Asset Digitization and the Rise of E-Commerce Financing
By Serra Angel Wei, Founder & CEO at Aegis Custody
With a projected growth rate of 21.8% between 2015 and 2024, e-commerce sales have become a significant contributor to total retail sales. As expected, e-commerce companies, such as vendors and payment processors, are looking for ways to capitalize on this growth but need the working capital to do so. It has, however, traditionally been difficult for smaller players to get access to capital due to issues such as restrictive bureaucracy, high borrowing costs and large collateral requirements.
Asset digitization has the potential to bypass these issues and create new, accessible financing opportunities. Through this process, borrowers can convert their accounts receivable and capital advance assets into tradable digital assets that can be sold to investors.
With asset digitization, e-commerce companies enjoy dramatically reduced borrowing costs and get near-instant access to working capital to continue scaling their business. Meanwhile, investors get access to new portfolio diversification opportunities and greater flexibility. It is a win-win for everyone.
The rise of e-commerce financing
COVID-19 lockdowns and the resulting global digitalization precipitated an explosion in the e-commerce industry. Its share of global retail trade went from 14% in 2019 to about 17% in 2020. In China, the online share of retail sales rose from 19.4% to 24.6% between August 2019 and August 2020. Businesses quickly realized that e-commerce was here to stay and had to pivot accordingly or risk collapse.
Like any small business, web-based retailers need to raise working capital for business operations such as meeting payment deadlines, purchasing stock in advance of holiday sales events, and improving their online sales platforms. Financing companies typically provide advances on capital to these sellers through instruments such as microloans, credit and invoice factoring. The merchants then repay the lenders in stages according to the sales revenue they generate.
This financing model is particularly common among payment processors offering “capital advance” assets to vendors. Since they facilitate inbound transactions for vendors, they have visibility over the vendor’s current and historical sales performance, allowing them to predict future sales. With this data, they can evaluate risk and determine how much working capital they will offer the vendor. And because they control the vendor’s turnover, repayment of the advance can be subtracted automatically before paying the vendor’s account.
Asset digitization enables better e-commerce financing
Despite the control of vendor turnover, payment processors have been hesitant to make capital advances because of the associated risks. Those that did make capital advances, however, were not able to generate their own working capital from these assets. They simply remained as locked assets on balance sheets. This is where asset digitization has the potential to transform the industry.
Asset digitization involves taking a previously illiquid asset, such as real estate, gold and carbon certificates, and turning it into a tradable asset by representing it as a digital token that can be freely exchanged. The token is stored on public blockchain networks, such as Ethereum, and corresponds to the holder’s ownership of said illiquid asset. What makes these digital assets so intriguing is the possibility of frictionless value transfer and change of ownership. In this case, the payment processor can digitize its capital advance assets and immediately sell them to investors in exchange for working capital. The same is true for vendors looking to unlock the value of their accounts receivable assets.
A regulated custodial service, when combined with trusted and immutable blockchain networks, makes asset digitization even more attractive. Custodians can hold digital assets in segregated trust accounts and facilitate ownership transfer without the asset leaving custody. A payment processor, then, can digitize its capital advance assets, have them held in regulated custody, and sell them to investors without the costly and time-consuming paperwork. With this streamlined and secure process, more payment processors are thus incentivized to make capital advances to e-commerce vendors and facilitate the growth of the entire ecosystem.
New investment opportunities for e-commerce financing assets
Besides facilitating easier capital advances by payment processors, asset digitization also makes it possible for investors to buy direct ownership of the capital advance. This makes these newly digitized capital advance assets attractive as an investment instrument. Marketplaces are already being developed to connect capital advance asset owners with investors looking for portfolio diversification opportunities.
When an investor chooses to invest in these digitized capital advance assets, the token representing the asset will be transferred to the investor. The regulated custody service also verifies that the asset is legitimate and backed by custody-related legal frameworks, which gives both asset owners and investors peace of mind.
Fueling the growth of vendors
For many vendors, high-volume shopping events such as Black Friday and Christmas represent a bulk of sales. To avoid fulfillment delays and maximize revenue, it is a common preparatory practice, therefore, to increase, or “front-load,” inventory prior to these events. The challenge for vendors is raising the capital to make this happen. This is what makes asset digitization and e-commerce financing an ideal match. The fast-moving e-commerce industry needs more agile financing solutions than are currently available. Asset digitization can fill that gap. By enabling better and faster financing opportunities, it allows e-commerce companies to scale to meet consumer demand. And as the market matures, digitized assets will also grow in popularity as an investment asset class, which will further fuel the rise of e-commerce financing.
About the author:
Based in San Francisco, Serra Angel Wei is a cryptocurrency finance executive, investor and entrepreneur. With a blend of skills across traditional and blockchain-based finance, she has over 10 years of investment, research and private equity experience. She founded Aegis Custody in 2018 to solve the problem of illiquidity as a barrier to value creation.
Prior to Aegis Custody, Ms. Wei was a crypto investor at Passport Capital, where she helped build an Asian digital asset strategy desk to bridge the gap between cryptocurrency and institutional finance. Her particular strategic focus was on blockchain funds of funds (FoF) and direct ICO investments.
In 2015, Ms. Wei founded Serra Advisors LP , a boutique investment bank that provided cross-border investment advisory and M&A services for clients in China and the United States. The firm’s synergy VC/Growth Fund evolved from an advisory model to help Chinese companies gain a full-fledged US-based investment partner.
Before Serra Advisors LP, Ms. Wei was an equity research analyst in the technology group at Goldman Sachs. Whilst there, she worked for a US$5 billion crossover fund called QVT Financial LP and was responsible for research and investments in global technology sectors.
Ms. Wei holds an MBA from Stanford University Graduate School of Business.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.