Looking at ‘Tech’ in Trade Finance: Trends for 2024

As we enter 2024, significant developments from a convergence of trade finance and technology perspectives are on the horizon. The joining of these two domains is set to redefine how we approach financial services and transactions. In this context, three key trends take centre stage; a) the continued surge in digital lending, b) the commercialization of the Central Bank Digital Currency (CBDC) with the digital rupee from current ongoing pilots, and c) the transformative potential of tokenization use cases in the financing sphere. Let’s find out more.

The Digital Lending surge for CFO’s last mile partners

Two key factors are expected to drive the predicted increase in digital lending for MSMEs. Firstly, the growing presence of MSMEs on digital platforms like the Open Network for Digital Commerce (ONDC) and the E-government marketplace (EGM) is anticipated to boost their engagement with embedded digital lending services. This trend is set to amplify as MSMEs increasingly conduct business on these platforms.

Secondly, as MSMEs establish partnerships with larger, more credit-worthy anchors boasting superior vintage and financial performance, their access to digital lending is poised to expand. Recognition within a broader value chain for their credibility and business dealings with reputable partners contributes to their enhanced standing, facilitating increased access to digital lending opportunities. For the CFO, this better interconnected financial ecosystem translates into enhanced risk management. The inclusion of financially empowered counterparties contributes to a more resilient supply network, minimizing disruptions and bolstering the overall stability of the company’s operations.

Quicker, more traceable, and cheaper cost for B2B transactions:

The RBI’s pilot launch of the Central Bank Digital Currency (CBDC), is a legal tender in digital form predicted to ensure more secure and efficient transactions.In retail (CBDC-R), the this initiative is targeted towards promoting financial inclusion, also catering to offline transactions and benefiting diverse segments, including the last mile. Meanwhile, on the wholesale side, particularly in cross- border transactions, the digital rupee aims to streamline processes, reducing timeline, costs and overall friction. For cross border remittances, CFOs can expect the e-rupee to reduce the cost of such payments to 2-3 percent.

Crucially, the digital rupee even adds to India’s Digital Public Infrastructure (DPI), for example: take its unique use- case related to subsidies and restricting wrong usage of the same. By offering offline yet trackable access to funds, CBDCs ensure specific and targeted subsidy distribution. Thus, ensuring the subsidy amount is used only as intended. Moreover, getting all populations used to the digital rupee fosters a transition to a digital-savvy population. There are umpteen such examples on the CBDC-R / CBDC-W front which can benefit an emerging market such as India.

Tokenization for fractional asset investments for a more diverse portfolio

Tokenization is set to revolutionize investment strategies, marking a significant departure in how assets are approached. The tokenization of Real-World Assets (RWA), spanning from real estate to invoices to Trade documents and even securities, is predicted to enhance capital accessibility for MSMEs and encourage the development of a secondary market for such assets. This shift comes from the option for investors to opt for fractional investments, instead of committing a substantial sum to an asset like a real estate project, shares, or gold. For Finance Professionals, this introduces a new approach to asset management and investment strategies. Fractional investments allow for risk mitigation, via a more diversified investment portfolio with reduced exposure to any singular asset.

Contributing to this transformative charge is Vayana’s Emerging Tech Platforms Division, leveraging cutting-edge technologies such as blockchain, CBDC infrastructure, and tokenization to facilitate affordable trade-credit access for MSMEs on a global scale. The Team is highly active with deployments in the GCC & APAC region already with developed markets such as Europe & USA in near term Radar. Anticipate a paradigm shift in the investment landscape as tokenization introduces enhanced liquidity, access to untapped markets, improved transparency, and reduced costs.

In the coming year, the intertwining of finance and technology brings about tangible shifts in how we approach financial services. Digital lending, the digital rupee, and tokenization will play pivotal roles, offering down-to-earth changes in efficiency and accessibility. As we learn more about these trends, the focus is on practical advancements that reshape financial practices and offer concrete opportunities for inclusivity in trade finance.