Digitisation: gaining momentum in trade finance

Today, buzzwords such as ‘blockchain’ and ‘Uberisation’ are commonplace in the shared economy. Everyday life has been transformed by digitalisation, and most industries are similarly being overhauled by technological developments. Except trade finance, that is.

In an era of slow growth – and at a time where the trade finance gap is at its largest and most crippling – trade finance must now accelerate its own digitisation journey.

Automation, efficiency and risk reduction – the benefits are clear

Digitisation could transform trade finance. For one, the automation of key processes – such as the generation of purchase orders and invoices, document comparisons and sanction checks – improves working capital management and reduces operational costs. Not only does such automation enhance liquidity, but it also facilitates efforts to comply with regulatory and compliance requirements – by making processes overall more efficient and more reliable.

Digital contracts and documents streamline processes. The ability to access, review and approve original paperless electronic documents (eDocs) separately from other parties allows for operational improvements at banks, ports and terminals. What’s more, e-Docs enable individuals across the supply chain  and across different countries  to collaboratively draft documents; reducing errors, centralising processes, maintaining data integrity and accelerating the completion of agreements.

Of course, another noteworthy benefit of digitisation is the reduction in risk. The convergence of the physical, financial and document chains provides greater control and oversight over documents, centralises processes, enhances  visibility and lessens the risk of fraud.

So what’s holding the industry back?

Yet, despite the clear benefits of digitisation, uptake across the trade finance industry has been slow. The recently-published International Chamber of Commerce (ICC) Global Survey on Trade Finance revealed that just over 7% of respondents – primarily national, regional and global banks with trade finance functions – see digitisation as being widespread. Furthermore, one in five respondents reported that there is no evident digitisation at all, while two thirds saw very little evidence of the impact of technology.

So, given the benefits, why is the trade finance industry acting so slowly? First, we must consider the considerable size of the task at hand. Digitising trade finance requires significant support and capacity in itself and involves participation from a number of parties. Many port authorities still require the original Bills of Lading (BoL), and are often hesitant to digitise, for instance. In order for digitisation to be widespread across the industry the authorities must accept digital documents, and governments and regulators must create the infrastructure to support their use.

Furthermore, digitising trade is complex, requiring simultaneous changes over multiple industries. Even within a single organisation, changes to contracts and processes need to be made across departments; requiring corporates to consider their change management functions carefully and requiring banks to consider operational impacts and demands.

Another issue associated with digitisation is the potential increase in cybercrime activities. Some fear it could create the opportunity for new forms of fraud in the industry; particularly with regards to the potential for electronically forging or duplicating documents.

Finally, while digitisation must come from the banks – as the gatekeepers of trade finance – it is corporates that must demand it. So far, they seem reluctant to do so.

Inroads are being made

Fortunately, a significant amount of groundwork has already been underway to make digitisation easier for the trade finance industry – particularly with regards to preparing legal standards, technical solutions, and trade facilitation aspects.

As the global survey shows, there have certainly been significant efforts at the industry level. For instance, SWIFT has developed the MT798 – a message used to exchange data between corporates and SWIFT member banks – and trade services utility (TSU). Meanwhile, ICC has developed the electronic Uniform Customs and Practice (eUCP) – rules on the issuance and use of letters of credit (L/C) – which prove crucial in harmonising the use of documentary credits worldwide.

In addition, ICC has created the Uniform Rules for Bank Payment Obligations (URBPO) – a 21st centurychain finance that governs BPO transactions worldwide. At the same time, corporates have pushed for the adoption of electronic documents, including original bills of lading – showing that paperless trade is achievable.

 Next steps

A crucial step towards bringing digitisation to the trade finance industry is harmonisation. Trade often relies on a dense network of counterparties, banks and logistics companies. For the benefits to be felt all parties must be prepared and equipped to deal with digitisation. In line with this, communicating plans both internally and at an industry level will ensure that others learn from work and can collaborate towards digitisation.

In addition, the global survey discusses how slowing down and automating processes step by step can actually accelerate progress. For instance, companies can start by digitising the creation of documents through an online ‘DocPrep’ solution, and then digitise trade finance via online applications, and finally move to end-to-end paperless trade. Taking the process steadily rather than rushing to overhaul all systems is a more likely route to success.

It is important to remember that digitisation is a large-scale project, and cannot happen overnight. Realistic timelines are therefore important when setting goals and annual targets. Such goals can also be aligned with counterparties and even industry competitors, in order to achieve widespread success.

While still a work in progress, the increased uptake of digitisation will certainly streamline trade finance. The slow uptake to date is concerning, but there are ample opportunities and benefits looking forwards. More should be done to help accelerate this development and ensure that the uptake of digitisation is widespread. If corporates demand digitisation, banks will respond.

 

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