Trade & Supply Chain

Question Answered: Trade digitisation

Published: Mar 2023

“To what extent are trade flows and trade finance benefiting from digitisation, and how much progress has been made?”

Christian Bauwens

Senior VP, Treasury
Flex

Flex has launched a number of trade finance digitisation projects over the past few years. Our primary goal is to automate transactions with suppliers and customers with full authentication, using the cloud platform. We also want to expand funding solutions for our customers and suppliers by reducing transaction risks earlier in the purchasing cycle.

In 2015, we developed an in-house end-to-end solution for account receivable factoring programmes. This was successfully implemented with various banks and allowed us to have a robust digital financing solution fairly early in the global digitisation wave.

In 2017 we engaged with various blockchain fintech companies and a few financial institutions to deliver a pilot project to automate end-to-end transactions between suppliers and customers.

In 2019 we began a project to digitise the identification of global companies using a connected platform to authenticate business registrations and tax records.

Recently, we implemented a solution to improve Order To Cash cycle and reduce the number of days invoices take to be approved by customers. Our approach was to automate invoice submission to customer portals, which reduced invoice dispute resolution days.

In the last example we faced multiple challenges, including a diverse statutory/regulatory environment, various invoice requirements, and a multitude of customer portals with different specifications, sometimes with the same client. Globally, I think the key challenges are: the rate of new technology adoption by the corporate world, and the scale required for trade finance digitalisation to succeed.

To be truly successful, digitisation tools need to be used by a majority of your customer base. The same vision must be coordinated and shared between governments and institutions in charge of global governance, central banks, and the banking community.

The digitalisation journey would benefit greatly from a commonly used technology that could digitalise the entire supply chain in a uniform legal framework, while also offering the flexibility to comply with multiple parameters required by each partner and regulator. If companies are not willing to invest in this area without the certainty of short-term gains there will be fewer efforts to identify a transformative solution that can be used across companies and industries.

Payment security and cybersecurity is a good example. New technology like blockchain could be used broadly to reduce fraud risks if everyone involved had a standardised approach. Tackling security threats (authentication and security control), offer an opportunity to create new partnerships with banks and/or fintechs to validate transactions and provide funding solutions for the entire supply chain.

We use a combination of internally developed and externally available technologies to support our function. We use a treasury management system that supports host to host, SWIFT and API connections; and a range of other tools such as Robotic Process Automation (RPA), Optical Character Readers (OCR), Machine Learning Technologies (ML), Electronic Data Interchange (EDI) and more.

Key to success is the seamless integration between technologies and effective communication between the tools, partners and banks. Our ecosystem of tools to digitise accounts payables for example, has improved invoice financing/working capital funding solutions for our suppliers, given us better access to material for production, and secured preferred supplier terms.

Because the trade finance digitisation process is currently decentralised, financial institutions have a key role to play. Ideally, they could facilitate a global standard which would help stronger adoption by corporates, lower cost, ease data integration and enhance security. Flex has started to embrace ESG into our treasury practices generally. One example is that we are in the process of converting our supplier financing program into a sustainability-linked facility. This will allow preferential funding rates for ESG-focused suppliers.

Iain MacLennan

VP of Trade and Supply Chain Finance
Finastra

As we know, there is a lot of paperwork associated with the physical movement of goods including bills of lading, packing lists and origination certificates, etc. Trade finance is traditionally part of transaction banking areas within banks but unlike other areas, ie payments or liquidity management, trade finance (and commercial lending) hasn’t experienced anything like the same level of digitisation. Having to rely on pieces of paper with an appropriate signature to allow the physical movement of goods is both costly and unsustainable, and a source of significant friction for businesses.

Digitisation allows efficiency, visibility, cost reduction and speed to market, and takes away the opaque nature of paper. Significant progress has been made since the G7 meeting in early 2021, when the lack of digitisation in trade finance was seen as a key topic. Today we are seeing the adoption of MLETR [Model Law on Electronic Transferable Records] coming to the fore, creating the legal framework to address the need for wet signatures. Of course, the broader digitisation in trade finance has also accelerated since the pandemic. We are now seeing huge demand from banks and corporates to speed up processes and create efficiencies, as well as integrate ESG in an end-to-end process.

Digitisation is not just about the software – multiple digitisation partners need to help banks improve their end-to-end processes. Trade finance from an operations perspective is a knowledge-driven sector that depends on specific skill sets and in another, worrying trend, we are seeing a significant “brain drain” from this space with the ensuing loss of knowledge.

The technology is available to support digitisation, distributed ledger and blockchain get most of the press and can allow different stakeholders in the supply chain to share information. However, the key points here are to prevent so-called data islands and to ensure interoperability. One of the items that needs to be addressed in the data is who owns the goods, or who has rights to the underlying transaction. Still, we’ve been talking about blockchain for years, and we are still talking about it today. The problem is scale, but adoption and interoperability are key. The technology is great, but you need to get to a point where you can connect with other networks to process transactions. There are lots of solutions, but corporates face a challenge of how they become part of this trade ecosystem and create value by this engagement.

Encouragingly, we are seeing more cooperation between different providers and stakeholders. Banks have also figured out what they can bring to their client base and are working with multiple new entrants. One challenge that both banks and corporates face is how to integrate new partners, as this can be very time-consuming. It involves a procurement and contractual process, and we are looking at how to accelerate that in the marketplace by removing this friction from the process.

Digitisation will again be accelerated by ESG integration. Stakeholders from shareholders to customers and regulators expect evidence of ESG standards. Whether sharing information on workers’ rights or a product’s energy source, providing it to stakeholders in a truthful way that safeguards against greenwashing is only going to be achieved via digitisation.

Gabriel Buck

Founder and Managing Director
GKB Venture

I see some digitisation in trade processes, but I am sceptical that digitisation will be a panacea for increasing and facilitating greater trade flows. My overriding belief is that despite the efficiencies of digitisation, it won’t significantly help those producing lower value goods move up the ladder to producing higher value goods, or those in local markets reach international markets. For example, if a company trades principally in the production of raw materials, say, coffee beans, digitisation is not in itself going to move that company up the value-add ladder to trade in processed coffee.

I would argue that the digitisation of payments has been more transformational than the digitisation of trade processes because this has provided companies with the ability to trade internationally. Most companies can obtain and transmit payments with ease, and relatively cheaply. Our exporting clients have never mentioned that the lack of digitisation in trade is hampering their growth. Companies that know how to export, have worked hard on developing their markets, and provide a fully integrated package aren’t thriving because of digitisation. Freight forwarders, exporters and importers know the processes.

Banks are at the forefront of introducing digitisation in trade because it reduces their processing costs. Trade finance incurs back office costs, especially around human processing. But the benefits of lower costs through digitisation will only really be felt by the banks, and I don’t think they will pass this on to their clients. It’s not really surprising given banks and financial institutions are the ones who are funding digitisation development and want to see a payback. Moreover, trade finance is a low-risk, low return asset class for banks. As a result of being low risk and low yielding, the only way they can make money is by volume and keeping processing costs as low as possible.

Innovation and technological developments supporting trade and trade finance digitisation often fold. I think there are too many platforms that can’t scale. Many of these new platforms also believe they can solve the funding gap in trade finance through digitisation, but this premise is also misguided. The funding gap exists because there is a lack of access to capital, not because of a lack of digitisation.

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