A growing assembly of digital-first, small and medium-sized enterprise (SME)-focused origination actors – ranging from alternative lenders to B2B platforms – increasingly regard trade finance as a significant business opportunity. These players are uniquely positioned to bridge gaps in underserved markets, leveraging their digital capabilities and customer proximity to extend new sources of liquidity to their clients – and ultimately supporting efforts to address the record US$2.5trn trade finance gap.¹

One promising area of development is the number of links being forged between these new entrants and institutional liquidity providers. “By bridging the gap between innovative originators and institutional investors, the industry can create a more inclusive ecosystem that improves access to financing for SMEs, especially in emerging markets,” says André Casterman, Chief Executive of Trade Finance Distribution initiative (TFDi).

To make these connections, asset-backed securitisation (ABS) and private securitisation of trade finance assets are emerging as powerful drivers.² These capital markets practices – traditionally applied to other asset classes, such as mortgages or auto loans – offer a scalable and structured approach to mobilising liquidity for trade finance from institutional investors. But how exactly can this goal be achieved, and what are the related challenges and opportunities?

While flow has provided updates on this important potential source of additional trade finance liquidity in earlier reports (see below) and on Trade Finance TV, this article draws on additional insights gathered at the TFDi’s Trade Finance Investor Day 2024, held in November 2024.

ABS offers investors an opportunity to diversify their portfolio, giving them access to asset classes that they wouldn't otherwise reach in a pooled, rated and sometimes liquid format. So why is trade finance as an asset class being targeted? Put simply, trade finance as an asset class is not only generally diversified across products, industries and client types, it is also often characterised by low default rates, self-liquidation, and short tenors that make it a stable and attractive asset class for capital market investors.³

“We need to use the securitisation instrument to make the trade finance asset class more available for investors”
Guenther Poettler, Managing Director, Head Cross-Product Structuring, Deutsche Bank

This offers a potential win-win for both sides. By sharing risk with a broader investor pool, originators – in particular, the more balance sheet constrained incumbent players – can unlock the opportunity to support on a higher volume of trade finance transactions while continuing to meet their regulatory requirements.

“We need to use the securitisation instrument to make the trade finance asset class more available for investors,” says Guenther Poettler, Managing Director, Head Cross-Product Structuring, Deutsche Bank. “By raising the interest and demand, in particular by also striving for enhanced central bank acceptance globally as well as for a more beneficial regulatory treatment of trade finance exposures, we can make trade finance as an asset class more fungible and ultimately have a better risk return dynamic.”

There are, however, a host of associated challenges, including legal enforceability issues, regulatory non-compliance, operational challenges like tax leakage, dilution and set-off risks, and fraud, all of which require robust legal, structural, and monitoring measures to mitigate.

One specific complexity, for example, stems from the nature of the underlying trade receivables. As securitisation relies on consistent cash flows from the asset pool, payment interruption poses an ever-present risk across all asset classes. When it comes to trade finance as an asset class, however, the much shorter tenors of trade receivables – when compared to other securitised assets – presents unique difficulties. As trade receivables mature, originators need to be able replenish the portfolio with new, high-quality assets.

Rating agency methodologies and extensive, data-driven analysis play a central role in determining whether this topping-up can be achieved and raises the bar for larger, multi-tranche securitisation transactions – especially for those that involve riskier SME lending or emerging origination entrants.

Collaboration, rather than competition, could be the key to overcoming many of these hurdles. “We've seen in payments new entrants often trying to fight the incumbents. On the trade finance side, we haven't seen the same appetite to fight from the big banks, even from really large private debt funds,” reports Casterman.

Instead, major private debt funds, alternative lenders, and even fintech platforms are increasingly seeking partnerships with banks, credit insurers, and development institutions to scale their operations. This collaboration extends across the entire transaction cycle, from origination to risk management to liquidity provision – with the integration of technical innovations beginning to transform the market.

“End-to-end workflow automation reduces operational and utilisation risks”
Christoph Gugelmann, CEO and Founder, Tradeteq

One notable example of this innovation is Tradeteq, a fintech that is using an AI-powered trade finance investment platform to streamline trade asset distribution, enhancing efficiency for both investors and originators while also mitigating some of the associated risks.

We are not claiming to eliminate every operational risk, but we can mitigate a significant portion,” says Christoph Gugelmann, CEO and Founder of Tradeteq. “End-to-end workflow automation reduces operational and utilisation risks, making trade receivables sufficiently predictable for the first time to enable wider distribution in structured credit markets."

Technologies such as blockchain and tokenisation, though still at an early stage, also hold significant promise in terms of unlocking transparency, efficiency and accessibility to new liquidity pools in the future. In the capital markets space more broadly, asset tokenisation is already an emerging topic, with BlackRock – the world's largest asset manager – announcing plans last March to tokenise US$10trn of its assets, in partnership with fintech Securitize.⁴

As the tokenisation market continues to show promise for trade finance and other classes, there is a risk that the technology remains ahead of policy, with legal rights for digital assets still unclear, particularly as they move across jurisdictions. Once greater clarity develops, it is hoped that the wider adoption of tokenised assets, focused on relevant use cases, will take off.

As the trade finance industry seeks to capitalise on growing interest from institutional investors, one potential obstacle to progress is the lack of digitalisation in the space. Traditional trade finance still relies heavily on the issuance and transfer of physical documentation, with the manual nature of these processes prone to inefficiencies and a lack of transparency. When it comes to packaging trade finance instruments into investible securities, these underlying challenges mean that a reliable flow of real-time data on transaction performance may be difficult to achieve, which can negatively impact investor confidence and scalability.

Digitalisation in trade finance could enhance access to high-quality, real-time data to improve asset origination and distribution. “Having those additional data points and transparency would enable the market to develop products and to develop markets which, to this date, are insufficiently served – including SMEs in Africa and APAC,” explains Richard Wulff, Executive Director of the International Credit Insurance and Surety Association (ICISA).

On the distribution side, improved transparency and data standardisation would also bolster investor confidence, supporting securitisation and liquidity in secondary markets. “The obvious one is cost efficiency in terms of the people involved in the process and how quickly we can facilitate data, and this actually also drives the scalability,” comments Poettler. “The other is the transparency element, where we can build the reliance, the trust and the data that we can pass on, not just internally to our risk department, but also to our investors.”

There are legislative steps that can – and are – being taken to address digitalisation in trade. Over the past couple of years, efforts to remove the legal barriers that have historically prevented wider trade digitalisation have gained momentum. For example, leveraging the work done by the UN Commission on International Trade Law (UNCITRAL) on its Model Law on Electronic Transferable Records (MLETR), the UK passed the Electronic Trade Documents Act (ETDA) in 2023, which grants digital trade documentation the same legal recognition of their physical counterparts.

This landmark legislation has facilitated the journey towards digital trade finance in the UK while also offering a blueprint for other jurisdictions to follow, with France enacting similar legislation in June 2024. While this was made somewhat easier by the advocacy efforts in the US, the push for legal change met a degree of resistance. A lack of understanding in the market exposed a need to connect across all the actors involved in global trade, whether commercial, financial, transport and logistics or regulatory and customs.

“Trade finance was not well known by a number of stakeholders, including by those at the top of the banks, corporates and the government itself,” notes Philippe Henry, Advisor on Digital Trade to the French Government. “We found that each of them was looking at digitalisation on a vertical basis, where, in reality, the objective is really to create a single window so that we could share more intelligently digital data horizontally.”
As more countries align with the MLETR, the expanding pool of digital trade data will foster greater transparency in trade portfolios while also strengthening investor confidence – creating a more scalable, efficient, and trusted market for trade finance securitisations.

While this coordination and advocacy was enough to get the trade digitalisation legislation across the line in France, a wider educational challenge still lies on the horizon. The European Capital Markets Union (CMU) – the plan to create a single market for capital in Europe – is currently under discussion, and without a clear articulation of the role that trade finance as an asset class can play the market risks being left behind.⁵

One of the challenges is that many of the discussions around the ABS market are drawn back to the traditional asset classes that have long defined the space. The goal, therefore, is to position this asset class as a key enabler of the CMU vision, emphasising how it can drive meaningful progress by introducing something new and impactful, rather than simply expanding existing asset classes that are already widely accepted by institutional investors.

“I don't think there are any significant obstacles or resistance. It's primarily an educational phase with the politicians and the European Commission to align our goals suggests Casterman. “Their focus is on the CMU, while ours is on positioning the trade as an asset class for institutional investors and securitisation. The challenge lies in joining the dots and integrating our ambition with theirs.”

The insights contained in this article were shared at the Trade Finance Investor Day 2024, held at the Four Seasons Hotel, Park Lane, London in November 2024

Sources

¹ See adb.org
² For an explainer on the private credit market, see  Private credit – a rising asset class explained at flow.db.com
³ See TRAFIN 2023-1: Deutsche Bank closes fifth trade finance securitisation at corporates.db.com
⁴ See forbes.com
⁵ See finance.ec.europa.eu