A glance at global trade flows reveals a stunning fact: while overall world trade has grown more slowly after 2008 than any time since the recession of the early 1980s, cross-border e-commerce is on fire, growing five times faster than regular trade. The e-commerce opportunity is enormous, but growing army of small online sellers has limited access to credit, creating the urgent need for export credit agencies to help these early-stage businesses reach the global market.
Indeed, 97 percent of American micro and small businesses that sell on eBay export, as opposed to the 1 percent of brick-and-mortar U.S. businesses that export. These online sellers are micro-multinationals – they export to an average 18 markets, as opposed to the traditional exporters that sell to 1 to 2 foreign markets, usually Mexico and/or Canada. These data are echoed in practically all economies, from Chile to South Africa: online sellers are highly likely to export; offline sellers are highly unlikely to.
Export credit agencies (ECAs) have traditionally helped finance exporters with such means as by guaranteeing bank-issued export working capital loans an exporter uses to pay for raw materials, labor and inputs that go to fulfilling the export order. However, onerous Know-Your-Customer/Anti-Money Laundering rules and Basel III capital standards are today squeezing banks’ profit margins, reducing their appetite for small business loans – right when there are more and more small businesses in need of export credit.
Micro-multinationals typically do not need large loans; they need microloans. Luckily, an army of online lenders have surfaced to provide capital to small businesses, using innovative credit scoring methods and algorithm-driven automated underwriting. Products like PayPal’s working capital loan has opened significant new opportunities for low-income businesses, companies in remote areas with limited financial services, and women-owned businesses.
While small businesses are often still unaware of online lenders, this is changing fast: the peer-to-peer business lending market is growing at over 150 percent annually, as opposed to bank loans to small businesses that are growing at 10 to 15 percent. Data shows that once small businesses are able to access trade finance, they increase hiring by 20 percent and production by 30 percent.
The rise of online sellers and online lenders is a fantastic opportunity for export credit agencies such as the U.S. Export-Import Bank, which many lawmakers have chastised for being biased toward larger businesses – yet which also has a mandate to place 25 percent of its funding behind small businesses. Riding the online lending revolution, ExIm Bank and its fellow ECAs can now move to guarantee small export working capital loans, thereby incentivizing lenders to lower their loan interest rates and expand loan coverage.
Automating credit scoring and loan guarantee underwriting, ECAs would overcome their own lack of underwriting bandwidth. And by testing various credit scoring methods from, say, three to four online lenders with the lowest default rates and diversifying their exposure across borrowers from different sectors, sizes, geographies and risk levels, ECAs would also protect their backer: the taxpayer.
The benefits of new guarantees on online loans would be great in the United States, and immense in the developing world, with shallower capital markets. What’s more, easier access to credit for developing country buyers would remove another choke point for U.S. sellers: small importers’ limited access to affordable loans in their home markets.
E-commerce undoes geographic distance that has kept buyers blind to far-flung sellers for centuries. By 2020, 6.1 billion people will have smartphones with which to get online and shop, up by 3 billion netizens from today’s levels. Is the world ready to facilitate small business trade on that scale? An ECA-backed guarantee on online export working capital loans would incentivize the formation of new online lenders for exporters, help close the global trade finance gap and enable buyers to find sellers anywhere in the world.
Kati Suominen is Founder and CEO of Nextrade Group, Founder and Chairwoman of the Trade Capital Fund, and Adjunct Professor at the Anderson School of Management. She is finalizing her 10thbook, Revolutionizing World Trade: How Disruptive Technologies Open Opportunity for All.