Your IndustryMay 24 2017

Trade is about to go digital

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Trade is about to go digital

Three decades after Big Bang, digitisation is more than an echo.

The way financial services are delivered has changed beyond all recognition since the advent of digitisation. Nobody today, for example, need write a cheque and hand it to a cashier to obtain their own money.

The world of trade finance, however, has moved more slowly than its counterparts. Global trade is still heavily based on processes that are inherited from the interchange of paper documents to confirm transactions. In financial services it is already hard to think back to that period in the 1980s just before the dominance of IT giants such as Microsoft and Oracle, when institutions realised that paper was no longer the most efficient medium.

Change was certainly in the air. Developments in EFTPOS systems eventually led us to everyday use of credit cards and, after some education, to today’s use of contactless payments. It was a pivotal decade. In the City, Big Bang swept away unnecessary regulation in 1986, relying heavily on digitisation to do so. In trade finance, digitisation can trace its origins back to 1985 when HSBC launched Hexagon, its PC-based cash management system that linked corporate customers to the bank and for the first time allowed Letters of Credit to be applied for without paper.

It has been a long haul, but trade finance is finally waking up to the huge potential of digitisation, driven by a tide of change felt most strongly in Asia and the commodity markets. There is a growing realisation that trade can be so much more efficient if all parties involved are prepared to leave the old error-prone, insecure ways behind and instead embrace for example, electronic Letters of Credit, bank guarantees and bills of lading.

The acceptance of digitisation has, admittedly, taken some time compared with other industries.  After Hexagon, there was no significant change until 1998, when it became obvious from European Union-funded research that there were huge gains in efficiency and security to be had from digitising cross-border trade processes and an initial platform was created by Bolero in partnership with Swift messaging network.

Since that point, the penny has been dropping about the many benefits in terms of speed of completion, transparency, regulatory compliance and cost-reduction that flow from digitising trade documents and processes to complete an international trade transaction securely.

The advantages are now sufficient for major organisations such as BHP Billiton, Cargill and the Bank of China to use them for transactions worth tens of millions of dollars.

Even so, it is worth asking why it has taken so long. Conservatism and inertia have, of course, been great barriers, along with the difficulty of gaining agreement from so many different types of organisation engaged in the trade supply chain.

Unfortunately trade in general has also proved to be one of the last bastions of manual processes in the world’s financial system, still reliant on conducting business in ways that date back to the 13th century, when the use of bills of lading to serve as a contract between a seller and a carrier began. Letters of Credit, which mitigate risk between sellers and buyers, go back even further. 

There are still countries in which customs organisations staunchly insist on seeing original bills of lading before they are prepared to give clearance to cargoes.

It is also true that while the benefits of digitisation are being increasingly proven we have seen a recent downturn in global trade based on the price volatility in the commodities sectors, linked to the slowdown in the growth of the Chinese economy, among other factors.

Now, however, with supporting technological innovation, comparative stability in commodity prices and stricter regulation, everyone in the trade supply chain is thinking hard about using technology to drive efficiencies and achieve savings. This is a new normal following the period in which the value of the world’s trade in goods dropped from $19 trillion in 2014 to $16.5 trillion in 2015, with margins and interest rates remaining historically low.

This combination of forces has seen corporate organisations, particularly in the stronger developing economies, look to embrace digitisation. Their treasury departments want to use the technology to manage multiple bank relationships and to derive all the benefits in freeing up working capital. 

Last year HSBC and Reliance Industries of India, for example, used an electronic Letter of Credit for an export deal, which is the first time this has happened in a trade transaction from that country. The use of electronic presentation meant the trade could be settled in a single day, rather than the standard 20-plus days it would take to exchange physical Letters of Credit and related paper documents.

Yet the future will not be without pitfalls. Although distributed ledger technology (blockchain) has many beneficial attributes that can be applied to the secure transfer of assets between trading counter-parties, we are still waiting to see true industrial scaleability of the technology.

For digitisation to be successful, technology must not just match, but look to radically improve day-to-day working processes in international trade. This is far from straightforward when there are multiple parties using multiple documents across numerous jurisdictions in different timezones. A real understanding of how international trade works and the trusted and legal execution of transactions is required before a solution can be designed and implemented which operates to everybody’s advantage. Technological wizardry on its own is not enough – an important factor for all organisations considering the many solutions being offered by the burgeoning Fintech sector.

Lastly, one of the greatest pitfalls to be avoided is that of assuming a Big Bang approach is necessary. Commodity companies, banks and carriers can all proceed with digitisation at the pace that best suits them, addressing their own particular pinch-points first.

In truth, the sky is the limit for digitisation in trade finance, with the benefits rippling out to everyone. Banks stand to increase revenues and reduce their compliance costs, while buyers, sellers and carriers will all see radical improvements in cost, speed, security and efficiency that will completely transform their performance.

Digitisation has already transformed retail banking and the markets, and now we can expect to see it gather pace in international trade, allowing everyone to get their hands on the money or the goods more quickly and more efficiently.

Ian Kerr is chief executive of Bolero International 

 

Key points

The way financial services are delivered has changed beyond all recognition since the advent of digitisation.

Trade finance is finally waking up to the huge potential of digitisation.

Technology must not just match, but look to radically improve day-to-day working processes in international trade.