Authors: Alexander Goulandris, CEO, essDOCS, and Michael Vrontamitis, Global Head of Trade, Product Management, Standard Chartered; ICC Digitalisation Working Group co-chairs.

*This article originally appeared in the ICC & ICC Banking Commission's '2017 Rethinking Trade & Finance' publication, a comprehensive overview of the major regional and global trends in trade and trade finance. It is republished with the kind permission of the ICC.

The growth of digital processes – including blockchain, straight-through processing, big data, and artificial intelligence – is driving the shift to paperless trade​​​​​

For trade finance, digitalisation is influencing business models and strategies for corporates and banks. This is primarily due to its power to simplify and to reduce costs, while also allowing banks to better serve small-to SMEs and stimulate trade flows. The benefits of digitalisation are now widely accepted and were largely outlined in last year’s ICC report, which highlighted its capacity for reduced risks, increased speed, improved working capital management, efficiency, transparency, and operational improvements, to name but a few.

In times of slowing trade growth, the wider macro-economic benefits of digitalisation also deserve attention. In fact, the World Trade Organization (WTO) estimated that technological progress will have the largest impact on GDP levels by 2035, accounting for 9% higher or lower GDP levels in developed countries. In emerging markets the variation is even greater – up to 20% higher/lower GDP in Brazil and 55% in China.

When the cost of processing a Letter of Credit (LC) decreases, so too does the entire cost of trade finance – which enables financial inclusion. The ease of process also facilitates customs clearance procedures – allowing goods to move through supply chains more easily and reach consumers faster.

Overall, emerging markets have been the fastest adopters of digital practices, with the high implementation rate of mobile technology – “M-Pesa” in East Africa, for instance – demonstrating both regional sophistication and a willingness to experiment and try new technologies. Similarly, Asia has seen fast-movers tapping into digitalisation early on, also helped along by the pro-digital agendas of their governments, who see the future as a data economy.

There are clear signs that momentum is growing in the industry. Last year, for example, commodity trader Cargill and Wells Fargo collaborated on the first electronic export LC along the US to Taiwan shipping route, using the essDOCS digital platform. This development marks the first time Cargill used a third-party buyer export LC for an e-bill of lading, and for Wells Fargo it is the first use of an e-bill of lading, reducing the process from over 10 days to five days or less.

Digital islands

Still, despite significant progress and developments, a considerable amount of work remains to be done for the trade and trade finance industries to appreciate the benefits of digitalisation. Digitalisation has yet to reach the critical turning point where there is sufficient appetite in the industry and benefits are realised.

Many players are good at digitising their own processes, operating in digital “silos” or “islands”. The challenge lies in linking up these digital islands – enabling them to communicate.

Of course, this means that the whole supply chain needs to digitise and realise the true potential of digitalisation in the physical supply chain. For many, there is a misconception between the process of converting paper documents into an image and passing it onto banks – which is in fact not digitalisation. True digitalisation enables data extraction and analysis, with the aim of improving business processes.

If trade finance is to be digitalised, the industry needs to also focus on enabling the movement of goods. Indeed, the banking industry’s objective of removing paper has in part met with limited success because efforts have been focused on digitising the financial supply chain while often ignoring the physical supply chain.  

Accelerating the digital journey

So how can the trade finance industry enable players to connect faster? Focusing on collaboration between industry players, removing any uncertainty with regards to legal standards and rules, and accelerating the adoption of industry know-how will accelerate the pace of digitalisation. Let’s take each in turn:

Collaboration

The entire trade finance ecosystem needs to grow to help bring different players – from the seller, the buyer, the financing party, government bodies, and others – online. Collaboration between banks, corporates, FinTechs, and other industry players will therefore be crucial in helping digitalisation reach critical mass.

As a start, industry efforts should focus on the digitalisation already happening in the market, and on leveraging the benefits of digitalisation by enhancing connectivity. Creating a framework or platform enabling stakeholders to speak to each other more effectively will connect the digital islands and allow these players to share their practices.

Of course, commercial interests are the driving force behind the uptake of digitalisation. The industry should therefore tap into the demand for digitalisation. More can be done to improve awareness of digitalisation and encourage banks and corporates to become involved, particularly where it is already in place and growing. Incentives to collaborate on digital platforms will also prove important.

What’s more, government collaboration will play a crucial part in moving along the process. Lessons can be drawn from government support in the Asia-Pacific region, along with the experimental mind-set seen in some African countries. Overlooking a fear of failure can be aided by first trying out digital experiments in contained environments, in order to speed up introduction into the wider market.

Standards and rules

Uncertainty around practice, rules and regulations are all barriers facing the digitalisation journey. In order to facilitate the shift to paperless trade, minimum standards and clearly defined rules will accelerate know-how and allow banks and corporates to more easily connect to digital platforms. Just as the shipping industry began using a standard 20-foot container for referencing cargo volumes from the 1950s to 1970s, the trade finance industry needs to find its very own container model for digital trade. Indeed, the 20-foot equivalent unit (TEU) industry standard allowed for the same container to be used on different transportation methods – solving the issue of a previously slow and difficult manual process. The idea of a minimum set of standards ensures that all service providers are working to the same criteria.

Similarly, developing a set of minimum standards for the digital connectivity of service providers across legal, liability, information security and technology will remove legal uncertainty. Today, while technology is well-placed to connect platforms, the discussion of who has liability of data from one platform to another must be considered. In fact, the information and security around platforms requires a lot of due diligence, which can take months.

Among other areas, ICC’s Working Group on Digitalisation aims to evaluate ICC rules such as the electronic UCP and ensure these are “e” compliant, enabling banks to accept data versus documents. This also extends to e-bills of lading, minimum liability standards, minimum security standards, and minimum reference data standards – compatibility with the World Custom Organization’s (WCO) data model, for example, in addition to recommended formatting standards (e.g. XML data formatting), and standard forms for IT reviews.

Clearly, guidelines are crucial to the evolution of digitalisation – allowing for shared past experiences and faster learning. These will also help certain players to analyse risk on platforms and understand the effects of digitalisation on the rest of their business. Similarly, enabling rules and ensuring enforceability around some of the documentation is crucial to encouraging companies to digitise processes faster. Providing guidance in one single rule book, fully covering the electronic delivery of documentation, will provide the confidence needed for trade financiers. Overall, the more the information provided, the easier it will be for digitalisation to be adopted.

Practical solutions

International trade spans different countries and regions, all at different stages of digital evolution. Digitalisation will therefore begin to happen in the context of one or more trade corridors with forward-thinking parties and industries more amenable to digital practices. Industry players need be encouraged to try digitalising in pockets, which will also help the industry achieve a minimum viable ecosystem involving buyers, sellers, banks, ports, customs and carriers – across multiple industries.

The greater use of current technologies is also providing opportunities that the industry has not had before. For instance, it’s no secret that banks are increasingly looking to the application of blockchain to trade finance. There are significant opportunities to tap into these technologies,and, similarly, to use data analytic tools and machine-based tools to make informed credit decisions and forecasts, and to monitor risks.

Collaboration is key

Clearly, the more the trade finance industry can alleviate concerns about digitalisation, the faster it will happen. What’s more, it is clear that no single institution can fully digitise alone. Collaboration between banks, corporates, industry players, via digital platforms will be the determining factor in the pace of which the trade finance industry shifts to paperless trade.

*ICC Editorial Comment – selected strategic and tactical implications:

Strategic implications

The strategic focus of the trade finance industry must decisively evolve beyond preliminary discussions and initiatives related to dematerialisation of documents under traditional instruments, to a broadly-based, industry-wide effort to digitise trade finance in the wider context of digital trade. Creative and non-traditional collaboration, the willingness to adopt potentially disruptive technologies and business models, and the imperative to align with client needs and expectations ought to be part of the strategic landscape around digital trade and finance.

Advocacy efforts aimed at facilitating legal, regulatory, accounting and other key stakeholders’ acceptance of digital trade finance must accompany the numerous proofs of concept and the various platform-based solutions under assessment. As with the corporate payments space, trade financiers may find useful lessons and insights in the retail experience of individuals, with consumer ecommerce platforms like eBay or solutions like PayPal or AliPay serving as launch points for similar models in the wholesale banking arena.

Tactical considerations

Tactically, leading adopters of digital models linked to trade and trade financing can usefully place additional emphasis on the operational and transactional considerations linked to digital trade, including focused consideration of compliance issues, fraud risk issues and related areas of practical, implementation-level concern.