Dynamic Trade Finance in the Presence of Information Frictions and FinTech

38 Pages Posted: 20 Jul 2020

See all articles by Hau L. Lee

Hau L. Lee

Stanford Graduate School of Business

Christopher S. Tang

University of California, Los Angeles (UCLA) - Anderson School of Management

S. Alex Yang

London Business School

Yuxuan Zhang

Tsinghua University

Date Written: July 7, 2020

Abstract

We study the value of a type of innovative bank-intermediated trade finance contract, which we call dynamic trade finance (DTF, under which banks dynamically adjust loan interest rates as an order passes through different steps in the trade process) in the presence of information frictions related to process uncertainties, and its strategic interaction with FinTech. As more than one third of global trade involves bank-intermediated trade finance (IMF 2009), examining the value of DTF as a contract innovation and its strategic interaction with FinTech is of practical importance. Also, analyzing trade finance in the presence of process dynamics and information frictions complements the existing academic literature.

We construct a parsimonious model of a supply chain process consisting of two steps: the duration of each step is uncertain, and the process may fail at either step. The seller borrows from a bank to finance this 2-step process either through uniform financing (the interest rate remains constant over the process) or DTF (the interest rates are adjusted as the process passes each step). While lending, the bank faces either ex-post information opacity (the bank may experience a time delay to verify information about the order's passing of a step) or ex-ante information asymmetry (the seller possesses more accurate information about the trade process than the bank). FinTech may alleviate such information frictions. We find that the value of DTF increases as the trade process becomes more reliable or lengthier. The severity of ex-post information opacity hurts the value of DTF convexly. FinTech that enables speedy information verification and automatic execution complements DTF. In the presence of ex-ante information asymmetry, DTF enables separating the more reliable sellers from the less so ones, and hence, substitutes FinTech that alleviates information asymmetry. Our results shed light on how the underlying trade process dynamics and the type of information frictions involved affect the optimal deployment of contract innovations (DTF) and FinTech in trade finance.

Keywords: Trade finance, supply chain finance, structured trade finance, information friction, information asymmetry, FinTech, blockchain, smart contracts

Suggested Citation

Lee, Hau L. and Tang, Christopher S. and Yang, S. Alex and Zhang, Yuxuan, Dynamic Trade Finance in the Presence of Information Frictions and FinTech (July 7, 2020). Available at SSRN: https://ssrn.com/abstract=3632563 or http://dx.doi.org/10.2139/ssrn.3632563

Hau L. Lee

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Christopher S. Tang

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

S. Alex Yang

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

Yuxuan Zhang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
66
Abstract Views
280
rank
369,493
PlumX Metrics