Sustainability

Advancements in technology have contributed to an acceleration in the trade finance industry’s digitization efforts, but the reality is that many processes are still done manually and with paper. When will we see critical change in digitizing trade finance?

Via Contour

Advancements in technology, from legal entity identifiers (LEI) to digital trade finance platforms, have contributed to an acceleration in the trade finance industry’s digitization efforts. The pandemic and subsequent lockdowns were a big push factor for many to jump on the digital bandwagon, but the reality is that many trade finance processes are still done manually and with paper.

When will we see critical change in digitizing trade finance? We define that moment as when all participants – banks and their clients, are part of a wider digital network.

“I think it is in this decade – five to seven years is reasonable,” commented Tod Burwell, President & CEO of BAFT (Bankers Association for Finance and Trade), in a recent Contour podcast.

Burwell noted that governments are starting to drive the push towards digitalization through incentives and penalties. He cited deep tier supply chain financing as an example of when policymakers can spur action and activity.

“The more we start to see real examples of success as a function of digitizing, the more it will increase the rate at which we see other organizations adopting it,” he said.

Driving Change in Standards and Interoperability

In June 2022, BAFT, which is the leading international transaction banking association, released a whitepaper “Digitizing Trade Finance: Now and the Future”. The report highlighted the inefficiencies of the global trade system, where roughly 30% of time is spent on processing documents. As a result, $150 billion is estimated to be lost annually to the manual activities of trade finance operations.

The whitepaper concluded that the two major obstacles standing in the way of more digital adoption are interoperability and standards or legal frameworks.

“Those are the two huge pieces that we’re trying to solve for as an industry,” said Burwell.

There are steps made in the right direction to drive change in these areas. Burwell gave the example of the Model Law on Electronic Transferable Records (MLETR), proposed by the United Nations Commission on International Trade Law (UNCITRAL) which has been adopted in seven to eight countries.

“There has been a huge push to try to drive change in the legal framework, in order to allow for data and digital documents to be legally acceptable and legally binding in the context of digital trade,” he added.

BAFT is helping its members, which include banks, technology companies and advisory firms, navigate the obstacles and opportunities that trade digitization presents. It created the Distributed Ledger Payment Commitment (DLPC) as a useful standard to address issues on interoperability. On the broader scale, Burwell added that this is where the ICC Digital Standards Initiative (DSI) comes in.

Solving for Interoperability Through Partnerships

Digital trade finance solutions like Contour are addressing the issue of interoperability by forging partnerships and integrating with other solutions providers.

“We work with bank bank-office systems that manage trade and risk, and we bring our transaction data into those systems,” said Carl Wegner, CEO of Contour.

The fintech’s recent tie-up with Finastra, a bank solutions provider, demonstrates interoperability at its best, as it integrates both solutions – removing friction and simplifying the process for bank operators and their clients.

“The banks’ staff do not need to log in to Contour and can manage their digital Letter of Credit workflows as part of their normal transaction process,” he described.

With the collective power of organizations trying to work towards digitalization, Burwell believes the industry will get there sooner than he personally thinks it would.

Sustaining the Future of Digital Trade

Contour has led the way for more efficient, streamlined and paperless trade finance. It is a platform that creates opportunities for everyone in the trade ecosystem.

This is where sustainability and digital trade solutions intersect. At its core, digitalization and sustainability are the two topics that BAFT is engaged in with their members and what Burwell consistently hears is “achieving sustainability is not possible without digitalisation”.

While Burwell observes that the primary purpose of an organization’s investment in technology is to improve efficiencies or reduce fraud, he fully believes that “sustainability is another fundamental reason why organizations are making that investment in technology”.

However, ESG priorities should not just focus on the environment but also about society and governance. Small and medium-sized enterprises (SMEs) are a big part of the “S” in ESG and a big part of closing the trade finance gap is ensuring that all technological solutions are within the reach of everyone.

“Often, the smaller banks, regional banks and emerging markets banks are best placed to serve that SME population, but they’re not the early adopters of this technology,” Burwell noted. “I think we’re in a place right now where we’re trying to meet those two.”

Wegner emphasized the need to have an SME model to allow them to participate as well.

“Everyone wins when you have more data to exchange and follow,” said Wegner.

The future of trade digitization is now, but this has to happen in a way that is inclusive. SMEs play a big role in many economies, especially in the emerging world. The World Bank estimates that they represent about 90% of businesses and more than 50% of employment worldwide. Improving SMEs’ access to finance is what will make a difference in narrowing the trade finance gap.

To listen to the full podcast featuring Tod Burwell, click the link here.