FROM MAGAZINE: Trade finance and logistics will merge in future

With clients in 31 countries, the UK-based fintech PrimaDollar’s finance product aims to bridge the time gap involved in international trade. The company’s CEO Tim Nicolle explains how mid cap companies are being the drivers of change in trade finance. Nicolle also revealed that the company has been serving more than 10 percent of the Bangladeshi garment industry by value today.

How does PrimaDollar help exporters in ease of doing business?
When an exporter ships his goods, we pay him in cash, and his buyer pays him later. We take the buyer’s credit risk. Basically, we provide finance to the exporter, on the basis of his buyer. Here in India, there is a lot of drama around non-performing loans (NPLs), bank liquidity and other restrictions coming in from the Reserve Bank of India (RBI). This does not affect us as we are giving money to Indian exporters on the strength of their customers offshore. We can provide money to them when banks cannot. This is really a golden opportunity for Indian exporters. Banks tend to make decisions on credit for today, based on yesterday. But when you are running a company, you worry about your credit for tomorrow, not for yesterday. So there are a lot of businesses that could grow faster, make more money, have better margins, and attract more customers - if they took liquidity from a company like us, because we don't ask for collateral. Our money is non-recourse.

We want to work with creditworthy buyers and supply chains that are reliable, and that is not because we have got lots of risks. If the exporter does not ship the right stuff, the buyer is going to argue on it. Being in a low margin industry, it takes up a lot of our time talking to the buyer trying to sort it out. So, we like reliable, sensible, and simple supply chains. We work in consumer electronics, garments, pharmaceuticals, industrial products, car parts, and few perishables. We tend to avoid bulk.

Currently, we do finance for trade between India to Australia, India to the US, India to Europe, and India to South America. We may have solutions for Africa in the future. We are putting money in India as low as 4 percent and there is a strong demand for liquidity at that price.

Is there any reason to avoid financing for bulk goods exporters?
Typically, the buyer of bulk goods is a trader, and very rarely, it is properly off taken. If you are selling grain, it will be on pay-and-take basis to the wholesalers. If the buyer does not pay, PrimaDollar ends up owning a container full of rice. What we are going to do with it, we have no idea. So pay-and-take does not really work as a financial product for trade partners.

Could you justify your claim on your letter of credit (LC) being cheaper, simpler, and quicker compared to banks?
LCs are less than 8 percent market share of world trade. Earlier, it was around 50 percent. However, year-on-year, it is going down. Why is this happening? In the old days, it was sent by telex and every word was being paid. Thus, it used to be short and the conditions were easy to meet. Now with all sent by SWIFT, people write long set of conditions. We work with banks in Bangladesh, where they do a billion dollars LC business in a year, with zero percent compliance. Banks make things complicated. It is not their fault; they have to deal with regulators, sanctions, money laundering, politics, and all sorts of pressures. I have not yet met a customer who is happy with an LC product. Today, the only alternative is self-financing and 92 percent of the market is built on it. Either the buyer is paying early, or the exporter is giving credit and waiting to get the cash. Now, there are plenty of guarantees and insurance products to mitigate risks, but they do not provide finance. Hence, LC is not like other fintech products, which is going to disrupt the banking market as banks do not have such a product. So this is a business where you have to turn up with a working product. Talking about our LC being cheaper, when you add up the fees that the exporter pays for documents, amendments, processing, payments, recharges, inspecting documents, it is about 5 percent of the invoice value. We charge one and a half percent of the invoice value.

How did you establish a strong foot print in the Bangladesh apparel market?
When we set up PrimaDollar, we realised very quickly that there was nobody to hire who knew how to do this. It is not like mortgages, car loans or credit cards where you have people who know this business model. This was a proper blue ocean. The only working capital product in this market is LC. We started in Bangladesh with an office in 2015. It is a simple country from an export perspective because it is all garments, which means you can develop deep expertise in understanding the credit of the buyers. Here, you can price it properly and manage the risk. What we did not realise was how tough that market is in terms of margins. We were in the toughest supply chain but we learnt how to trade and sell our products in that market. Today, more than 10 percent of the Bangladeshi garment industry, by value, is served by us and they are those people who have never taken trade finance before from a non-bank.

How will trade financing change the customer journey in the logistics business?
Trade finance and logistics are going to merge. In the future, the exporter will get his trade finance from his logistics provider in an electronic fashion. So when an exporter has stuffed his container and is sitting in his yard, he can log into the freight forwarders’ portal. He can upload advanced shipping notice (ASN), which says, ‘Come and take the box’. At that moment, we can insert a credit dashboard, which says ‘here is your credit limit, would you like to purchase what is in the box?’ Press the button, take the cash, the shipping line will take responsibility for collecting the money later. For this platform, our IT departmentis trying to put our credit dashboards inside the portals of the logistics companies. This will be a one-stop solution for the customer. We will soon implement it in India. The first step is, just researching and proving that exporters will take finance from a logistics partner. Then understanding the price points and working with a logistics partner to understand how to create a brand new product.

Is there any particular turnover needed by the exporting company to procure funds?
Our margin is based on how much money we put to work. So if the trade is small, you have to work a lot harder to cover all your costs. Eighty percent of the exports are done by only 5 percent of the exporters, which is done by big entities. Hence, SMEs are crammed into 2 or 3 percent by value. They are our clients and are getting cheaper money from us than they expect. The interesting part of the markets is the mid capital, which is 18-20 percent of the market by value, with a turnover from $50 million to $5 billion. They have great clients, regular supply chains, reliable, professional, and do good numbers. To target this sector, you have to get your price down. So we have smart financial engineering on the funding side of our business. Our pricing is much more into the middle capital. We have clients whose turnover is billion dollars a year.