Digitisation of trade finance inevitable

TRADE finance processes are still predominantly paper-based, not only in Zimbabwe but everywhere.

This results in unnecessary costs, delays and inefficiencies. With a number of digitisation initiatives and developments currently in play, how could trade finance benefit from digitisation and how much progress has been made so far? 

In the global trade arena, the need for digitisation is widely understood. The current process for trade is notoriously paper-heavy, manual and iterative. Digitisation can help businesses create simpler workflows, track flows of goods and funds in real time, and make smarter financing and funding decisions based on available data.

While various initiatives have been attempted over the years, these have tended to create digital islands that fall short of digitising the industry in any meaningful way. But with numerous industry initiatives underway, not to mention the opportunities brought by emerging technologies, could trade finance digitisation finally be an achievable prospect?

Given the costs, delays and potential for error associated with traditional processes, everyone in the trade ecosystem stands to benefit from greater digitisation. Indeed, the abundance of paper and the lack of common standards can sometimes mean that the paperwork related to a transaction is still being processed, days after the actual goods have arrived, particularly when it comes to trade finance instruments such as guarantees and letters of credit (LCs).

In a digital process, a guarantee can be issued within minutes, rather than days, and documents under an LC can be reviewed within hours rather than days. In addition, with participants able to access full transparency over the status of the transaction, such instant feedback allows corporates much better planning and greater reliability.

Beyond the ability to speed up individual transactions, digitisation also has the potential to improve the resilience of global trade on a much wider scale. Digitisation, in other words, not having to rely on physically moving pieces of paper around the world to support the movement of critical goods, makes global supply chains and trade more robust, more reliable and less prone to shocks. 

It could drive numerous improvements throughout the trade ecosystem, which includes exporters, shippers, ports, customs, warehousing/logistics, finance and importers. Digitisation would reduce costs, lowering barriers to entry for amall and medium enterprises. It would drive higher productivity  and it would also drive transparency, thereby improving environmental and social safeguards while reducing trade-based money laundering.

African countries through the African Continental Free Trade Area (AfCFTA) should push towards trade finance digitisation. One big advantage of digitisation is that it has the potential to create metadata that can support the closing of trade finance gaps by providing granular information on risks including credit risk, performance risk and money laundering risk.

Various developments and initiatives are currently underway that could pave the way for greater digitisation. The rise of digital transferable records, together with relevant legislation, has the potential to replace paper with digital tokens.

One notable development is the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR). Adopted in 2017, the MLETR provides legal recognition for electronically transferable records and has so far been enacted by Bahrain and Singapore.

Digital identity is another area of focus. The Global Legal Entity Identifier Foundation (GLEIF) has created a framework for a chain of trust relating to the digital identities of corporates and the natural persons acting on behalf of these entities.  Furthermore, there is a growing number of very interesting fintechs that provide an ecosystem with services around these digital identities. Ultimately, this will drive down the effort for corporates and banks/financiers alike to verify counterparties.

Alongside these initiatives, efforts are underway to bridge the trade finance gap and support digitisation through the adoption of technology. For instance, one of the most meaningful by-products of the Covid-19 pandemic for trade finance is the renewed drive to digitise historically manual and paper-based processes.

This is driving a greater emphasis on accessing trade finance online portals remotely, converting non-digital data into a digitised format, leveraging e-signature capabilities, and simply being able to operate effectively outside the office environment in a fully electronic manner with enhanced visibility and control.

To note, different companies have different requirements insofar as trade finance digitisation is concerned.  Emphasis therefore should be on the role of digitisation opportunities across multiple technologies which can offer the right mix of digital solutions. Digital trade finance tools, therefore, should include secure trade finance online portals which can automate workflows for traditional trade and supply chain finance transactions.

Of interest among bank and corporate treasurers is an innovative concept called “supply chain as a service”, which creates the ability to integrate bank systems directly with clients’ Enterprise Resource Planning (ERP) systems to identify transactions that can shore up the financial health of a client’s supply chain through early payment financing.

A number of other technology developments have a role to play in trade finance digitisation, from big data and advanced data analytics to artificial intelligence (AI), Optical Character Recognition (OCR) and Robotic Process Automation (RPA).

While there are plenty of developments and initiatives in the pipeline, adopting technology in the trade finance space is not always straightforward due to the complexity of global supply chains and the proliferation of different standards and practices in different markets. Sometimes end-to-end automation is hampered by the least sophisticated party (or country) in the supply chain, which, in turn, is governed by local market rules.

There is sometimes a perception that the adoption of technology is too expensive or futuristic, or that only large or newly set up companies have the luxury of being able to put funding aside for investment in technology. Unless all parties in a supply chain are aligned in moving towards a paperless dispensation, there is little incentive for a company, especially a smaller player, to make the first move and invest in digitising their internal trade processes.

What is needed in order to accelerate digitisation? Where specific solutions are concerned, emphasis should be on the importance of focusing on users in order to encourage the wide adoption of digitisation. The smaller the change for the user, the more likely is the adoption.

With the Covid-19 global pandemic, governments are recognising the importance of keeping supply chains moving.  Many policymakers are re-examining how legal and regulatory environments need to evolve in order to accommodate greater digitisation of trade finance, whilst providing the same level of certainty and risk mitigation afforded by paper-based predecessors. These moves should set the framework for finally enabling trade finance to move towards a digitised future.

However, to realise the full potential of digital trade, it is also crucial for industry leaders and practitioners to drive the development of digital standards that will enable trade digital solutions to function and communicate with one another.

As such, the coming years could be critical. Looking back to the years 2020 and 2021, it is clear that the pandemic was a great shift towards digitisation, and that the years until 2025 will see a steady growth in the adoption of digital solutions.  

*About the writer: Tinashe Kaduwo is a researcher and economist. He writes in his personal capacity. Contact [email protected] whatsapp +263773376128