Little wonder, then, that just as the Fed was raising rates and everyone was rushing to sell down stocks, companies that bought back their own shares did relatively better than those that did not buy back any of their own shares or only paid out dividends. In 2021, the world’s biggest purchasers of their own stocks were iPhone maker Apple, software behemoth Microsoft, social media supremo Facebook’s owner Meta Platforms, search giant Google’s parent Alphabet, and another large software firm Oracle. Those five firms accounted for 28% of buybacks in the US. In 2022, the order of the top five companies buying back their own shares changed slightly, with the oil giant ExxonMobil replacing Oracle.
Buybacks and dividends
Here is a simple primer on dividends and buybacks. When a company is hoarding a ton of profit, it can spend it on expansion like a new plant or buying out another company, on hiring more workers, or on R&D. Or it can pay the profit out as dividends or buy back its own shares. Dividends and stock buybacks are just different ways to distribute income to shareholders.
If trade is the gear that drives the global economy, trade finance is the oil that keeps the equipment turning.
On a macro-level, trade finance is crucial in facilitating the movement of goods across borders. It helps generate investment and employment while ensuring the population's needs are met. Furthermore, trade finance enables companies to participate in global trade by providing cash flow and risk mitigation, finding new markets, expanding their business, and capturing new revenue streams.
While trade finance underpins every phase of the global supply chain and is pivotal for the economy's growth, the world faces a chronic and vast trade finance gap. According to the Asia Development Bank (ADB), the global trade finance gap widened to US$1.7 trillion in 2020, a 15% increase from US$1.5 trillion in 2018.
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Not surprisingly, small and medium-sized enterprises (SMEs) continue to be most impacted by the trade finance gap. Although SMEs comprise just 23% of all trade finance applications, more than two in five trade finance requests rejected by banks were from SMEs.
The pandemic has weakened the financial situation of SMEs, and they continue to struggle to prove creditworthiness to traditional banks. They might be left not financed due to the perceived risks.
Banks also focus their funding on established relationships and businesses to lower default risks, a trend that has left many worthy SMEs without an option for trade finance. It limits their ability to grow their business and participate in global trade.
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Digitalisation increasing access to trade finance for SMEs
The ongoing economic volatility and widening trade finance gap highlight the urgent need to revamp the entire ecosystem.
Tech-enabled innovations can shape the future of trade finance by making it more accessible and equitable for SMEs. They can also alleviate many key challenges SMEs face when sourcing for working capital to fuel new growth opportunities and participate in global trade.
One of the significant barriers that digital technology can address is around Know-Your-Customer (KYC) and Anti-Money laundering (AML) procedures. These processes can often be too resource- intensive and time consuming for resource-constraint SMEs.
Additionally, an Asian Development Bank survey found that banks rejected approximately 45% of the trade finance applications from SMEs primarily due to tighter AML and KYC regulations. While these compliance requirements improve transparency and combat financial misdeeds, they can also prevent promising SMEs from receiving financial support.
Digital technology, such as automation and real-time data, can enhance process efficiencies and accelerate onboarding time for SMEs. Moreover, the industry is looking at the centralisation of KYC databases. It will facilitate information sharing for trade finance providers and reduce redundancies and costs, helping SMEs adhere to KYC and AML regulations.
The industry's heavy dependence on paper can also undermine SMEs' ability to access trade financing as the quality and legitimacy of their documentation are often called into question. However, with digital solutions such as blockchain and electronic documentation, trade finance players can eradicate the delays and errors associated with paper documents and significantly reduce the vulnerability to forgery and fraud.
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In the trade finance environment, we must digitalise the bill of lading (BL). The core marine document is an essential negotiable document in cross border trade transactions. We can optimise traceability with an electronic BL by managing and tracking payments from start to finish. It facilitates greater transparency and security for each transaction, minimising documentation disputes for SMEs.
Furthermore, solutions leveraging big data and artificial intelligence can meaningfully interpret various data and information sources. It gives rise to a broad spectrum of self-service credit assessment tools for SMEs, which can help worthy SMEs to prove their creditworthiness and secure the funding they need to trade globally.
Greater collaboration needed to create a more cohesive trade finance ecosystem
One of the silver linings emerging from the COVID-19 pandemic is that organisations in the global trade finance ecosystem are intensifying digitalisation efforts. We see this trend as likely to continue or even accelerate in 2022.
Whilst important, digital technology is just one part of the equation. Today, end-to-end digitalisation across the trade finance ecosystem remains fragmented. Many digital solutions are also not interoperable.
To unlock and harness the maximum potential of digital technology, the entire ecosystem – including regulators, border agencies, financial players, and businesses – must work together to co-create solutions and drive adoption. For instance, technology companies can partner with financial players to develop a white-label digital platform that allows different fintech players to deliver their services and mitigate the risk of fraud.
The demand for trade finance solutions today far exceeds what the market can supply, and there are many ways that trade finance ecosystem players can collaborate to address this gap. By building stronger, strategic partnerships and pooling together their collective expertise, they can develop more holistic solutions, drive better outcomes, and ultimately make a more significant difference when addressing the market's unmet demands.
Morgan Terigi is the chief executive officer and co-founder of Incomlend
