There have been many initiatives targeting trade finance automation over the last 20 years, yet full digitalization of the core trade finance techniques (L/Cs and documentary collections) seems some way off.
The traditional techniques are still widely used, and there have been few moves toward digitization (the acceptance of electronic documents) and digitalization (the ability to automate processes) that have characterized other areas of finance.
Trade finance experts expect digitalization will happen sometime. The problem is there is no consensus over when that might take place or the form it will take. There are some key hurdles:
- Uncertainty over how a digitalized trade finance ecosystem will look and, crucially, the design of the technology that will power a digitalized network. Blockchain and more general cloud-based technology offer routes to automation, with the key being to ensure interoperability between technology platforms used by the various market participants. All parties to a particular transaction must be able to interact seamlessly.
- Legislation needs to change to enable digitization and digitalization. There has been some progress. For example, there is an international framework that enables the electronic transfer of documents (the UNCITRAL Model Law on Electronic Transferable Records), but only eight countries have implemented it so far.
- Market participants will then need to understand the implications of the legislation, specifically to develop confidence that the new legislation gives them access to recourse in the event that something goes wrong in a transaction. For many, this confidence will grow once any new legislation has been tested in relevant courts.
In other words, market participants need confidence in both the new technology and the legal system that will underpin a digitalized trade finance system before committing to a transition away from the current paper-based environment.
Overcoming these hurdles will take time, yet there is still scope for treasurers to improve the efficiency of their trade finance operations in the meantime. Three areas stand out:
- Use technology where it can help. Some banks operate portals that can streamline the issuance of L/Cs, allowing documents to be prepared electronically. Combining OCR technology with AI means scanned documents can be reviewed for trends and anomalies, potentially streamlining the document review process. The use of APIs may provide some answers to the questions of interoperability.
- Use existing solutions where it makes sense to do so. Any companies with access to SWIFT for payments management can work with their banks to utilize SWIFT’s trade functionality. It may not lead to a fully automated solution, but it will give companies access to more detailed reporting, for example.
- Recognize that trade is likely to digitalize incrementally, so be prepared to react accordingly. The complex nature of trade finance, including the multiple participants, means that digital solutions may evolve over time. This may be geographic — solutions are more likely to emerge in countries such as Singapore, where legislation accepts digital documents — or it may be by process; cross-border payments will be much more efficient as the use of ISO 20022 is extended.
The fact that there have been some successful proofs of concept in specific industries and locations shows that digitalization can happen. The lessons from other areas of finance, such as payments, show that it will happen. It is just unlikely to happen in one “big bang,” so treasurers will want to take advantage of opportunities to improve efficiency and manage risk as they arise.
Learn how you can benefit by moving away from paper processes to digitalization. Check out the AFP Payments Guide to What's New in Trade Finance, underwritten by MUFG.