An era of digital trade
The COVID-19 pandemic has resulted in a significant slump in global trade volumes in 2020, with the latest World Trade Organisation (WTO) forecast estimating that global merchandise trade will shrink by 9.2% year-on-year. If there is any silver lining to the crisis, however, it is that it has accelerated the adoption of digital trade processes and raised the profile of digital innovators within the industry.
Digital innovation is changing the way that global trade is transacted, by delivering new capabilities that facilitate optimised, efficient processes and more frictionless trade. Technology has already enabled micro, small and medium-sized enterprises (MSMEs) across the globe to identify counterparties and to trade goods over far greater distances, while advances in communication and transportation have supported the growth of more sustainable global value chains.
Digital processes that leverage blockchain and the latest advances in artificial intelligence (AI), now have the potential to further boost global trade activity and thereby economic growth, which is important as global trade volumes are forecast to rebound by 7.2% in 2021 following the pandemic induced slump. A key element of this digital transformation is happening in the hitherto largely analogue world of trade finance, which is increasingly becoming a digitised, data management business.
Banks and non-bank financial institutions (NBFIs) process and store phenomenal amounts of data and can harness this using technology, to gain a deeper understanding of their clients’ businesses and thereby build enriched relationships them; supporting their business needs and helping to generate opportunities for growth. For instance, companies looking to export to new markets could be provided with information pertaining to the potential risks and rewards of doing business in those locations, as well as details of the trade finance products that are most suitable for those countries.
Digital trade is also seen as a key enabler to help financial institutions close the global trade finance gap, estimated to be in excess of $2 trillion per annum. Indeed some 55% of respondents to the International Chamber of Commerce (ICC) 2020 Global Survey on Trade Finance stated that they are looking to use technology solutions, including outsources Software-as-a-Service (SaaS) based platforms, to help them service more MSMEs.
According to the ICC survey, MSMEs (particularly those from emerging markets) face a disproportionate challenge accessing working capital funding and are more likely to have their requests for trade finance rejected than their larger counterparts; usually due to know your customer (KYC) concerns and/or low-quality applications.
If this trade finance gap is allowed to persist, it could have severe implications for international trade and compromise the health of the world economy. Indeed, with both emerging markets and MSMEs tipped to become primary contributors to global trade growth in the coming years, and as key trading partners for larger companies across the world, ensuring that they can access trade finance is of paramount importance to the industry.
The potential benefits of digitalisation range from cost savings and enhanced efficiency, greater transparency and security throughout the supply chain, enabling the adoption of common documentation standards, to improving the overall ease of doing business. Blockchain technology, for example, has the potential to be an ideal platform for KYC checks, as its distributed-ledger format records data in a completely transparent manner, whilst being cryptographically secure. For example, the data stored and shared on databases such as the Global Legal Entity Identifier System, enables financial institutions to authorise and verify identity, and could reduce the cost of verifying parties to a trade transaction by an estimated $500 million per annum.
The role of technology in enhancing trade finance does not stop with KYC. It is also creating opportunities to transform existing processes across global supply chains, with resulting enhancements to operational efficiency.
AI, for example, is increasingly being used to digitalise trade and supply chain processes. From a transaction initiation perspective, AI helps digital platform users submit relevant transactional information, by validating data inputs and ensuring that their applications are submitted in an optimal manner. From a risk management perspective, AI can leverage network data and real-time payment behaviours to develop more accurate, real time credit scores and associated tools to monitor investments. Increased use of AI across all aspects of global supply chains will help to further boost economic growth, by reducing transactional risks, driving down costs and facilitating smoother, frictionless trade.
Application programming interfaces (APIs) can also play a particularly important role in the new era of digital trade. APIs enable the easy exchange of information between systems, allowing data to be extracted from multiple sources and collated. Powerful analytic capabilities can then be used to deliver comprehensive, meaningful insights on both the performance of portfolios of assets, and also on the behaviours of participants to specific transactions, from which financial institutions can develop bespoke solutions and add real value to the client experience.
Investing into new technology can, however, present challenges for many businesses, given the costs and complexities involved. However, partnerships between corporates, financial institutions and fintechs can provide the answer. Such alliances are powerful means by which companies and financial institutions can leverage the latest technological capabilities, as well as knowledge and specialist expertise, and avail of the very best service and trade solutions, without the need for substantial investment.
Technological developments are integral to the success of global trade and trade finance, and the importance of delivering digital capabilities to enhance transaction management processes and alleviate the $2 trillion trade finance gap, is increasingly being recognised by industry participants. If global trade is to really flourish in the digital era, the barriers that are blocking access to trade finance must be tackled strategically and collaboratively.
Banks, non-banking financial institutions (NBFIs), fintechs, industry associations, regulators and governmental bodies can all work together to promote common digital standards, enhance participation in global supply chains by enterprises of all shapes and sizes, and thereby allow new business opportunities to be unlocked.