How do you trade assets worth a trillion?
Charles Schram, ex-chairman of the Kauffman Foundation, nailed it. In a recent article in the Wall Street Journal, he categorically stated: “According to data from the Bureau of Labour Statistics, Americans who are 35 or older are 50 per cent more likely to start a business than are their younger counterparts. A study in 2009 by the Kauffman Foundation (which I then headed) showed that the average entrepreneur was 39 when starting a company. It also found that mid-career entrepreneurs were nearly 5 times more likely to have a going concern 5 years later than those starting a business right out of college.”
During research for this column, the writer often comes across “millennial hype-machine” conversations with wannabe entrepreneurs who’ve learnt a few buzzwords. They soak up coco-lattes hunched up over Macbooks and paint piein-the-sky pictures about disruption. Of course, without sound business cases, they don’t make it to this column.
Banking is an industry. Some startups often talk about the “Kodak moment” in the same sentence as banking. Without understanding a simple truth. Photography didn’t disappear when Kodak lost its grip on the industry. Taxi rides did not disappear with the appearance of Uber and Careem. The model changes but not the underlying business dynamic. It takes years of experience of doing real stuff to recognise that.
The background
The World Trade Organisation estimated that merchant exports (cross-border) were about $15.6 trillion in 2016. A large part of these exports are facilitated by instruments commonly known as letters-of-credit. Anybody who has been in banking appreciates the humongous value of this instrument class. Its various forms are mind-boggling. It has moved beyond the trade finance realm and created a massive secured and unsecured consumer lending business. Even the ubiquitous credit card is one such form. So if you truly look at it, the business of short-term credit to manage payments is much bigger than its origins in trade finance.
The UAE is strategically located to facilitate asset trading across a targeted number of trade corridors. Some important ones are those that originate and terminate in the Middle East, Turkey, India, Bangladesh and Africa from across the world. These corridors have a viable share of the $3 trillion global primary and secondary asset market.
The company
Tapping into this value pool is TradeAssets (www.tradeassets. online). TradeAssets is the market name for the startup powered by Fintech Innovations International, a company cofounded and headed by veteran bankers who have made the UAE their base. Lakshmanan Sankaran with over 3 decades of senior banking experience in the UAE and in India is the chairman and CEO. Sumit Roy with over 2 decades of experience has worked globally with American Express Bank and Deutsche Bank is the president and CMO. The chief strategy officer is New York-based Ramaswamy Madhavan, with over 4 decades of senior decision making roles in Standard Chartered Bank, American Express Bank and State Bank of India.
Speaking about the business, Roy explained that in trade finance, credit facilities, instruments or loans are termed as assets. And each bank has frameworks or policies which govern the kinds of assets that can be kept on its books. This exposure could relate to the country of origin of the asset, the industry type, the size or a number of other criteria. This exposure has limits primarily to contain the type of risk that the bank is willing to take. Consequently, bankers trade assets to balance their portfolios so that they are within the overall policy requirements. As is true in any business, a market gets created when there is an equilibrium of demand-and-supply. Assets that one bank may not want to keep on its books may be the exact ones that another bank wants to onboard.
How it works
The actual process of making these assets available for trading is complex, imprecise and highly human-resource intensive. Quite often, the demand-supply equilibrium is not achieved. Multiple channels of communication — phone, email, fax, face-to-face and non-standardised contracts many of which are verbal and based on worksheets lead to inefficiencies. The founders tapped into their knowledge base and distilled it to achieve a blockchain based platform that allows any bank to connect up and either make available assets for trading or buy them in real time.
Each transaction is precisely and perfectly recorded on the blockchain. The platform is built on the Hyperledger fabric 1.0, a blockchain implementation hosted by Linux foundation, providing an enterprise-grade foundation for transactional applications.
The fact that the TradeAssets platform is online and available 24x7 means that it is not geographically restricted to the UAE or the Middle East. Also, since banks do not have to technologically integrate with the platform, it is immediately available for use. The speed, transparency and user-friendly pricing model would appear to point towards adoption by financial institutions. Like all marketplaces, the success will depend on the number of active participants.
An interesting business model, headed by practitioners who are using their well-honed expertise to attempt to create value through efficiency.