May 2018

Now in its 10th year, the ICC Banking Commission’s annual report on global trade reveals that the industry needs to do more to agree common standards so that all the benefits of trade digitalisation can be realised. flow provides a snapshot of where the digital revolution and evolution has got to

A single trade finance transaction can require more than 100 pages of documents, with an estimated four billion pages of documents currently circulating in documentary trade. According to Boston Consulting Group (BCG) estimates,1 digitalisation could cut trade finance costs by up to US$6bn in three to five years and boost banks’ trade finance revenues by 10%.

Will this digital nirvana actually happen? While the International Chamber of Commerce (ICC) 10th Annual Global Survey underpinning the new ICC report—Global Trade: Securing Future Growth demonstrates that 60% of banks are moving towards greater digitalisation, it also reveals that only 9% confirm that technology solutions have, as yet, increased efficiency.

Transformation timeline

In what the ICC’s barometer of the trade finance industry, now in its 10th year, describes as a “reality check”, 30% of respondents say their banks remain one to two years away from implementing technology solutions. Worse still, a worrying 7% say digitalisation is not on their agenda at all.

Trade finance, with its documentary credit-based transaction dynamics has developed as a heavily paper-based industry amounting to around US$9trn in 2017. Despite obvious ripeness for digital disruption, the sheer multitude of documents and players (banks, customs authorities, shippers, and insurers, among others) involved in trade finance transactions have made it difficult for the industry to digitalise quickly. Two years ago in 2016, in their article ‘Digital Revolution in Trade Finance’ BCG suggested “the next generation of trade technologies—electronic bills of lading (eB/Ls), SWIFT MT798 messages, bank payment obligation (BPO), and blockchain—may push trade finance toward the paperless business long envisaged.

As yet, this has not really happened, and while such off-the-shelf solutions have been helping to speed up some transactions, use has been slow – only 13% of the respondents, notes the report, say their bank uses the BPO.  “Corporate use is slow, largely because banks have not promoted it.”2  Progress on removing physical paper from the value chain has been patchy – 65% of respondents confirmed this has been done, to some extent, in the issuance/advising and settlement/financing of documentary transactions. But, when it came to the all-important document verification process, 52% of respondents say that paper has not been removed at all.

Beyond the faster horses

The bigger picture that comes out of the survey is neatly summed up by Alexander Malaket, Chair, ICC Banking Commission Market Intelligence, who believes that trade is on its way to regaining its familiar, pre-crisis position as an “engine of global GDP growth”.

It will be the new disruptive technologies that will ultimately enable trade and expand delivery channels. Just as the motor car superseded the apocryphal faster horse, it is highly likely, given the persistent flat to downward trend in usage by volume and value, that  documentary credits may be less in demand as new technologies find other ways of delivering transactional transparency and trust between counterparties.
 
Many of the experts contributing to this year’s ICC research report see blockchain/distributed ledger technologies replacing much of the paper documentation and manual reconciliation, tracking and verification of transactions. “This switch,” says BCG, “would boost trade transparency, prevent duplication and excess documentation, and boost compliance”. The consultants also observe that methods such as Robotic Process Automation (RPA) and machine learning (ML) have matured enough to play a part here and “support the automation of compliance processes, such as sanctions screening.”

BCG note that disruptors to trade and its finance are evidenced by smart contracts automating payment releases, multi-bank platforms and bank agnostic messaging systems disrupting importer/bank relationships and advances in AI (see Figure 1).

Figure 1: Digital disruptors to trade and trade finance

Source: BCG

Building trust

For any of this to work,  trade stakeholders (banks, counterparties, regulators, technology providers) need to trust whatever technology, system or platform emerges – just as everyone trusted the letter of credit when the 12th century Knights Templar came up with it for journeying pilgrims 700 years ago.

“Adapting global trade finance rules to the digital era will play a pivotal role in enabling banks to capitalise on new technologies,” said Olivier Paul, Head of Policy at ICC’s Banking Commission, which launched a digitalisation working group in June 2017. He adds, “ICC rules underpin over US$1trn of transactions each year. Now, we are working to both ensure these rules are ‘e-compatible’ and establish a set of standards to enable digital connectivity for trade finance service providers.”

While common rules and standards are one vital ecosystem component, “not much can happen without the support of regulators and governments,” says Daniel Schmand, the ICC Banking Commission Chair, and Deutsche Bank’s Global Head of Trade Finance. As Deutsche Bank’s Global Head of Trade Flow Michael Dietz puts it, “regulators expect reconcilable and diligent monitoring of transactions,” and the survey “underlines how important the ICC Banking Commission’s role is in defining generally accepted frameworks and harmonising standards to make this happen.”

Schmand sees the ICC’s role as one of not only advocacy but pulling key bodies and organisations such as the WTO and the UN together into a constructive dialogue.3 “Trade finance cannot be left behind in this digital revolution,” he reflects.

Legal framework

“Electronic platforms raise new questions about the enforcement of electronic contracts, and the capacity an authority of a party that attaches an electronic signature and its probative value in an enforcement action,” explains Angelia Chia from the law firm Mayer Brown on page 144 of the report. She notes that while UNCITRAL has developed model laws in the form of its Model law on Electronic Commerce laws and Model laws on Electronic Signatures, they have not been adopted consistently across the globe and “many countries have not adopted electronic commerce legislation”.

International Trade and Forfaiting Chair, Sean Edwards, makes the point that, given the right legal framework, “promissory notes could be created that are true digital assets”. “Electronic writing and signing are, he says, “critical to create promissory notes in digital form” (page 146 of the report). While many proposed blockchain applications for trade have focussed on matching or tracking invoices, purchase orders and shipping data, there has been, he explains, “there has been less focus on creating powerful and robust payment obligations”. According to Edwards, a digital promissory note has the benefits of a paper promissory note, with tout the most practical and logistical drawbacks of paper.

Made in Singapore

Singapore’s digital trade finance journey is helpfully set out on page 157 of the report. Given it is home to one of the world’s busiest ports and largest transhipment hubs, and the Monetary Authority of Singapore’s (MAS) collaboration with the Hong Kong Monetary Authority on developing a Global Trade Connectivity Network (GTCN) using distributed leger technology, this is a region to watch. Five ingredients, says this section of the report must be fulfilled for the full global adoption of digital trade finance:

  1. Technological standardisation and interoperability covering data exchange, electronic documentation, and the interoperability of digital platforms
  2. Consistency in legalising digital documents and the implementation of the right legislation
  3. Digital infrastructure at national level to capture trade and financial data at source
  4. Collaboration of MNCs, global banks, shipping lines, and governments to forge a common strategic vision for their digital journeys
  5. Inclusion and education of SMEs – they make up 60% of trade finance rejections, according to the report, and would benefit the most from the better access to finance that trade digitalisation provides.

Future growth

Among the many other Global Survey findings, responses show that banks are bullish on future trade finance growth trends. Nearly three quarters of banks presented an optimistic outlook for the next 12 months, with respondents headquartered in Africa and Asia Pacific the most positive, at 89% and 81% respectively.

Nearly half of respondents agreed that attracting non-bank capital, leveraging emerging technologies such as blockchain and shifting geographical coverage were priority areas for the next three to five years.

The backdrop for this confidence has looked rosier than in recent years because of improved economic growth, and growth in real trade with experts from the World Bank pointing out that 2018 is likely to mark a turning point for the global economy because “the negative global output gap is expected to be closed for the first time since the onset of the Global Financial Crisis in 2008.” This, together with “improvements in the strength and robustness of banks in many advanced economies”4 is all very good news.

About the ICC Global Survey on Trade Finance

Note that this is just one snapshot looking at digitalisation themes within what is a 174-page overall industry report. The full report can be downloaded here upon supply of contact information to the ICC Banking Commission.

Conducted annually, the ICC Global Survey report is an authoritative review of the trade finance industry, based on exclusive information from over 250 banks (including Deutsche Bank AG) in more than 90 countries. The survey results are bolstered by contributions from an international array of leading voices on trade and finance, including experts from the World Bank, the Boston Consulting Group (BCG), the World Trade Organization, and the International Trade Centre

ICC Global Survey Twitter

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Sources

1 As stated in BCG’s article, ‘Digital trade/Plotting the path to transformation’ on page 131 of the ICC Banking Commission’s 2018 Global Survey: Global Trade, Securing Future Growth
2
See page 140, Global Trade – Securing Future Growth
3 See page 129, Global Trade – Securing Future Growth
4
See page 26, Global Trade – Securing Future Growth

Michael Dietz

Global Head of Trade Finance Flow | Deutsche Bank

Michael Dietz

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