Trade finance processes are still predominantly paper-based, resulting in unnecessary costs, delays and inefficiencies. With a number of digitisation initiatives and developments currently in play, how could trade finance benefit from digitisation and how much progress has been made so far?
In the global trade arena, the need for digitisation is widely understood. “The current process for trade is notoriously paper-heavy, manual and iterative,” explains Peter Jameson, head of Asia Pacific Trade and Supply Chain Finance, Global Transaction Services at Bank of America. “Digitisation can help treasurers create simpler workflows, track flows of goods and funds in real time, and make smarter financing and funding decisions based on available data.”
While various initiatives have been attempted over the years, these have tended to create digital islands that fall short of digitising the industry in any meaningful way. But with numerous industry initiatives under way, not to mention the opportunities brought by emerging technologies, could trade finance digitisation finally be an achievable prospect?
Why digitise trade?
Given the costs, delays and potential for error associated with traditional processes, everyone in the trade ecosystem stands to benefit from greater digitisation. Indeed, the abundance of paper and the lack of common standards can sometimes mean that the paperwork related to a transaction is still being processed days after the actual goods have arrived – particularly when it comes to trade finance instruments such as guarantees and letters of credit (LCs).
“In a digital process, a guarantee can be issued within minutes, rather than days,” says Enno-Burghard Weitzel, SVP Strategy, Digitization and Business Development at Surecomp. “And documents under an LC can be reviewed within hours rather than days.” In addition, with participants able to access full transparency over the status of the transaction, “such instant feedback allows corporates much better planning and greater reliability.”
Beyond the ability to speed up individual transactions, digitisation also has the potential to improve the resilience of global trade on a much wider scale. “Digitisation – in other words, not having to rely on physically moving pieces of paper around the world to support the movement of critical goods – makes global supply chains and trade more robust, more reliable and less prone to shocks,” says Steven Beck, Head of Trade & Supply Chain Finance at Asian Development Bank.
Beck explains that digitisation could drive numerous improvements throughout the trade ecosystem, which includes exporters, shippers, ports, customs, warehousing/logistics, finance and importers. “Digitisation would reduce costs, lowering barriers to entry for SMEs. It would drive higher productivity – and it would also drive transparency, thereby improving environmental and social safeguards while reducing trade-based money laundering,” he says.
In addition, he notes, digitisation has the potential to create metadata that can support the closing of trade finance gaps by providing “granular information on risks including credit risk, performance risk and money laundering risk.”
End-to-end automation is hampered by the least sophisticated party (or country) in the supply chain, which in turn is governed by local market rules.
Peter Jameson, head of Asia Pacific Trade and Supply Chain Finance, Global Transaction Services, Bank of America
Developments to watch
Various developments and initiatives currently under way could pave the way for greater digitisation. For one thing, Weitzel notes that the rise of digital transferable records, together with relevant legislation, has the potential to replace paper with digital tokens.
One notable development is the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR). Adopted in 2017, the MLETR provides legal recognition for electronic transferable records and has so far been enacted by Bahrain and Singapore.
Digital identity is another area of focus. Weitzel explains that the Global Legal Entity Identifier Foundation (GLEIF) has created a framework for a chain of trust relating to the “digital identities of corporates and the natural persons acting on behalf of these entities.” He adds: “There is a growing number of very interesting fintechs that provide an ecosystem with services around these digital identities. Ultimately, this will drive down the effort for corporates and banks/financiers alike to verify counterparties.”
Another notable initiative cited by Asian Development Bank’s Beck is the Digital Standards Initiative (DSI) which has been created by ADB together with the Government of Singapore and the International Chamber of Commerce (ICC). “DSI is bringing together industry from each component part of the trade ecosystem to agree common standards and protocols that will drive digitisation and interoperability,” says Beck.
In addition, when it comes to facilitating interoperability between digital islands, Vinay Mendonca, Global Head of Product and Proposition Management at HSBC, says the ICC’s Uniform Rules for Digital Trade Transactions (URDTT) “is a key initiative which would create a framework for an end-to-end digital trade transaction and adoption.” He adds, “HSBC is an active participant in the design and construct of these standards, which are in the final stages of release.”
Innovation through digitisation
Enno-Burghard Weitzel, SVP Strategy, Digitization and Business Development at Surecomp, says innovation is key when it comes to enabling corporates to compete successfully. “Think of an import of dried fruits from Namibia to Hamburg,” he says. “The fruits need a certain temperature band and also humidity level. If the temperature or humidity are outside the bands, the fruits will be rotten and worthless.”
In the traditional process, says Weitzel, the status of the fruit would only be discovered at the destination port – and if the fruit is worthless, the importer would have to wait for three of four weeks to receive the next shipment and get funds from the insurer.
In a digital process, says Weitzel, “there are almost no barriers to the scope of innovation that can be adopted.” In this case, he says, a sensor within the container could continually measure temperature and humidity. “In case one of them is outside the bands, the insurance would automatically pay, the importer could immediately order a new lot, and the container could be discharged at the next best harbour.”
Digital trade finance tools
Alongside these initiatives, efforts are under way to bridge the trade finance gap and support digitisation through the adoption of technology. “One of the most meaningful by-products of the pandemic for trade finance is the renewed drive to digitise its historically manual and paper-based processes,” comments Bank of America’s Jameson.
He adds that this has led to a greater emphasis on accessing trade finance online portals remotely, converting non-digital data into a digitised format, leveraging e-signature capabilities, “and simply being able to operate effectively outside the office environment in a fully electronic manner with enhanced visibility and control.”
Different companies have different requirements where trade finance digitisation is concerned – and as such, Jameson emphasises the role of “digitisation opportunities across multiple technologies which can offer the right mix of digital solutions”. He adds that digital trade finance tools include secure trade finance online portals which can automate workflows for traditional trade and supply chain finance transactions.
Also of interest, says Jameson, is “an innovative concept called ‘supply chain as a service’, which creates the ability to integrate bank systems directly with clients’ ERP systems to identify transactions that can shore up the financial health of a client’s supply chain through early payment financing.”
Blockchain and beyond
Where technology is concerned, Jameson also notes the role blockchain can play in tracking goods and funds in real-time, while providing transparency to instruments throughout the lifecycle of a transaction.
Indeed, blockchain/distributed ledger technology (DLT) has emerged as a key enabler for digitisation. As HSBC’s Mendonca points out, this is due to its ability to offer decentralisation, real-time visibility for all participants, and tokenisation. “Digitalising and tokenising assets enables banks to have better control over the financing of trade assets,” he comments. “It also opens possibilities to finance deeper into the supply chain to lower tiers.”
Mendonca adds that HSBC has pioneered the use of blockchain technology in global trade since the first blockchain-enabled letter of credit transaction in May 2018. “Since then, we have been instrumental in the evolution of the Contour platform, and we’re currently working with several clients to help them to move their flow transactions onto the platform,” he says.
In addition, Mendonca says a number of other technology developments have a role to play in trade finance digitisation, from big data and advanced data analytics to artificial intelligence (AI), Optical Character Recognition (OCR) and Robotic Process Automation (RPA).
In a digital process, a guarantee can be issued.
Enno-Burghard Weitzel, SVP Strategy, Digitization and Business Development, Surecomp
Overcoming the obstacles
While there are plenty of developments and initiatives in the pipeline, adopting technology in the trade finance space is not always straightforward due to the complexity of global supply chains and the proliferation of different standards and practices in different markets. As Bank of America’s Jameson notes, “End-to-end automation is hampered by the least sophisticated party (or country) in the supply chain, which in turn is governed by local market rules.”
In addition, he says there is sometimes a perception that the adoption of technology is too expensive or futuristic, or that only large or newly set up companies have the luxury of being able to put funding aside for investment in technology. “Unless all parties in a supply chain are aligned in moving towards paperless, there is little incentive for a company, especially a smaller player, to make the first move and invest in digitising their internal trade processes,” he says.
So what is needed in order to accelerate digitisation? Where specific solutions are concerned, Surecomp’s Weitzel emphasises the importance of focusing on users in order to encourage the wide adoption of digitisation. “The smaller the change for the user, the more likely is the adoption,” he points out.
At the industry level, Jameson notes that as governments recognise the importance of keeping supply chains moving during the pandemic, “many policymakers are re-examining how legal and regulatory environments need to evolve in order to accommodate greater digitisation of trade finance, whilst providing the same level of certainty and risk mitigation afforded by paper-based predecessors. These moves should set the framework for – finally – enabling trade finance to move towards a digitised future.”
He adds, “To realise the full potential of digital trade, it is also crucial for industry leaders and practitioners to drive the development of digital standards that will enable trade digital solutions to function and communicate with one another.”
As such, the coming years could be critical. Citing the importance of developments such as the widespread adoption of MLETR and the standardisation of API interfaces, Weitzel predicts that in 2030, “If we look back to the year 2021, we will realise that the pandemic was a great shift towards digitisation, and that the years until 2025 saw a steady growth in the adoption of digital solutions.”
When it comes to accelerating trade finance digitisation, Steven Beck, Head of Trade & Supply Chain Finance at ADB, cites the importance of the following developments:
- Closing legislative gaps for the digitisation of trade – countries should adopt UNCITRAL model laws on legislation.
- Global implementation of standards and protocols for digitisation, which would drive interoperability between IT platforms and between the component parts of the trade ecosystem.
- Global implementation of the Legal Entity Identifier.