Waking the Sleeping Giant? The Potential for Trade Finance Transformation
By Helen Sanders, Editor
There are few areas of modern life which have not seen radical change over the past two decades. The way we shop and communicate, the way we do our jobs, what we eat, and where and how we travel continue to change inexorably. The way that both individuals and businesses consume banking services is no different. Across areas such as cash management, FX and lending, there has been significant innovation in recent years, with opportunities such as mobile payments and wallets and FX trading platforms facilitating new business models and prompting changes in user expectations. However, trade finance remains a key area where developments have been modest in comparison, despite its importance in facilitating international trade. Recently, the sleeping giant seems to have stirred, however, albeit slightly, with a notable number of press releases about proof of concept projects to digitise trade finance, frequently based on distributed ledger technology (DLT), often known as blockchain. Could we now be starting to see the start of a transformation in trade finance?
Innovation imperative in trade finance
Trade finance is often described as an area ripe for change, and Daniel Schmand, Managing Director and Head of Trade Finance and Cash Management, Corporates, EMEA, Deutsche Bank, and Chair of the ICC Banking Commission emphasises,
“The level of unmet demand for trade finance has been estimated at more than US$1.6tr annually at a time when banks continue to face capacity constraints in responding to this demand and fintech firms are actively looking to apply innovative solutions to trade financing.”
As he continues, digitisation of trade finance brings immediate and quantifiable benefits to all participants,
“The 2017 ICC Banking Commission report, Rethinking Trade and Finance notes that the elimination of paper from trade finance transaction processing could reduce processing time by two hours per transaction and reduce compliance costs by 30%.”
While there are operational advantages to digitisation and increased efficiency are universal across all participants, the imperative for SMEs is more profound. According to the 2016 edition of the above report, 58% of trade finance applications by SMEs were turned down, compared with 53% in 2014, severely hampering international trade and damaging growth, particularly given that two of every three jobs globally are created by SMEs. There are multiple reasons for this, but the slower, more opaque and more expensive a transaction, the greater the risk and therefore the less attractive it is for banks to offer financing. By reducing costs and accelerating transactions, however, and making it easier to comply with relevant regulations, digitising trade finance could help to unlock additional financing and therefore fuel growth.
Motivation and momentum
There is undoubtedly motivation for change across the banking and wider community, as Schmand comments,
“The dependence of trade finance on a paper environment, while logistics such as container shipping have electronic architectures, is holding back trade. Given that more than 80% of trade is financed by some form of credit, the industry has a responsibility to resolve the issue.”
This motivation is illustrated in the 2017 ICC Banking Commission report cited above which highlights that nearly 44% of respondents identify priorities linked to digitisation and technology as strategic priorities; however, while 50% anticipate high levels of digitisation within a decade, a similar number expect this evolution to take 10 – 25 years. Given the progress that has been made in other areas of banking, even the most optimistic of predictions still seem relatively conservative. Angela Koll, Specialist Trade & Supply Chain Finance, Commerzbank AG explains some of the reasons why innovation in this space is likely to take time,
“Trade finance is based on a complex ecosystem with multiple stakeholders, a large number of data flows, country specific jurisdictions and regulatory requirements. Added to this is the challenge of meeting the increasing demands of compliance, sanctions, embargos and KYC. As a result, trade remains very much based on paper-driven processes, as the document contains key data about the transaction, often being signed and stamped to provide evidence. These documents are subject to certain standards and are globally accepted, such as the invoice, bill of lading or insurance document.”