Trade & Supply Chain

No to paper, yes to trade

Published: May 2020

Trade growth is all about making strong connections, and yet the paper-trail that follows cross-border commerce stubbornly remains the weakest link. We explore how digitalisation can improve connectivity, paving the way for better business and stronger growth.

Cobbled path in Italy with sun shining

Global trade can be challenging with all the tariff wars, protectionist policies and regulatory uncertainty to navigate. But these are transient worries; for most businesses, there is a greater menace that remains largely unchallenged, accepted almost, and that is the fact that paper still rules supreme.

Of course, it’s no great mystery why trade documentation represents around 20% of the cost of moving goods; it’s grossly inefficient. But as Gert Sylvest, Co-founder, Tradeshift, and GM Tradeshift Frontiers, notes, “although digitalisation within large enterprises is actually at a pretty advanced stage, globally just 8% of trade transactions are digital”. If the means of dramatic improvement is available, why does this state of inefficiency persist?

For many, the missing piece in the puzzle is digitalisation between business partners across the broader supply chain ecosystem. As Sylvest explains, “you can have the greatest level of digitalisation internally, but if the partners you are dealing with – banks, suppliers, buyers, logistics handlers – are not digital, then the whole process reverts to the lowest common denominator.”

With International Chamber of Commerce (ICC) suggesting an annual count of around four billion sheets of paper required to represent current levels of ‘lowest-common-denominator’ activity, it’s no wonder technologists are frustrated. Martin McCann, CEO and Founder of Trade Ledger, even sees current global trade finance practice as “pre-industrial”.

The reason why digitalisation across supply chain ecosystems has yet to take off is clear to Daniel Cotti, MD, Centre of Excellence Banking & Trade at the Marco Polo Network. Where multiple parties involved in international trade are located in different jurisdictions, process harmonisation is often absent.

Re-invent, not fix

But setting out to ‘fix’ trade is always going to end in failure, warns McCann. “People have been trying to do this since the 1990s. When you’ve got different laws in different jurisdictions, and different industries with different needs and procedures, where do you even start trying to standardise trade finance documentation?”

Research by BCG last year explored the transit of trade information through paper documents. It found that in typical international trade documentation “a single transaction often requires the interaction of more than 20 entities, and involves between ten and 20 paper documents and 5,000 data field exchanges”. And yet it says only one to two per cent of the available fields are commonly used.

Bodies such as the World Trade Organisation and the World Customs Organisation, charged with driving standardisation initiatives in this space, have “lacked the appetite for transformative change”, says Dai Bedford, EY NextWave Global Trade Leader. Noting a predisposition in some quarters for physical documentation, he says that in some emerging markets, for example, “documentation and administrative processes around customs and port authorities creates jobs”.

It’s a difficult approach to challenge. Nonetheless, change is in the air. With China central to global trade, Bedford says it has invested massively in digitising its whole trade ecosystem. It has been adopting innovations, such as blockchain, to create smart documents, has brought about the legal enablement of digital signatures and is using new technologies to create ‘smart’ ports and shipping.

The knock-on effect in neighbouring trade-focused jurisdictions, especially Singapore, is significant. Challenged by Chinese port efficiency, Singapore has a roadmap that is looking to accelerate development in ASEAN. Singapore Customs has already launched its Networked Trade Platform, described as a ‘one-stop trade and logistics ecosystem’, with reports coming through already of talks to connect this with Hong Kong’s own eTradeConnect blockchain-based platform.

With many stakeholders involved, connecting different ecosystems could allow trade credit services to be consumed at the point of the transaction. “Then we’ll see de-aggregation of the vertically integrated supply chain for trade finance,” states McCann. His ‘ideal’ will necessarily see trade finance providers stop producing and distributing traditional products, and start thinking in terms of new customer propositions and experiences. “The product wrapping and fulfilment factories can just melt into the background; it’s not something customers need to interact with.”

But bringing disparate parties together remains a challenge, comments Marie-Laure Gastellu, Deputy Head of Trade Services, Societe Generale. The possibility of a fully paperless trade value chain within the next five years, to her, seems unrealistic. “There have been commendable initiatives designed to encourage standardisation – the ICC, and the Bankers Association for Finance and Trade, are some notable examples – but we have a long way to go,” she believes.

“Our industry involves many stakeholders who share few common standards, meaning paper is often unavoidable. Between the placing of an order, and that order’s delivery, manufacturers, shipping companies, port authorities and banks must reconcile the information they share in their own standards, sometimes varying from country to country. Despite its limitations, paper continues to help with this.”

The ambition to have paper-free trade can already be met with today’s – and even yesterday’s – technology, says Gastellu, but the problem of ‘admissibility’ refuses to go away. “We could just stop printing the required forms and share them digitally, something for which AI and blockchain are not even necessary, but the lack of shared admissibility that rules within our industry makes this impossible.”

Interoperability

The answer for McCann is not to try to patch-up trade but to focus instead on interoperability. Creating a trusted digital data-sharing environment will, he believes, make individual processes more efficient and inexpensive.

Bedford agrees, adding that collaboration between governments and agencies which are prepared to change the law to move beyond simple digitisation of documentation (using tools such as character recognition software) towards dispensing with documentation altogether, will enable the exchange of data between different trade ecosystems. We are, he notes, “already seeing pockets of progress”.

Indeed, in the UK, digitalisation of trade ecosystems – driven in part by Brexit as the country seeks to open up trade with new partners, including China – has seen improvements in data sharing, with subsequent transparency and trust making efficiency improvements, for example, in shipping insurance. Here, as part of the Insurwave platform, blockchain combined with IoT data gives parties access to real-time information. This allows shippers to track assets and share data with brokers and insurers, enabling dynamic premiums so vessels in transit are never over- or under-insured, with commensurate cost efficiencies. On the finance side, for McCann, although open account and structured trade are seeing some interesting developments, he believes the industry shouldn’t be thinking in terms of an evolution of documentary trade, “rather we should be thinking in terms of revolution”. And this, he says, is all about data accessibility – confirming interoperability as the essential step forward.

Network of networks

One solution that can aid progress is the API. At the behest of legislation (largely Europe’s PSD2), banks have been moving towards API-based data-driven infrastructures and the notion of open banking. This is starting to significantly disrupt traditional models of documentary trade, providing alternatives which can begin to de-aggregate the network origination and customer experience at the front-end, from the product and fulfilment elements of the back office.

Visa’s acquisition in January 2020 of Plaid, a technology that allows consumers to share their financial information with apps and services, is a play to begin controlling the evolution of the ecosystems around the customer experience network. It’s an important battle ground and connectivity between FIs and developers is becoming increasingly essential as consumers seek enablement to use fintech applications. Their appetite is irrefutable: according to EY, 75% of the world’s internet-enabled consumers used a fintech application to initiate money movement in 2019, versus 18% in 2015.

Why does this matter? Where consumers go, corporates will follow. Creating a ‘network of networks’ using APIs and augmented by robotic process automation, AI/machine-learning and, for security, blockchain, would allow data to be acquired, analysed and transformed into a common format for all permissioned participants to consume. This network could then be exposed to any new types of workflow that trade participants require, across any digital channel. And then, as Cotti says, “by connecting a critical mass of parties in the trade ecosystem, it makes digitalisation of trade finance a real possibility”.

Imagine the future

Of course, technology is only ever the enabler. “The real disruption is in the demand,” notes McCann. Indeed, within many sectors, as new generations join the workforce, so pressure to replicate their consumer-level experience in their professional lives increases. Millennials, it seems, “just don’t have the same level of tolerance for the inconveniences and challenges in trade services that previous generations do,” he notes.

However, he feels that one of the biggest challenges for a full trade revolution is change management. The tier one banks, which have cornered the MNC market, have seen Basel III capital requirements erode their interest in this space for anything other than key clients. With fintechs typically serving the lower end of the market, the global trade finance gap, which is currently estimated by Asian Development Bank to be around US$1.5trn, is now largely a mid-market issue.

This gap is fast becoming an opportunity for co-operation or disintermediation. On the latter, Big Tech players such as Amazon, Google, Apple, Alibaba and Tencent are moving to control the ‘network of networks’, enabling service origination at scale. “In the next few years we are going to see some very big plays in this area,” predicts McCann. “We’re starting to see disintermediation happen already.”

Indeed, Bedford notes that e-commerce platforms are already providing credit to its small business partners on their platforms “because they have the data” to make correct credit risk assessments. PayPal is offering products like debit cards, cheque deposits and small business loans. In Asia, challenger banks are rapidly gaining ground, with WeBank, MYbank, and Kakao Bank all backed by Big Tech (Tencent, Alibaba, and Kakao respectively). These Big Tech players have the money and, crucially, they have the data.

As for the MNCs, if holding data is vital in this new digital world, at the large corporate end of the spectrum, Bedford says the major banks should still be in a prime position, having a view over entire networks of trade that they are financing. But change is coming here too.

With more stringent Basel IV capital requirements applying from January 2022, bank money could become even more expensive for trade-based products. No wonder then that banks are reportedly looking to sell down trade assets to non-bank investors – institutional investors, fund managers and even wealth managers – to try to plug the financing gap. Banks may retain the corporate data and, critically, trade compliance elements but, he warns, “it’s not going to be easy for them”, as other players really are sensing opportunity.

Driven by millennial demand for a consumer-like experience, fintechs are driving connectivity and data sharing, enabling non-banks to take on trade finance as an asset class through trade platforms. And now it seems more large corporates are looking to self-finance trade, either in-house or through these non-bank investors.

Technology is increasingly making corporate access to their own trade transactional data possible, enabling them to make informed funding decisions on their own trade relationships. What’s more, the emergence of Reg Tech platforms is enabling corporates to manage compliance issues around self-funding (becoming a regulated entity in this respect would be a major concern otherwise).

Banks appear to be under huge pressure from a model that, as Bedford argues, “could completely disintermediate them”. However, whilst many corporates do own all the data they need on their total-cost-of-trade, they can’t necessarily collect it, let alone analyse where the opportunities for self-financing lie. It’s an interesting thought to which McCann adds that MNCs, as currently the least well-served by digital trade services, will be the slowest movers, and thus the last to abandon the old-school documentary trade model.

Treasury challenge

The need now is for forward-looking corporate treasurers who want to be “innovative value-drivers”, says Bedford. “They are going to have to start looking at a more complex view of how they finance,” he says. “It may be that it will be cheaper to issue a corporate bond and have a revolver to finance a supply chain, and make money off that, than it is to deal with a bank.”

Pulling together corporate data from treasury and the rest of the business, and then getting it into a usable state to make such decisions, remains a struggle for the MNC, for now. The notion of a virtual trade function, taking structured and unstructured data into a cloud-based platform, requires investment that as yet might prove elusive for treasury. But as digital solutions are incorporated into the flows of information in open account trade, and the gap in the low to middle markets is increasingly serviced, the idea of digitalisation will begin to feed through to the upper end of the market.

Self-financing will gain ground as more companies seek to better understand the flexibility and security of their supply chains. Access to granular data on fees around finance, insurance, taxation, shipping and so on – and a deeper understanding of production and inventory management – should begin to alert senior management, the board and other stakeholders, to the benefits of greater preparedness and proactivity in meeting the challenges of a rapidly changing business environment.

End of the trail?

As large swathes of the lower end of the market start to move towards next-generation solutions, a tipping point will be reached, McCann believes. “All the tools and data are there; what’s been missing so far is the imagination and ambition on the part of the large service providers.”

Quite naturally, caution is encouraged by Gastellu who says reducing the use of paper should not be pursued as an end in itself. “Limiting paper use, and, where necessary, making use of AI and blockchain, is only worth it if it makes trade and supply chain processes more time and cost efficient,” she says.

“Paper should be regarded as what it is: a vessel for information. The ability to decipher and share this information quickly and to a high standard is what differentiates best in class service from time-consuming, inefficient processes. It allows payments to be made quickly and prevents ships being stuck at port.”

Paper still has a future in the trade and trade finance space, and may do so for years to come, despite the promise of APIs, AI and blockchain. “As a very first step, these technologies are used to improve our operational efficiency to the very benefit of our clients, in terms of speed, cost efficiency and security,” says Gastellu. “And they are also the basis for a paper-free trade industry – one day.”

Banks are beginning to respond; it’s that or face disintermediation, warns McCann. But only when true connectivity is established between ecosystems, will corporate treasurers across the spectrum be able to look forward to managing growth, not paper.

All our content is free,
just register below

Already have an account? Sign in

Please only use letters.
Please only use letters.
Please only use letters.
Please complete this field.
Please select an answer.