. That’s definitely created a massive gap. Whenever there is a gap, there is a void and the void gets filled somehow.
Now, in the case of trade finance, one way that we think the void will effectively be filled is by bringing institutional investors into the equation.
And we found that there’s not much education that we needed to do because they were already looking at the space and they were already coming into the space. By my count, and it’s not exhaustive at all, there are at least 20 to 25 investors globally, institutional investors that invest in trade finance.
And so, then when you look at the kind of investors, for example banks, we know how they do it. They do it by way of lending and they do take risks and, and then in the case of institutional investors: they just want to take certain risks, not every risk.
So, that brings a certain discipline in terms of our focus, right? We’re focused on the very good, the very best risks that investors in emerging markets hold.
This is really key because for our model to work, we have to find those assets. So, our model is based on ‘okay, are we able to find these assets that are high quality assets that are the focus of the institutional investors, investment criteria’?
Our model does not depend on finding companies in emerging markets that are willing to pay high teens or low twenties. The banks’ approach, the factors approach and our approach are then very different. And then, we support it with technology. This is the context: we have institutional investors as opposed to banks. Institutional investors are more used to securitization techniques as you were rightly saying.
But here is where our friends at Tradeteq come into play. They have developed a platform that they’ve invested millions of dollars in, and they’ve earned the trust of many institutional investors, if not all the institutional investors, and they’re definitely on their way to doing that. And they provide a securitization as a service type support, where they have standardized documentation, and hence, they provide a solution for us. It was a perfect combination and a perfect match for us to be able to reach investors through them. So very early on we decided to essentially use that as our only source of funding. So, we use their trading infrastructure to issue notes. These notes are invested in by the institutional investors; and, with those funds that are held in a segregated account with JP Morgan we effect the payments for the acquisition of the receivables. and That’s our operating model.
Right. And are they bundled together the securities, or is it individuated?
We look at each invoice individually, and we make an assessment of each individual invoice. It’s another interesting question – I could speak about it at length.
Banks have a certain way, and insurance companies, by the way, as well, have a certain way of looking at the world. And the world is, they look at John and they say, John, I’m going to give you 150 K or a million or one and a half, whatever it is, right? They establish a line for you. And then, you have to work within that line. That line may or may not be related to your trade. You may trade well in excess of that, or you may have needs well in excess of that. It’s not necessarily related to the quality of your clients. All of a sudden the widgets you produced are bought by very high-quality clients. That doesn’t quite change the nature of your credit line. All the more so in emerging markets where banks are more focused on the more profitable consumer business fee based [model] or they’re more focused on other fully knowns of their parent companies. Therefore, the policy or the strategy is dictated by overseas [decision-makers], as some of the decision making is not necessarily in the country.
Therefore, we look at you, we look at the people that are paying you, and how much they like your widgets and we look at understanding that. We look at each receivable. So, we don’t give you a line; we don’t have any limit to work with you because so long as what you create and what you export is well liked and bought by quality buyers, then you can count on us to continue to give you liquidity against that.
That’s the differentiated approach. A bank will give you a line, you’ll have to work within your line. There are no lines with us. We basically check that you are in good standing, that there are no sanctions issues on each receivable and we seek to understand the relationship between you and your buyer. And once we have understood that, then you can pretty much count on the money being in your account fairly quickly.
Yes. Okay. That’s fine. What makes vabble different from its competitors?
So, everything I told you so far makes us different from our competitors. We do not take risk. We’re not an asset manager. We’re a processor – we process. We’re a liquidity provider to emerging markets export companies. We’re very focused on the high-quality receivables as a way to provide that liquidity. Therefore, we can either do that or not. So, we’re not a solution provider.
As I said to you earlier, our model does not depend on finding someone willing to pay us 20%. So, we’re not a high yield sort of entity or player or originator.
We’re focused on the receivables. We monitor the credit quality of the companies that we buy the assets from, the receivables. And, we have to comply with the criteria of the obligors according to what the institutional investors’ risk appetite is.
It could be as simple as or as simplified as here’s a list of 40 names that we want to buy assets from. That would be our criteria for looking for the assets. But it is, thankfully, a lot more complex and therefore more flexible. It’s more a question of certain risk parameters that we can monitor objectively outside with outside resources. And if we comply with those parameters, the parameters being the parameters of the payers of the invoices, then Tradeteq acting as a third-party manager, matches the assets with the funding. And that happens pretty much automatically. So, that’s how we operate.
Brilliant. One thing I was going to mention about vabble is that it strikes me that you’ve got a very good team. I read this morning that you actually handpicked them. These are people you’ve worked with in the business for a long time. But what was curious for me is that your company is quite special because you’ve got boots on the ground in South America. You’re able to use all of this local talent in an international setting.
Have you also got boots on the ground in Asia and Africa? Your website focuses more on like places like Peru, Ecuador, I notice. Is it expanding all the time this team?
It’s a great question. You are hitting all the key points. Well, no, we’re starting with Peru and Ecuador, which we feel are markets that are underserved. It’s a question for us of start walking before we can run. We know the process works. Manually we know how to do it. We’re mounting this process of acquiring an asset -a receivable- monetizing it, paying for it, then collecting it, insuring it in the middle because we use trade credit insurance. We can do it manually; we can do it manually in maybe a week’s time. We aim to do this in a few hours’ time soon. That’s the challenge. We are starting with Peru: it’s a very dynamic economy, it’s still an investment grade country. It’s been growing exports for the last 10 years. It has a very reputable and transparent business owner community and I really like it as a place to start. There are, of course, bigger markets, which will have a much greater impact, but we want to be ready and up to speed and have tried it in Peru and Ecuador before we move to bigger pastures. I wouldn’t say greener pastures because they are wonderful markets. We really have had great experiences so far.
So, the team – it’s really people I worked with. And it’s a very flat structure. We always thought, in order to move into a new country, into new markets, we need two things: we need the best people and we need to achieve a true sale. Those are the two considerations. But it’s really key that we get the right people, and the right people are, in our experience, former trade finance bankers who we are essentially providing the entire admin support through the platform. So, we’ll remove all the administrative burden of the processing, of onboarding.
The onboarding is laborious but it’s all done online. Everything is done online. There’s no need to go to any bank or to sit with any bank officer.
We have a customer support group and a product support group. They work overseas, by the way, because these are very capable, bilingual people. We have them in Argentina. It’s much more cost efficient to have the groups there than having them in England, where it’d be significantly costlier for the enterprise, and also for the time zone it’s better.
We’re moving as soon as we can to Africa and the Middle East. Because at the end of the day, if what you’re looking for is a receivable from a good quality company then it really doesn’t matter where it is so long as you can acquire it on a true sale basis.
The point of having boots on the ground is really key because these former bankers know the companies locally; they know the trade. Some of the people that are part of our team have been country heads for global institutions, like trade finance banks. So, they know the companies, they know the owners, they know the management, they know where and how long they’ve been exporting to home because they have been part of that trade. So, they give us instant access to that deal.
Can you describe for us what technological innovations you have deployed on your platform?
In terms of technology: we build our own technology and we own our own technology. Everything we have done we have built ourselves. I think that that’s really key for us; it is really key for building the IP of the business.
The IP is not just technology, it is also legal. This legal infrastructure basically allows you to be able to acquire on a true sale basis in different places. And that’s married up to and matched up to essentially the global master resource personal agreement standard. It is consistent with it. And the whole sort of legal infrastructure from the moment the receivable basically comes into existence in our platform through the life of that receivable until it gets paid or extinguished or defaulted or whatever it is.
Each and every case is well documented and there’s a process for each of them. And that’s been developed by us.
The technology stack is running on Google Cloud mainly. We’ve developed a front end with a user interface that is very consumer friendly.
It’s been built using React. And then we use very modern databases that uses the front end so that it’s a speedy application. It’s distributed across the world. So, if you’re in the UK, when you log into the application, you’ll log into a version near you. Whereas, if you’re in Peru, you’ll log into the same application, but it’s hosted nearby. So, the application is hosted and distributed globally. And the data is centralized, residing in Ireland and the Netherlands.
And you have an algorithm in Ireland and Netherlands that can process all of this information that’s coming through every day, every minute, presumably?
And that is a great question because, you know, in addition to the technology and the logic behind it. We have a working group that is devoted to essentially analysing the data and identifying patterns, which is the important part. Of course, that initially it’s theoretical because we know what we want and what we want to do, but it will get more and more powerful as we increase the volume of transactions that we process.
We’re looking at advanced ratios, we’re looking at payment behaviour. And we’re looking at automating all these stages. And for the automation, we’re looking at technologies like, blockchain, Web3 -embedding the solution. We’re looking at how much of it can be done on blockchain and where can we use blockchain technology to essentially provide a more efficient experience. I don’t think that the technology, you know, necessarily matters to the users. What really matters to the users is that when they upload an invoice, they can get cash for it pretty quickly.
Using blockchain technology enables us to provide that user experience better or cheaper. And that means, essentially, how do we get these assets from the hands of the exporter all the way down to the new owner? And if in order to transfer the ownership of that asset and to effect payment for it, it turns out that using blockchain is better, than we will use blockchain.
And so, we’re not using blockchain now, but we believe that there’s a big move [towards using blockchain technology] if you take a look at Blackrock and Goldman and some of the developments that are taking place in this space.
It’s a bit like securitization, right? Securitization was and is a great technique. It was abused at one point, and then we went into the 2008 crisis because it was misused. But the technology itself is a very good technology, and is still used: it’s super useful and super-efficient. And so, blockchain is the same, right? So, it’s going through the same sort of cycle: it’s been used, it’s been sort of overused and abused by FTX and all the cryptos. And so, people tend to want to throw the baby out with the bath water.
Are you going to be using a bunch of trustees and, as you said, a very expensive securitization infrastructure to distribute transfer risk or even to affect payments?
So essentially, the option you can use to verify identity, to verify authenticity of documents, to affect the payment very quickly from point A to point B within a certain network, almost instantly, is blockchain.
A bit like, you use Revolut to send money; I send it to my kids – ‘bang’ and they get it wherever they have access to the internet.
So ideally, we would like the world to be like that.
And of course, I think this plays into the reason why you’re associated with the Trade Finance Distribution Initiative, because you can see how the digitalization of trade finance assets is going to be like the wider financial landscape for people moving forward. Is that right?
Yeah; that is a great question. Actually, the Trade Finance Distribution Initiative (TFDi) is a great forum that congregates all of the existing, and new players (if I count ourselves as new) of the trade finance initiative. We’re proud to be members there.
It’s a great forum to discuss innovations, the state of affairs: how things are, what can be changed. All the relevant players are there; we get together and we get to learn about each other and to talk about what can be done and how it can be done.
There was an article written by a FinTech writer by the name of Simon Taylor, who produces a newsletter called FinTech Food Brain. It’s quite influential and it’s quite interesting and smart the way he analyses the FinTech space. He covers the FinTech space globally; and he wrote an article about trade finance being the end boss of FinTech.
It’s an interesting viewpoint and I can’t help but agree with him. We agree with him because the problem with trade finance is, as we said initially when we started our conversation, what we’re trying to do is a very simple thing to do, but it’s quite complex in the execution of it.
Therefore, attempts to provide a holistic, a whole solution to the problem have failed. They have failed in the past. So, I think that what you need to look to do is you need to look at providing a solution to your square meter of space.
So, where you are, and with the stakeholders that come into play in that square meter – I’m just exaggerating saying ‘square meter’. Whatever the area of influence is, you can seek to bring a solution that can be quite meaningful to trade finance. It doesn’t need to be used by everyone to be a successful solution.
And so, then we come into things like interoperability. And that interoperability refers, to a great extent, these ways of approaching the solution. So, as long as you bring a solution that works for the people to whom that solution matters, and it improves the efficiency of the trade of their trade finance operations, then that is a very valid, valuable solution. And it’s been proven again and again, even with recent transactions where Blackstone acquired a company out of Switzerland that did global supply chain finance and provided a solution for a certain type of operations. That was a super successful adventure. It was bought by one of the large PE (private equity) houses for one of their companies for big ticket money.
And so, you need to essentially provide a solution that is relevant to the space that you occupy. And that’s why we have defined our space very narrowly.
We only do cross border. Confirmed by the buyer so that is disclosed. And trade credit insured receivables from developed market companies. You try to provide a solution for the whole, but you can’t eat an elephant in one go. So, we take one bite at the apple.
Well, it’s such a huge market anyway. There’s no need to try and cover all of it. It is estimated that there is about a six trillion dollar a year gap in trade finance gap. There’s plenty of space for everybody.
Yeah; absolutely. I think that people place a lot of emphasis in trying to become a global standard: sometimes that’s their own death sentence. That’s my word of caution, which we were hoping to avoid.
Yes. You try to please everyone and you end up pleasing no one.
Exactly.
Yeah. So briefly, you’ve touched upon this point already. So, the revenue model of vabble, you say you’re not an investor: you don’t hold funds. So, it’s presumably through a percentage in each transaction that you make your revenue?
Yes. We are tweaking. I mean, the basic is we have looked at other people’s models. Okay? They’re very complicated: this is the charge, and this is the charge. And there’s so many variables. And then they charge for everything.
So, if you onboard a client, they’ll charge you. If you onboard the buyer, they’ll charge you. They’ll charge you for every wire transfer they do. And so, at the end of the day, you as the user will be confused: you don’t really know how much this is going to cost you.
So, we are starting with a very simplified pricing. It’s a unique pricing; it’s basically the return the institutional investor wants to obtain plus some allowance to cover our processing fee. But we turn that into a margin on top of the cost of funding.
So, for example, the investor wants seven and a half percent. On top of that seven and a half percent we place a margin that covers our cost of operations and gives us a profit on top of that. And that’s how it is commensurate with the situation in Peru, or the situation in Ecuador, and the alternatives that are in each market. So, in that regard, we price to the relationship between the seller and the buyer.
We’re pretty persuaded that we will be able to offer the best additional unit of capital that the exporter can get in their market. And the important element here, John, is this will not be debt. They will not be adding debt to their balance sheet. There will be basically selling an asset and getting cash for it. So, this actually lowers the debt, provides liquidity and deleverages the companies.
Because the alternatives that they have in emerging markets are: 1. go to a bank, and they probably already have it where the bank may advance maybe 50% against those receivables, but it will eat into your line. So, you know, you have 150. Okay? So, you use that for letters of credit, for performance bonds, for working capital. And then if you do it for this, then they’ll eat into your capacity. It may be very good pricing, even maybe slightly better than ours, but it’ll eat into your existing debt capacity. You won’t be adding; you’ll be subtracting. And 2. the second alternative for companies in emerging markets, is to go to a local factor. And the local factors are in local currency. And they’re not funded properly to discount a receivable from a good quality obligor.
If you have a receivable from the UK government; say you sell to the UK government or to Marks and Spencer, then if you’re discounting a receivable of the quality of risk of the UK government or Marks and Spencer or Tesco’s, when funding is provided by a local currency, it’s going to end up costing you 25% or more to discount that receivable. That’s a huge cost of funds to pay.
So, how do you get around the currency fluctuation problem then in your revenue structure? Inflation in Argentina is running at about 100%, Venezuela is off the chart.
Let’s go the example of Marks and Spencer. Marks and Spencer are going to pay for that shipment of wine from Chile in pounds. They’re going to pay with pounds: so, we’ll take the pounds.
We’ll advance pounds and we’ll take pounds when we collect. So, we don’t take any FX risk.
Now, a business that we will look to do in the future is to provide alternatives. We’ll do that with partners to provide alternatives to the exporters. So here are the pounds: do you want them in Peruvian Soles or you want them in Dollars or you want them in Euros or do you want them in Pounds? This option is something that we’re looking forward to providing in the very near future.
E-invoicing international invoices: you’ve got partners stretching over continents with different jurisdictions with different rules for invoicing. How do you manage that?
That’s a really, really good question. So wouldn’t it be great. I mean, this is the dream of everyone to have kind of a global standard. That’s the end boss of the invoice fraud.
Well, it is not possible really. I mean, we manage it by cross referencing information because the main risk that we are aiming at eradicating here is fraud. Fraud is the one risk that gets everything undone. So that’s why it’s very important for us to understand the relationship between the buyer and the seller; understand if there have been any delusions in the amounts collected; any problems. And for that, we typically ask to see a year of transactions.
So, if you all of a sudden come and say, ‘Hey, you know, we got this wonderful new buyer, Walmart, that we’re going to be selling them 10 million next month’. We unfortunately have to pass until we have enough of a track record of transactions with that buyer.
So, the key for us, as I said earlier, is to identify those suppliers to these good companies. It’s not to find a guy that is willing to pay 25% to get some liquidity. We cannot help the latter; we can help the former.
We monitor all of this because microservices are progressing, advancing a lot in emerging markets. Starting with the consumer: integration with Zero and Quick Books; all of those integrations into essentially the accounting systems or the ERP systems of the buyer and the seller. All these microservices are progressing rapidly in Latin America, and particularly for anything that gets paid on credit card rails.
So, you can provide services based on point of sale, connectivity and integration with the ERP of the company If you’re dealing with credit card payments. It’s there. It’s well-known. It’s diversified. It’s proven. It works.
So, in a way, we’re trying to bring the same experience to cross-border payments. Where we can identify patterns; have it been known, proven. And so, for that, it would help tremendously. There are some countries that have government databases or government sources where you can only e-invoice through the government service.
And for that we require access to the keys of the companies to be able to verify their invoices and basically check the invoices are OK.
But in any event, after they find the invoice is actually a true invoice, we notify the obligor. And we instruct payment into our account. So, it will always have to go through that notification and payment instruction, which is operational risk because, you know, it could easily be the case that ‘Oops, sorry, you know, we normally pay to that guy. You know, we have misdirected the payment to you’. But we take enough measures to ensure that we minimize that operational risk of a payment having been sent to the exporter in Peru, as opposed to our account with J.P. Morgan.
And so, we take preventative measures: we contact them beforehand. If it is the first time that they’re going to operate with us, we make sure that a week before we’re talking to them, we’re connecting, and we’re ensuring. We clarify any questions they may have, and that they understand how the payment needs to be directed.
Yes. Just as a side note, yes, I recently discovered that Mexico is leading the world in e-invoicing at the moment.
So that’s also the case in Peru, e-invoices, by the way.
Ah, okay. So, there’s a brilliant country to work in because the invoices are in a government database.
Yes. So, you can check everything about the invoicing and the company through a government API. Where you call, and if you have the right keys, then you can access all the information.
I think we should move on to the next question from that. We’ve just had a change in the law in the UK. We have the Electronic Trades Documents Act, which incorporates the UN idea about MLETR. So, my question becomes, why aren’t more European countries doing this? Setting up a government database or government process that if you want to validate an invoice, you’ve got to go to their database. And if you upload your invoice, they give you a number, you use this number to validate your invoice, then you can send it off. So, there’s never any duplication involved.
Yeah. I think it’s wonderful. I think it’s commendable that the UK government has such a leading role in actually making it a reality. And we absolutely support any digitization that allows us to process faster.
It’s absolutely wonderful.
Now, I think all these blessings are also cursed by the same curse that we talked about before, where you do require a widespread adoption. I would consider it a success, if we can use it, I mean, if anybody can use it. The point I’m trying to make is that any adoption is a massive success. It doesn’t have to be completely widespread. Not everybody has to use it. Of course, if they already use it, then it’ll be much easier. But any adoption, any use of this technology, it’s a bit like blockchain again.
I think that is very important that you keep the focus on the solution that solves your problem and the problem of the people that you touch with the solution.
So sometimes widespread adoption goes against common sense; good is really much better than perfect.
No, I agree with your point that if you impose from the top some rule, and then there’s some mama and papa shop that just can’t deal with all of this; they want paper invoices: they know their customers and their suppliers. It makes no sense to them at all.
So, that’s exactly the point. Yes. You’re basically rubbing against the grain. So, the adoption, I think is very important. Also, to make it negotiable is the element that is behind it. So, to make it basically discountable by the banks. Because everything that is done in trade finance is with the banks in mind.
And we’re breaking that idea a little bit.
And we’re saying, ‘Hey, you know, this is great’. But, you know, it’s kind of when they ask people what do you want to travel faster, they ask for a faster horse; they don’t ask for a car.
We run the risk of actually designing a faster horse. And I think we can all move in cars, or at least have cars and horses share the parkway.
Yes. I’m very interested in the trade finance gap in Latin America, which I think I read on your website is about $350 billion a year. How will trade finance distribution initiatives help address this funding gap?
Yeah, we touched upon this earlier. $350 billion of payments from the jurisdictions that we highlighted as of interest, which is basically the US, Canada, Europe, the UK, Japan and South Korea. Those payment flows are per year. And they’re bigger actually, $655 billion per year of payments.
But we reckon about $250 billion are nowadays sort of captured by existing trade financing.
I think that’s an overstatement personally, but let’s give it that size because that would be the size of all the portfolios of trade financing taking place in Latin America and the Caribbean.
And so, there’s about $430 billion that are completely untouched by financing.
And these are still sort of payment flows coming from the same place. So that means that in a large majority of the cases these are exporters, such as in Peru, that have sold to a company in Europe and are waiting an average of 54 days to get paid.
And we have seen that in portfolios that have been supplied by the exporters from Latin America. So, we’ve had input from our boots on the ground from Ecuador and from Peru. And these are good, reputable exporters that on average run balances of account receivables of tens of millions; hundreds of millions in the aggregate.
They wait 54 days on average to get paid from shipment, from bill of lading date until they actually collect. And if you think about it, the cost of capital for a guy in Peru and cost of capital for a guy in Europe, it’s completely different. Especially now with interest rates going up, not just the cost of capital, but the availability.
When interest rates are going up, what happens always in emerging market is liquidity dries up.
Because any excess liquidity coming from the Northern Hemisphere, from Europe or the US; that liquidity was going an extra mile to get some additional return. Now with interest rates going up, you don’t need to go that far: you can get your returns closer to home.
That’s what always happens in the market. When interest rates go up, liquidity immediately dries up in emerging market because it’s kind of the fringes in a way.
So that makes our offering all the more compelling to emerging markets because we can continue to provide liquidity.
At the risk of sounding controversial, it almost sounds like emerging markets are completely under the control of the developed markets in terms of what financing becomes available to them. As you said, it depends upon interest rates back home and that it’s very convenient, obviously for Europe to have a very poor continent on their doorstep, Africa, that they can essentially manipulate through finance.
South America has obviously very ambivalent opinions about North America, about America and their involvement in their geopolitics and their financing and they can reward regimes that they like and punish regimes that they don’t like. One is almost tempted to say there’s an imperialistic dynamic here.
Well, you were touching a point that I recently heard from a Princeton graduate in the US. She was basically saying, I don’t understand how can we be the poor and you be the rich when we have the resources.
Now, it is a reading that you can take and I don’t think the reading is factually incorrect. I think it is actually correct on the case.
You bring up the issue of politics or geopolitics and definitely trade finance is affected and impacted by geopolitics. I mean, we work with institutional investors from Europe and the US. So, we naturally will only be able to acquire the assets that you or I as pensioners will want to have in our pension pot.
This sort of brings up another issue that you also asked me about earlier when you asked about the ESG (Environmental, Social, Corporate Governance).
Yeah. Let’s get into that now.
Naturally, when we talk to one of these investors that are, you know, real money pension fund investors, they tell us that they want to exclude these industries. And some of these industries are quite meaningful in emerging markets because it’s commodities, right? Oil, for example, is one of them.
They say they don’t want to finance fossil fuels. They don’t want to finance coal. They don’t want to finance tobacco.
And that’s perfectly fine. And we can adapt and adjust and work with them.
And as a matter of fact, they also generally do not want to finance traders. They want to finance the producers.
So, they want to finance the producers of the goods and not necessarily the traders. It’s an interesting point that is very seldom brought up. So, that’s the impact of sort of geopolitics in trade financing.
But, you know, it’s not a blame game. I mean who’s responsible: you know, there’s a saying, ‘Is it the pig or the one who gives food to the pig?’
It’s history. It’s geopolitics. Shared responsibilities I think is the key. We have now the liquidity and the interest of institutional investors to invest in trade financing in emerging markets provided they can get it transparent; in a transparent and traceable manner.
And we can use technology to provide that transparency and that traceability to the asset that ensures that it’s compliant with their regulatory environment and their regulatory requirements.
And together with Tradeteq we can do just that. And so, it’s a great solution. We can provide liquidity to emerging markets from a source of funds that wasn’t there in the first place.
Yes. One final question. You’ve touched on ESG. And I’ve spent a long time looking at it. And I realized how complicated it is and how although we have people like the United Nations and the EU setting out how to achieve these goals and what they are and what you should be looking at. There’s a pick and mix element to this for many companies. You’re speaking to investors, as you said, to large institutions that have particular things that they are not interested in, as you mentioned, they’re not interested in oil, tobacco, obviously firearms, other things. What are the trends in what they require and how does that match ESG?
For example, so they’re worried about the environment. Are they reluctant to deal with countries with governance issues?
Yes. Just as they say, not these industries, so they say not these countries. Obviously, sanctioned countries and sanctioned individuals or companies are completely off limits. And then there are preferences. So, you know, investors can express their preferences.
So, not all institutional investors, for example, will not do mining. Some will not do mining; some will do mining.
Generally, most institutional investors will not do oil.
Again, I think always the danger here is that we sleep walk into what is naturally the banking model or the way banks think about trade finance.
Banks have their very strong clients that provide them with a lot of business, and they will continue to serve them. And these are the oil guys and the large commodity trading houses.
That’s their space. And that’s the Pareto Principle: you know, 80, 20, they get 80% of their business from their 20% of share.
So, I don’t see that changing. I don’t see us necessarily competing or, any rate, taking away any of their leadership in those spaces. They will continue to be leaders there.
Special thanks to Pablo for his wide-ranging insights and for his valuable time.
