Digitise-to-distribute: How technology is expanding the scope of trade finance investors

Alternative investors are key contributors in bridging financing gaps and transforming industry dynamics. The team at Santander CIB highlights the role of digitisation in attracting new entrants to the trade finance market.

Digitisation in trade finance is a hot topic for an industry that has for centuries relied on paper and whose multiparty and cross-border nature poses significant obstacles to streamlining and automating its processes.

Despite being a challenging ambition, the benefits for corporates and banks of investing in new technology are enormous: it significantly reduces time, costs and operational errors, thus increasing efficiency and maximising volumes, which ultimately makes participation in international trade and access to competitive financing more inclusive.

Because of its plethora of advantages, the digital transformation of trade is speeding up. Those players who are not able to keep up with the latest technological advances risk losing competitiveness and being sentenced to disappear in the long term. Santander Corporate and Investment Banking (Santander CIB) is committed to pioneering this new environment and anticipating the needs arising from the digitisation journey its clients have embarked on.

“As a global bank, we have the right infrastructure, capital and risk management capabilities to position ourselves at the centre of the ecosystem and act as anchors for our corporate clients to connect them to all of the different players in the trade finance arena and provide them with the best value proposition,” says Enrique Rico, global head of trade and working capital solutions at Santander CIB.

This collaborative approach has led the team to become investors in trade finance platform Komgo, partner with fintech Two and insurer Allianz Trade to support clients in increasing their digital B2B sales, and ally with software provider SAP to embed their receivables and supply chain finance solutions into corporates’ ERPs.

Unlocking the power of digitisation

But digitisation not only boosts collaboration among the financial and technological industries. It also enables banks to form intra-industry partnerships that offer larger and more comprehensive trade finance solutions, meeting all client needs and simplifying their lives.

The latest technological developments have propelled the standardisation and automation of processes and templates, significantly enhancing banks’ syndication and distribution capabilities. This transformation has unlocked the potential of trade finance assets, which have been traditionally very difficult to distribute.

“The originate-to-distribute model most big banks follow is vital for financial institutions to comply with capital requirements, manage credit risk and ensure liquidity,” says Rico. “But being able to structure a multi-bank solution is also key for our clients, especially when we are talking about large multinationals in need of centralising the trade finance and working capital requirements of their different subsidiaries,” he adds.

Multi-funder programmes are inevitable when attempting to achieve the scalability and broad geographical scope that most big corporates demand. Diversifying the pool of funding sources also contributes to underpinning a programme’s resilience and flexibility to meet peak utilisation.

“We have recently closed a multi-billion supply chain finance facility with a major energy player including several buying entities located in three different continents,” explains Ángel Bustos, global head of supply chain finance at Santander CIB. “Without a multibank approach, no institution would have had such a massive appetite for a single group and the company would have been forced to manage several facilities, each with its own platform, legal documentation and operational processes.”

Santander CIB’s multi-funder supply chain finance platform

With its multi-bank white-label digital platform, Santander CIB offers its clients the possibility of structuring global facilities with a single point of entry and seamless process. Both buyers and suppliers deal exclusively with Santander CIB as fronting bank, while the other funders benefit from a digitised process under which invoices are automatically assigned, sold and finally paid to each participant according to their quota.

To achieve this, the bank has consistently invested an average of US$20mn annually over the past years in cutting-edge technology to fully digitise its supply chain finance platform, simplify the supplier onboarding and payment processes, and open it up to other banks and investors.

“Alongside other major connectivity achievements, like the integration of our solution into the clients’ ERP, the multibank funding structure we have implemented has been an inflexion point in our offering,” says Bustos. “Thanks to a flexible and automated distribution model, we have expanded the possibilities of participation alternatives for investors in terms of countries coverage, currencies, appetite, and funded or unfunded options.”

Even the buyer can invest its own excess liquidity in its programme via a dynamic discounting module that allows it to buy back discounted invoices before the maturity date.

The bank estimates that two in three supply chain finance programmes will include a multi-funder approach by 2025. This is a major win for trade finance assets, which have been traditionally very difficult to distribute, mainly because of the lack of automation and harmonisation.

New investors expand trade finance horizons

Despite their anticyclical behaviour and low-risk profile – attributable to their commercial basis and short-term nature – trade finance assets have significantly less access to capital markets compared to other financial assets, such as mortgages or bonds.

This trend, however, has been shifting lately, with many private equity funds and asset managers showing interest in the multi-trillion-dollar, self-liquidating asset class of trade finance. As an example, Santander Alternative Investments recently created two funds to allow investors access trade finance assets and its “low default rates and high recovery rates”.

“The entry of private investors into the trade finance space is excellent news for traditional banks, since the current scale of the trade finance distribution universe is not enough to meet the increasingly tighter capital requirements and faces liquidity constraints,” explains Rico.

“Non-bank investors are helping banks alleviate these limitations, but more importantly they are opening new roads of origination and will bring alternative sources for growth.”

Indeed, emerging trade finance investors are poised to inject fresh capital into the current trade finance landscape, reigniting an appetite for developing countries, sub-investment grade companies, and SMEs – markets traditionally challenged in accessing financing. As they expand the scope of origination for banks, alternative investors play a crucial role in bridging the US$2tn trade finance gap.

However, for the distribution process to function effectively, participants cannot rely on manual intervention.

With increasing volumes and a growing number of investors, having robust technological infrastructure becomes essential. Only banks committed to digitisation will be positioned to lead this transformation and assume a central role in the evolving trade finance ecosystem.

At Santander CIB, we have warmly embraced this call to action.