Treasurer Spotlight10 Minutes With The TreasuryCase study: Disrupting trade finance with technology for the good of the business

Case study: Disrupting trade finance with technology for the good of the business

Nitin Jain, Head of Treasury and Capital Markets at Agrocorp, discusses how the Agri-commodity trading and processing business is using technology to overcome trading challenges, focusing efforts on Blockchain and developing an ongoing process of digitalization.

Please tell us more about Agrocorp.

Agrocorp’s beginnings can be traced back to 1990, where we operated from shared office spaces in Singapore, trading mono-sodium glutamate and galvanised iron to Myanmar with a start-up capital of SGD25,000.

Today, we are a leading global Agri-Commodity trading and processing company specializing in the physical trading of agricultural commodities such as pulses, wheat, rice, oilseeds, sugar, cotton and edible nuts, oil and corn, with a global presence comprising 22 offices in 13 countries including Australia, Canada, China, India, Singapore, Myanmar, Ukraine, Vietnam, UAE, Turkey, Ivory Coast. We have customers in over 30 countries.

The processing arm was founded in 2012 with a flagship plant in Moose Jaw, Saskatchewan in Canada. We have now expanded into four countries, handling 700,000 metric tonnes of goods across eight plants. We process a wide range of commodities across the globe, transporting them to the places they will be consumed.

What is the value of Agrocorp’s trade?

From USD 1 billion in revenue in 2013, we’ve grown to record trade volumes of over 9.4 million metric tonnes of commodities, with revenues exceeding USD 4 billion.

Over the last five years we’ve seen 40 per cent CARG growth year on year. We expect to surpass revenues of USD 10 billion in 2021, with expansion plans in the pipeline, including both organic and inorganic growth.

How many staff do you have?

Our team of 500 professionals and associates in 24 countries draws together the worlds of food, agriculture, nutrition and risk management. As a result, Agrocorp has specialized, experienced staff in the key areas of origination, structuring, distribution, operations, tax and legal. Agrocorp’s structured finance and risk management team provides financial solutions that facilitate trade and mitigate trade-related risks for companies doing business in emerging and developed markets.

We work closely with customers, to create financing structures that enable the buying and selling of agricultural and other commodities while mitigating risks associated with cross-border transactions.

Since our formation, we’ve been committed to bringing high standards of operational excellence and risk management to our customers. Our understanding of global markets, commodity trade flows, the commercial aspects of international trade, and financial institutions allows us to play a key role in helping our customers and Agrocorp serve, grow and thrive in new markets.

Are you using technology to help with your trade finance development?

There are many areas where we are trying to introduce automation and digitization, including treasury, trade finance and accounts. Some of the key systems are now live and some of the systems are in the implementation phase. Over the last few years a lot of processes and information management has been automated.

Why have such a focus on technology?

To sustain a competitive edge over our competition, it’s important to embrace new technology. For example, today we connect with 15+ banks on our currency and money market requirement and all the interaction is via digital interface.

We are in process of implementing systems like TMS, RPA and have even deployed an enterprise wide Blockchain solution for our supply chain. We are connected with three banks via a private Blockchain platform and we believe we will be connecting another three or four later this year. We have closed more than 50 transactions worth USD 200 Million. On this private blockchain we have multiple parties, from farmers, shippers, banks, insurer, end customer.

Please tell us more about your Blockchain efforts and how you think it can disrupt trade finance?

Efficient global trade of physical goods relies on the availability of three key factors: credit, solid logistics and transparent payment.

Trade finance addresses the challenges with well-established instruments to issue credit, document the transfer of exported or imported goods and execute subsequent payments. Yet, despite its established nature, the trade finance business is becoming harder to manage than ever.

Traditionally, the business has targeted exporters and importers of a certain size. Only mid-range to larger players have been able to afford trade finance services such as issuance of letters of credit and payment services on the buyer’s side, as well as creation of bills of lading on the seller’s side. The combination of these two instruments, along with the respective shipping and payment processes, form the foundation of traditional trade finance. But change is, inevitably, heading to disrupt tradition.

As a group we feel trade finance is ripe for disruption. There is real potential for significant growth in both the scope of services and the scale, by utilizing Blockchain.

What are the key trading challenges that you are trying to overcome with this technology?

For us there are three key challenges:

  1. Poor customer experience: The need for a high degree of coordination effort across the complex landscape of exporters, importers, issuing and advising banks leads to adverse effects. These include overly complicated processes, long waiting times with low transparency and high levels of uncertainty, given the increasingly international scope of transactions. Furthermore, as an importer, we still face the delivery risk of fraudulent shipments, even if the transaction is backed by the “insurance factor” of a letter of credit.
  2. Increasing cost pressure: Creation of letters of credit is associated with high costs for both the bank and clients. Dispute resolution can be complex and is also costly. And the current restricted profile of viable trade finance customers means limited scalability. There is little potential within the status quo to reduce costs by building a volume business among an untapped customer base.
  3. Substantial regulatory burden: Management of geopolitical risks, such as sanctions and trade barriers, together with fraud prevention, KYC and AML requirements are growing as mandatory elements of the trade finance business. This drives up operational overheads even further.

The current trade finance model has built-in vulnerability. There is vulnerability at the heart of trade finance’s traditional focus on transactions that can be highly complex, global in scope, and expensive to execute. The business seriously and urgently needs significant reductions in cost and fresh sources of revenue and therefore there’s potential in building an open, automated and “thrustless” platform. The key here is open.

Do you think this is possible?

One strong potential solution lies in breaking out of trade finance providers’ traditional confines and thinking across the wider landscape. But for this to happen, previously closed systems need to open.

In fact, they must, if banks realistically expect to harness untapped market potential. If they don’t, disruptive niche players will exploit it instead, leveraging innovative technology-based solutions. Meaningful change demands nothing short of a paradigm shift. The move will be away from only providing a bespoke service to a limited set of clients who can afford high fees. By contrast, Capco Digital envisions a marketplace where any exporter or importer can easily and quickly gain access to credit issuance or advisory services.

Our Blockchain solution also reduces cost and efficiency as lot of paper is digitized. It also adds to visibility and traceability as we can track the end farmer. We also have built in ‘lite KYC’ for every new customer.

What are the other benefits of using your Blockchain platform?

Benefits include being able to offer supply chain participants with real-time updates on commodity prices and delivery information, and trade financing approval for orders coming in from any part of the world.

With the implementation of the blockchain platform, Agrocorp and its counterparties are able to enjoy a more seamless and secure transfer of goods, ownership and payments. The streamlined process also bodes well for cost savings, as it cuts Agrocorp’s average working capital cycle by about 20 days. This means more time to focus on developing new supply and customer networks to broaden global reach.

Our vision is to cover various different areas, split into buyer, seller and internal process/framework as follows:

Buyer Centric: PO financing for buyers

Seller Centric: Distributor finance, Account receivable, PO financing for sellers, Factoring, Forfeiting

Framework: Lite KYC, Smart contract, Bank payment obligation, Reconciliation, Host to host ERP connectivity, Digital BL, digital insurance, 24×7 tracking

How do you ensure Agrocorp’s people buy into the changes?

Well the new technology is groundbreaking. Humans naturally resist change, so while we are invested in technology, we are also investing in training and educating users. Incentives also come into play.

For example, we provide incentives to our end customers to come to the platform by offering competitive rates. In the end, I would say, we are in the first wave of digitization of trade finance. Today to make it a success we are investing in technology, training and increased awareness internally and externally, change management.

What does the future look like?

We are closely watching developments around Blockchain-based bonds. Issuance of corporate bonds is a lucrative business for Wall Street. Last year 3.5 trillion worth of bonds were issued, and investment banks control this market because they have access to these fund managers. But once these digital blockchain-based bonds become acceptable the reach would be global and reduced slippages across investment classes would happen.

This is really exciting for us – hopefully it’ll be in our next wave of digitalization.

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