INSIGHTS
Connecting digital islands to transform international trade By Michael Vrontamitis, Head of Trade, Europe & Americas, Transaction Banking
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 USD17.3 trillion1, of which 25 per cent is financed. What these figures mask, however, is the trade finance gap, estimated to be USD1.5 trillion2, 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 per cent of trade finance requests made by SMEs are rejected3, compared with 7 per cent of multinational corporations4. Given that SMEs comprise 50 per cent of global GDP and 66 per cent of employment5, 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 knowyour-customer requirements.
1
World Trade Statistical Review 2017. World Trade Organisation.
2
2017 Trade Finance Gaps & Jobs Survey, September 2017. Asia Development Bank.
3
Asia Development Bank, ibid
4
Trade Finance & SMEs. 2016. World Trade Organisation.
5
World Trade Organisation, ibid
Insights | Connecting digital islands to transform international trade
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 today6. As a result, it is easy to see why the obstacles to international trade for SMEs in particular are so high.
The value and obstacles to digitisation Digitisation 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 20357, increasing GDP by 9 per cent in developed markets and up to 20 per cent in Brazil and 55 per cent in China. The WTO estimates that a 10 per cent increase in trade finance would lead to a 1 per cent increase in jobs. With 3.3 billion8 people employed globally, this would represent a huge step in reducing global unemployment, estimated to be 188 million9, and increasing job stability in many countries where employment is vulnerable.
Figure 1
Understanding the SME trade finance gap Key reasons for banks to reject trade financing KYC concerns
29%
Need for more collateral/info
21%
Considered not suitable
20%
Low bank revenue
15%
Other
15% 0%
5%
10%
15%
20%
25%
30%
Source: Trade Finance & SMEs. 2016. World Trade Organisation.
Digitisation 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 20357, increasing GDP by 9 per cent in developed markets and up to 20 per cent in Brazil and 55 per cent in China.
Digital Innovation in Trade Finance. Boston Consulting Group (in association with SWIFT), October 2017
6
World Trade Organisation.
7
World Labour and Social Outlook 2018. International Labour Organisation.
8
International Labour Organisation, ibid
9
Despite such a compelling proposition, previous attempts to digitise trade have focused on specific elements of the process, as opposed to taking an endto-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 (figure 2). 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 maximise connectivity between buyers and sellers.
Figure 2
Digital islands in international trade – four key solutions Multi-funder solutions
Increasingly cloud-based, these enable corporations to submit documentation to multiple banks/funders via a single interface and process flow
Procure to pay networks
Enable buyers to streamline their purchasing process by connecting buyers and sellers through a single network, often evolving from non-direct spend categories
Supply chain management networks
Create visibility across supply chains, including managing direct spend and document flow
Dynamic discounting
Enable buyers to use their own funds to pay early and achieve a discount/return on their cash
Emerging solutions include: Marketplaces
Solutions that enable corporations to sell their receivables and/or bid out guarantees
AI toolset
Artificial intelligence and machine learning-based learning models to automate processes and create additional supply chain insights
Accelerating digitisation However, emerging technology such as artificial intelligence (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 or 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. 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 World Trade Organisation.
10
less developed countries for whom the obstacles to international trade are currently the highest. One of the major challenges in digitising international trade is that technology development needs to be accompanied by harmonisation 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 per cent, with the least developed countries expected to derive the greatest benefit, and boost world export growth by 2.7 per cent, adding 0.5 per cent of global GDP by 203010. The International Chamber of Commerce (ICC) is also engaged on a range of projects to update ICC rules in line with digitisation, create a roadmap for digital trade
and enhance connectivity between financial institutions and financial technology (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 digitisation 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, TradeLens. A key measure of success for these platforms will be the degree of industry collaboration. The recently announced Trade Information Network (the Network), for example, is the first inclusive global multibank, 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. 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, minimising 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 during which time 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.
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October 2018
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