At the World Trade Symposium 2018 in London, an annual platform for world business, policy and technology leaders to connect, three areas of “openness” were addressed; open markets, open finance and open technology. There was a view that under the current system, growing numbers of individuals and businesses were excluded and that fair, open trade for all had failed to materialise.
The use of trade as a political tool has become more common, with the term “weaponization” in relation to trade being used more and more frequently. Trade cannot just cater for the elite, yet the 1.5tn financing gap, much of which is attributed to SMEs and emerging Africa and Asia, suggests that this is the case under today’s model.
To deliver open and inclusive trade, there have been suggestions that the World Trade Organisation needs to reform, and the current approach to trade from the US, in particular, is aimed at delivering that reform. In fact, representatives from the US government said that despite the current rhetoric around tariffs and trade wars, and a view from the outside that the country was returning to mercantilism, America remains one of the most open economies for trade and investment in the world.
Increasing accessibility for SMEs
One means of making trade more accessible to those wishing to participate is improving access to finance. Small businesses generate 75% of global GDP. But according to the ICC nearly 70% of SME finance requests will be rejected initially, and of these nearly 30% will not return for financing. There is not only a disparity when it comes to company size and geography, but also gender, with female entrepreneurs 2.5 times more likely to be rejected for financing than their male counterparts.
The availability of new technologies at scale will play a significant role in lowering barriers to entry and making trade and financing more accessible. Increased availability of cloud computing gives more flexibility in solution pricing and lowers the cost of data storage and manipulation, while the increasing availability of open APIs means faster integration between different systems and data sources. A significant factor in the cost of financing in emerging markets is an inability to KYC. The availability of accurate data on financial history is a major contributor to this. However, the rise of the platform provides the capability to consolidate data sources and allows financial institutions, in particular, to more accurately assess risk in dealing with counterparties, reducing transaction time and cost in the process.
“A significant factor in the cost of financing in emerging markets is an inability to KYC”
Platforms further reduce the cost to serve by creating a single, golden source of data which can be accessed by all actors. When the management of that data is underpinned by distributed ledger technology (or blockchain), it has the potential to deliver immutability and shared decision making in real time. This data layer can be further augmented with technologies such as artificial intelligence, IoT and smart contracts to drive process automation and more effective decision making.
In the context of making trade more attainable, platforms are reshaping the ecosystem around SMEs by enhancing connectivity and access to services as well as facilitating cheaper access to new markets and customers. One caveat to this is that challenges around connectivity and infrastructure remain, with around half of the world’s population not using the internet.
Barriers to digital adoption
The symposium noted that efforts to advance the adoption of digital tools in trade finance and in digitalising physical and financial supply chains continue to be hampered by fragmented practices. With the increased demand for digitalisation in trade processes and documentation, there is a need for common standards for technology and data, and for the evolution of the current rules environment to match the paradigms created by new technologies. The rules regarding international trade are currently lagging the technology that is available and are heavily geared towards linear transfer of liability and paper documentation. Some countries even require any negotiable instrument to be physically signed.
“The rules regarding international trade are currently lagging the technology that is available”
New technologies support full digitalisation of processes, and shared liability always in the case of blockchain, meaning that rules need to be revisited to facilitate adoption of emerging paradigms and business models in a safe and sustainable manner. While fully electronic documentation and processing have existed in trade finance for several years, there has been no definitive standard around data or formats that has resulted in the current fragmented landscape and digital islands. Therefore, standards are also needed to drive interoperability between different networks and protocols. In addition, data protectionism and attitudes towards data sovereignty need to be revisited to support the platform-based business models and seamless cross-border data flows required to facilitate growth.
Provenance and sustainability
Another theme that was heavily prevalent at the World Trade Symposium was sustainability. Consumers are increasingly making buying decisions on moral grounds and want to know where their goods have originated from. Financial services providers are increasingly interested in the provenance of goods, which allows them to assess the risk of financing transactions not only from an operational and credit perspective but also for the potential reputational impact. One attendee even remarked that the trade relationships and wars of the future may be fought on these grounds; linked for example to whether a country has met their sustainability or climate change goals.
It’s vital to address these themes and issues if we are to improve international commerce for all. At the symposium, the view of the World Trade Board was very much that global trade can be a formidable force for good, with the potential to spur more inclusive growth. Greater digitalisation will play an important part in supporting this, but in an unstable and fast-changing world, improvements across trade, finance and technology are essential to achieve the end-goal.
About the author
Mike Walker is head of sales enablement, Corporate Banking and Payments, at Finastra. He is responsible for the go-to-market strategy and content across Cash Management, Trade and Supply Chain Finance, Complex Lending and Payments. Working with the Sales and Product Management organizations, Mike is accountable for defining target markets and ensuring roadmaps accurately reflect the needs of the customer. He is the Finastra Lead for the DigiTrade working group with the World Trade Board. Mike holds a Master’s degree in Systems Engineering from Loughborough University, and spent five years at Barclays in various roles across corporate banking prior to joining Finastra in 2016.