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Digitizing trade finance is expected to lower costs, enable faster processing, and provide greater access to funds, with benefits for import-export traders and supply chain managers.

Digitizing Trade FinanceARTICLE

By Karen Lynch

Bankers are digitizing trade finance to solve problems ranging from the decline of traditional finance mechanisms to high costs, regulatory roadblocks, inefficient service, and a growing level of unmet demand. A July 2017 report by the International Chamber of Commerce’s (ICC’s) Banking Commission1 sheds light on trade bankers’ digital priorities and how well they are meeting them for import-export traders, supply chain managers, and other customers. The report, titled 2017 Rethinking Trade & Finance, draws on a global survey of bankers and analysis from key trade finance actors in the public and private sectors.

Eighty percent of trade is enabled by some form of trade financing, the report notes. Most international trade among businesses is conducted on “open account” terms, under which goods are delivered before payment is due; about 10 percent of international trade relies on traditional trade finance mechanisms such as letters of credit. Traditional trade finance will exhibit little or no growth and possibly decline, say 80 percent of the trade bankers surveyed in the report. The higher growth area is supply chain finance – often in the form of factoring, in which suppliers sell their receivables to banks or other financial service providers for faster access to the money they are owed on open account transactions.

Automating these mechanisms is overdue, most of the bankers agree, as is innovating beyond such mature techniques. “It’s clear corporates are investing considerable time and energy in shortening, simplifying and reinforcing their physical and financial supply chains,” says Mark Evans, Managing Director, Transaction Banking at the Australia and New Zealand Banking Group. Trade bankers must work with these customers on appropriate solutions, he says.

What’s more, 61 percent of survey respondents say that demand for trade finance outstrips supply, with small and medium-sized enterprises experiencing the most difficulty in securing funds. Digitization could help close that gap, the report says.

Eliminating the Trade Finance Paper Chase

The elimination of paper from trade finance transactions can reduce processing times by two hours per transaction and could reduce regulatory compliance costs by 30 percent, the report says. There has been some digital evolution in trade finance over the past several years to include detailed management dashboards, reporting capabilities and automated document preparation. Technologies are available for more widespread “dematerialized documentation.” Non-paper-based communications, transfers of title, and representations of commercial or financial obligations have achieved legal recognition.

Still today, however, “for many, there is a misconception [regarding] the process of converting paper documents into an image and passing it on to banks – which is in fact not digitization,” the report says. “True digitization enables data extraction and analysis, with the aim of improving business processing.” Technologies such as blockchain/distributed ledgers, smart contracts, cloud computing, big data, machine-based learning and artificial intelligence are cited in the report as the way forward by Michael Vrontamitis, Global Head of Trade, Product Management at London-based Standard Chartered.

Trade Finance Futures

Recent developments, such as the World Trade Organization’s Trade Facilitation Agreement, could provide a catalyst for accelerating change as it digitizes and expedites border procedures, according to the ICC.

Yet, considerable work remains to be done. While many banks have digitized their own processes, for example, they often operate in digital “silos” or “islands,” the report says. “So, what happens is that somewhere in the process the chain gets broken and we default back to paper,” Vrontamitis says. A growing number of financial technology (fintech) companies are running third-party platforms providing cloud-based interfaces among supply chain participants and trade bankers, and “there is increasing collaboration between financial institutions and fintechs,” Evans says.

The outlook for trade finance digitization is decidedly mixed in the ICC report. Half of respondents see high levels of digitization achieved in less than a decade, but another half expect the evolution to take from 10 to 25 years. Among the obstacles cited are legal uncertainty, anti-money laundering regulations and the general inertia that comes with a lack of awareness and clear incentives.

The ICC Banking Commission recently launched a Working Group on Digitalization, with a specific focus on accelerating the pace of innovation. The group is calling on the trade finance industry to take concrete steps through greater collaboration, including the development of a minimum set of standards for the digital connectivity of trade bankers and other service providers across legal, information security, liability, technology and other dimensions.

The ICC report uses container shipping as a metaphor for the group’s work. In the mid-1900s, the 20-foot equivalent unit (TEU) was established as an industry standard, allowing for the same container to be used on different transportation methods and fixing what was a slow and difficult manual process. “The trade finance industry needs to find its very own container model for digital trade,” the report says.

The Takeaway

Trade finance digitization is in the works, but proceeding gradually. An ICC Working Group on Digitalization has been formed to speed this evolution. The ultimate benefits for import-export traders and supply chain managers are expected to be lower costs, faster processing, and greater access to funds.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. 2017 Rethinking Trade & Finance, International Chamber of Commerce; https://iccwbo.org/publication/2017-rethinking-trade-finance/

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