FX International Payments
By Karen Lynch
At the same time, alternatives such as supply chain finance are gaining ground, the report said, while growth is stagnating in the use of traditional international trade finance, such as bank-guaranteed letters of credit and documentary trade, whereby an exporter assigns a bank to collect payments for goods shipped. But evolution of such alternatives is also proceeding slowly, the ICC said.
The ICC calls its 10th annual survey a “reality check” on banks’ progress in adopting digital trade finance technology. The report, titled Global Trade: Securing Future Growth, is filled with statistics and commentary on the current state of international trade finance, with the ICC’s own survey of banks supplemented by chapters from consultancies, business associations, multilateral organizations, and others.
Supply chain finance provides a means for financing the increasing use of open account transactions, in which goods are shipped and delivered before payment is due. For example, some big buyers arrange finance programs for their suppliers, giving them the option of receiving payment early, though at a discounted rate, from one or more financial services companies. This payables finance approach, which some say is a less costly form of financing,2 is one of the fastest-growing areas of international trade finance; according to the ICC report, it is expanding at 20 percent per year.
About 80 percent of international trade now takes place on open account, the report said. And while this method of conducting business is more conducive to supply chain finance solutions, banks in the survey continue to focus 85 percent of their activity on traditional trade finance (TTF) and only 15 percent on supply chain finance (SCF). “The commitment to TTF runs contrary to global trade trends,” the report noted. “Whether focusing on TTF is a defensive measure, a strategic misalignment, or partly systemic reticence around innovation is worth further analysis,” it said.
Both TTF and SCF are concentrated markets, with a limited number of providers. “The reality is that deploying SCF programs is limited to large global banks and a few technology-enabled, platform-based fintechs,” the report said. This may be among the reasons why fintechs have had little or no impact on closing the international trade finance “gap,” a funding shortfall that the Asian Development Bank has calculated at $1.5 trillion in 2016.3
Overall, the report estimated that trade finance facilitates 80 percent or more of annual international trade in goods, a statistic that also includes government export agencies and multilateral development banks. Traditional trade finance remains predominant. However, a report chapter contributed by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) noted that the volume of letters of credit on its global network fell for the fourth straight year in 2017, which is a measure of the decline of traditional trade finance.4
“A heavily paper-based industry with transactions worth over US$9 trillion in 2017, trade finance is often noted to be ripe for digital disruption,” the report said. “A single trade finance transaction can require over 100 pages of documents, with an estimated four billion pages of documents currently circulating in documentary trade.”5
However, responses to the ICC survey indicated that within three to five years, there could be a marked change. Forty-five percent of respondents said they are prioritizing the design, development, and deployment of new technology platforms to facilitate international trade financing. And, “an indication of how this priority is evolving can be seen in the proliferation of proofs of concept for TTF and SCF platforms, technology-enabled delivery models, and distributed ledger technology, which could have transformative effects,” the report said.
“Efforts to transform the industry over the last three decades have underestimated the complexity and detail of transactions, while over-estimating the market’s preparedness,” the report said. “This is true for clients and providers alike, in their ability to adopt new solutions, value propositions, and operating models for financing international trade.”
Meanwhile, the letter of credit, in use for hundreds of years, is supported by global adoption of commonly understood rules and commercial practices. “The letter of credit has proven effective in enabling trade amid the most challenging political, commercial, and risk conditions in the world,” the report noted. As a result, market participants have lacked motivation to innovate around digital trade finance – which, as the report put it, is “the downside to the long-term efficacy of legacy products.”6
A third delaying factor is that, “the current trade model is a complex flow of goods, information, documentation, and capital among a wide range of players,” according to a chapter in the report from the Boston Consulting Group (BCG). Among such international trade finance players are banks, customs authorities, shippers, and insurers, in addition to buyers and sellers of various sizes, geographies, industries, and digital sophistication. “The large number of parties makes it hard to come up with a quick and widespread solution.”7
Legal and regulatory barriers must also be addressed—for example, adapting rules and regulations to allow banks to accept data rather than documents. “Know your customer” regulations, which combat money laundering and terrorist financing, are cited by 90 percent of respondents as hindering progress in international trade finance. The ICC’s Digitization Working Group has been developing standards and guidelines, while lobbying policymakers for change.
Transitions can also be costly, time-consuming, and risky, the report said. Yet even the survey respondents that are not currently digitizing said, for the most part, that they plan to do so within two years.
The barriers are not technological, BCG said – for example, robotic process automation and machine learning have matured enough to advance digital trade finance. Applying these technologies has been shown to cut processing times 60 percent, such as with optical character recognition (OCR) converting paper documents to text to support automated monitoring for regulatory compliance. Increasingly, automated templates will be used in international trade finance documentation.8
Breaking down the process of trade finance, the survey finds that over a third (35 percent) of respondents have not eliminated paper in the initiation and settlement stages of a transaction, which makes these two of the more automated parts of today’s transaction lifecycle. About half (52 percent) have not eliminated paper in the area of document verification, which is the most costly and time-consuming stage. Only about a quarter (24 percent) use electronic bills of lading or other electronic transport documentation, while the same percent reported using OCR.9
Eventually, blockchain distributed ledger technologies could replace much of the paper documentation and manual reconciliation, tracking, and verification of transactions, BCG said. In another part of the supply chain, the Internet of Things could lower delivery risk through end-to-end tracking of trade transactions. BCG noted that could accelerate the shift to open account transactions, since lower delivery risk would mitigate the need to manage risk through documentary trade.
Meanwhile, at companies engaged in international trade and finance, automation is also proceeding slowly, according to a separate survey by the Deloitte consultancy. Only about half (54 percent) of respondents indicated that they have automated trade finance and management, with the others supplementing manual processes with spreadsheets or other basic data structures. “There are more choices than ever to assemble the global trade management system and functionality needed to facilitate the management of global trade transactions, and more and more organizations are investing in such solutions,” Deloitte said.10
Progress in digitizing and transforming international trade finance has been slow, according to an ICC report, but the next three to five years could bring significant change. Meantime, finance departments at companies conducting international trade are unlikely to see improvements in the time and cost involved in trade finance transactions.
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.
1. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
2. “Supply Chain Finance – Good for Banks and SMEs,” Asian Development Bank; https://blogs.adb.org/blog/supply-chain-finance-good-banks-and-smes
3. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
4. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
10. Customs and Global Trade Management Benchmarking Survey Report, Deloitte; https://www2.deloitte.com/us/en/pages/tax/articles/customs-and-global-trade-management-benchmarking-survey.html#