Trade finance stumbles into the digital era

“IN WARM WEATHER, fewer people wear socks,” says Paul Rotstein of Gold Medal International, a wholesaler in New York. People may not sport socks in the summer but his firm starts shipping them to retailers in July, ahead of the start of the school year. There is, however, a big lag before he is paid. He normally uses trade-credit insurance to protect against the risk that his invoices go unpaid, but this year the insurers have slashed the amounts they are willing to cover by 50-90%. That leaves him with two options: shoulder huge credit risk himself, or walk away from orders.

Mr Rotstein’s dilemma underscores the role of trade finance, an unglamorous but critical bit of the financial system. Many firms are owed a large amount by their customers in the form of receivables; in total the amount is worth around 20% of global GDP. Some firms bear all the risk of non-payment themselves. But others look to an insurer to protect them from default, or take out specialist loans backed by the invoices. Together these financing solutions underpin four-fifths of cross-border transactions, which are worth $15trn a year.

Trade financiers face three problems created by the covid-19 pandemic (and the accompanying recession). It has disrupted normal operations by slowing the travel of documents; it has raised the risk that existing loans...