André Casterman, founder of Casterman Advisory, advises fintechs and financial institutions on trade finance, capital markets, and digital asset technology. Casterman spent 24 years at Swift, where he led various innovations in the interbank payments, corporate finance, and trade finance markets. He helped create the first digital trade payment instrument. Casterman is a board member of the International Trade Abandonment Association (ITFA), with a focus on helping banks digitize trade finance and establish it as an investable asset class for institutional and retail investors. He chairs one of the most active trade industry fintech committees.Casterman spoke. global finance Learn about the global trade finance industry and how technology is impacting its evolution.
global finance: What are you and your advisory firm working on these days?
Andre Casterman: We look at technology from the perspective of commercial adoption and market engagement. We work with business experts and policy stakeholders to amend the law as needed. It is important for technology leaders to collaborate with regulators around the world because adoption of technology will be limited if regulators do not recognize the effectiveness of the technology. For example, legislation such as the British Bills of Exchange Act 1882 required updates to enable digital documents. English law is one of the leading legal systems in global trade and negotiation instruments. Last year, the Electronic Documents Act was passed and is now a supplement to the Bills of Exchange Act. This technology is similar to electronic signatures, and documents such as bills of exchange, promissory notes, and warehouse receipts are the same, but instead of printing and signing, you create electronic documents.
GF: How will asset securitization practices transform trade finance?
Casterman: Securitization of trade receivables is a major change in the market, particularly in the United States. Provides an opportunity for non-bank financial institutions to enter the small business market. While traditional banks exist in the trade finance market, there are now alternative financial institutions that provide financing to small and medium-sized businesses. [SMEs] And we provide them with working capital by buying accounts receivable. They don't have large balance sheets like banks, so they look for third parties to fund their activities. Liquid companies such as asset managers, pension funds and family offices are looking for alternative asset classes in which to invest. We don't want to directly fund small businesses, but we are happy to fund banks and supply chain platforms. teeth.
GF: How important are these small lenders in the trade finance market?
Casterman: Since the financial crisis, small financial institutions have become extremely important as large banks have exited the small business market. The US market applies securitization to many asset classes. However, in Europe it is less common in trade finance. Technology is key here. Off-the-shelf technology and cloud capabilities are available to help lenders automate the securitization of trade finance invoices. In the past, only large banks could create securitization models. It is now becoming mainstream even for smaller players. They serve end-customers (usually small- and mid-cap companies) and raise liquidity through securitization.
GF: Why hasn't blockchain technology had as big an impact on trade finance as expected?
Casterman: When banks discovered blockchain a few years ago, there was a lot of excitement about it. They set up consortiums to develop projects like we.trade, Komgo and Marco Polo, but they took the wrong approach. They sought to develop new systems rather than working with existing vendors and platforms. Banks and businesses are not going away, so we need to consider the existing ecosystem. After funding the consortium for several years, the banks lost patience and pulled out.
The main feature of blockchain is traceability. You can track the lifecycle of your assets from start to finish, just like Swift did with his GPI. [global payments innovation] without blockchain. This is not the most important technology in trade finance. Workflow management is more important. We need to consider what changes new technologies like blockchain will actually bring.That's what we do at DNI [digital negotiable instrument] Initiative.
GF: Due to the SEC's recent approval of an exchange-traded fund's listing application. [ETFs] As you track the price of Bitcoin in the US, do you think corporate treasurers will invest more of their cash reserves in cryptocurrencies?
Casterman: no i don't. I don't think there are many companies that do what MicroStrategy does. Cryptocurrency is a difficult asset to manage. While it is possible that Bitcoin ETFs could be considered as an addition to existing investment products, we do not expect the corporate market to buy more Bitcoin on crypto exchanges.
GF: How important is security in the trade finance environment?
Casterman: Security is very important as trade flows involve sensitive things such as price information. Business information is stored forever, so there is no need to store it on the blockchain. This can be used as a common registry to ensure documents are still valid, but sensitive information must be removed.
Today's technology approach is interoperability. Not all players operate on the same platform, but the internet allows for a layer of interoperability. Businesses can use their preferred platform and interoperate with banks using a variety of technologies. This technology has demonstrated that it can be achieved. It's a matter of recruitment and its ongoing efforts. We are working with European authorities to develop a legal framework around the concept of open finance. We do that with payments and signatures, and we're looking at ways to do it with open finance.
GF: How is artificial intelligence being used in the trade finance industry?
Casterman: Banks were hoping for the magic of blockchain, but it didn't happen. Generative AI is where the magic happens. Using all the data the bank has about transactions and payments, end users can query her AI-supported system. Its greatest value may be around compliance and fraud detection. AI can provide lenders with insight into what is hard to find. Some institutions will need to approve the use of AI, and there are currently many vendors in this space.
GF: Are new alternative financial institutions democratizing trade finance?
Casterman: Trade finance is no longer just banking. There are currently many non-bank lenders on the market in the UK.It used to be just like that [receivables] factoring company. There are now platforms that allow you to finance individual bills. That can be risky, so we employ credit insurance at the invoice level. Trade finance is also embedded in companies that manage B2B transactions. We've seen it with Alibaba as well. Other new solutions are also emerging as better ways to finance the small business market are needed. Banks can be bypassed. They think small businesses are too risky anyway. Banks are not moving away from trade finance, but they are increasingly focusing on top-end customers.
GF: How will tokens and tokenization impact the trade finance market?
Casterman: More investment token products should be released in the first half of this year. Tokenization can reduce the cost of the investment process. The goal is to attract small investors with lower costs and higher yields. The token makes trade finance more accessible to a wide range of institutional and retail investors.
GF: How can new technologies and new market entrants reduce the gap between trade finance demand and supply?
Casterman: The trade finance gap is widening and people are talking more about it. The wave of regulation we have experienced since the financial crisis has increased the cost for banks to conduct due diligence on their corporate clients. They are cutting back on smaller relationships because they are losing money. I think technology is key to giving small businesses access to capital at a lower cost.
New lenders are expanding trade finance from banking to pure lending activities, and capital markets are supporting these lenders in extending credit. The market is attractive because the yields investors can earn through alternative financial institutions are higher than what they would get from big banks with their blue-chip customers. There is real reason for this market to grow, but it requires technology and new market entrants.
