FinTechConnecting digital islands to transform international trade

Connecting digital islands to transform international trade

How can the implementation of new technology be a catalyst for trade, reducing the trade finance gap and boosting growth and prosperity, asks Michael Vrontamitis.

International trade fuels growth and prosperity, but cost, complexity and fragmentation are stifling this growth. According to World Trade Organisation (WTO) figures, the value of manufactured exports is around $17.3trn, of which 25% is financed.

What these figures mask, however, is the trade finance gap, estimated to be $1.5trn, a significant barrier to trade. With trade growing at a slower rate than GDP growth in recent years, the question is whether technology can be a catalyst for trade and reduce the trade finance gap to boost growth and prosperity.

The trade finance gap and its impact

The trade finance gap is largely due to the high proportion of trade finance rejections, which affect small and medium sized enterprises (SMEs) disproportionately: 74% of trade finance requests made by SMEs are rejected, compared with 7% of multinational corporations. Given that SMEs comprise 50% of global GDP and 66% of employment, addressing these issues would unlock a major constraint on growth.

There are a variety of reasons why SMEs can find it so difficult to finance their trade (figure 1). Ultimately, a factor that underpins many of these issues is complexity, which is exacerbated further by shifting trade patterns, with a growth in south-south trade and extension of supply chains, and increased regulation, such as know your customer (KYC).

For example, a simple shipment from East Africa to Europe can go through nearly 30 stakeholders including more than 200 interactions and communications across a network of shippers, forwarders, ocean carriers, ports and customs authorities – excluding the banks that finance the transaction.

The documentation, legal, risk and compliance issues are replicated at each stage, leading to a proliferation of cost, paper and manual processing, with around 4 billion pages of documents circulating in documentary trade today. As a result, it is easy to see why the obstacles to international trade for SMEs in particular are so high.

 

Figure 1. Understanding the SME trade finance gap

Source: World Trade Organisation

Obstacles to digitization

Digitization is an obvious way of addressing this complexity; indeed, technology development is cited as the factor that will affect trade the most between now and 2035, increasing GDP by 9% in developed markets and up to 20% in Brazil and 55% in China. The WTO estimates that a 10% increase in trade finance would lead to a 1% increase in jobs. With 3.3 billion people employed globally, this would represent a huge step in reducing global unemployment, estimated to be 188 million, and increasing job stability in many countries where employment is vulnerable.

Despite such a compelling proposition, previous attempts to digitize trade have focused on specific elements of the process, as opposed to taking an end-to-end view, leading to ‘digital islands’ still surrounded by a sea of paper and complexity. These have typically fallen into one of four key solution categories.

Complexity remains as corporations typically need to work across multiple platforms and networks to maximize connectivity between buyers and sellers

Although these are starting to converge, it becomes more difficult to gain consensus on their value and adoption as these broader solutions touch multiple divisions of a corporation. Furthermore, complexity remains as corporations typically need to work across multiple platforms and networks to maximize connectivity between buyers and sellers.

Digital islands in international trade

Accelerating digitization

Emerging technology such as AI and machine learning tools can offer substantial benefits to corporations, such as by automating processes and improving predictability in both the physical and financial supply chain. Use cases and proof of concept projects using blockchain (distributed ledger technology) solutions will also mature.

Open application programming interfaces (APIs) already allow quicker, more integrated and seamless integration between systems and counterparties. It is not a case that one technology will supersede all others. Rather, emerging solutions are likely to take a ‘best in class’ approach, applying the most appropriate technology to solve a particular problem.

Technology development needs to be accompanied by harmonization of legal frameworks and clarity over liability and information security

In addition to individual technology innovations and initiatives, there are a variety of initiatives underway that could help to connect digital islands more quickly and increase access to trade finance, particularly amongst less developed countries for whom the obstacles to international trade are currently the highest. One of the major challenges in digitizing international trade is that technology development needs to be accompanied by harmonization of legal frameworks and clarity over liability and information security, an area in which we are seeing substantial progress.

For example, the WTO’s Trade Facilitation Agreement (TFA), which came into effect in 2017, has been designed to simplify documentation, modernise trade procedures and harmonise customs requirements. The TFA is estimated to reduce global trade costs by an average of 14.3%, with the least developed countries expected to derive the greatest benefit, and boost world export growth by 2.7%, adding 0.5% of global GDP by 2030.

The International Chamber of Commerce (ICC) is also engaged on a range of projects to update ICC rules in line with digitization, create a roadmap for digital trade and enhance connectivity between financial institutions and fintech providers. There are also new groups forming to develop and encourage adoption of data standards. These include the Digital Trade Standards Board and Universal Trade Network Organisation to enable platforms to be technically interoperable.

These efforts will help to remove paper from trade processes, which in turn will reduce some complexity and manual effort, and enhance connectivity between the digital islands over time.

Collaboration and innovation

Initiatives such as TFA provide a catalyst for digitization to accelerate the transformation of international trade and trade finance and connect buyers, sellers, funders and supply chain partners.

Most notably, “networks of networks” or data aggregators could bridge digital islands to allow both buyers and sellers to control their data more effectively, including enabling their financing and supply chain partners more seamless access to relevant data. These “networks of networks” are already emerging across shipping, banking and other sectors, such as Marco Polo, Voltron, we.trade and TradeLens. A key measure of success for these platforms will be the degree of industry collaboration.

The recently announced Trade Information Network, for example, is the first inclusive global multi-bank, multi-corporate network in trade finance. Set up by seven leading trade finance banks, and in partnership with technology corporation CGI, it is designed to be publicly available, to create a data exchange between all corporations and their banks for purchase orders (PO) and invoices.

The transformation of international trade and trade finance processes will not take place overnight; rather, there will be an inevitable transition period during which paper and digital processes will co-exist

This will make it easier to both obtain and provide trade finance, crucially including currently underserved market segments. Corporations can exchange PO and invoice data through their regular banking communications channel, or directly through the platform, minimizing disruption to processes and providing greater transparency and trust for banks and corporations alike. In addition to the founding banks, more than 20 additional banks globally are actively participating in developing the Network and several corporates have already expressed an interest in participating in pilot projects.

The transformation of international trade and trade finance processes will not take place overnight; rather, there will be an inevitable transition period during which paper and digital processes will co-exist. The technology available today offers significant potential to enhance international trade, but the value of these solutions, whether based on new or familiar technologies, will be greatly enhanced by the unprecedented degree of collaboration amongst industry players, as evidenced by the advent of consortium-led ‘networks of networks’.

The industry will be transformed not through innovation alone, however, but in adoption. This will require a significant change of mindset both by organisations and individuals, to unlearn the past, and embrace new technologies, collaborations and processes. The value of doing so could be extraordinary, increasing global prosperity, economic inclusion and stability, and increasing access to international trade to the companies that drive employment and growth.

 

About the author

Michael Vrontamitis is head of trade, Europe & Americas at Standard Chartered, and also chairs the ICC Trade Digitisation Working Group.

 

 

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