5.1. What is the outlook for adoption?
Banks and Corporates are generally positive about the future of trade ecosystems (see Exhibit 8). Most banks we surveyed either already partner with one or more trade ecosystems or plan to. More than 75% of banks and corporates surveyed were confident that they would conduct most trade finance via ecosystems in 3-5 years.
Despite this rapidly growing interest and investment, however, trade ecosystems now capture only a tiny fraction of trade flows. Indeed, many platforms have not yet moved beyond the proof-of-concept stage to wider “go live” commercially. While this is, in part, simply a consequence of their novelty, there are still obstacles that need to be overcome before the use of trade ecosystems becomes the new normal.
Exhibit 8 – What do you think are the biggest barriers to the development & adoption of these ecosystems?
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5.2. Fragmentation and the need for network effects
The trade finance landscape is fragmented, with any one transaction involving at least 20+ actors across at least two countries, but often more. A trade ecosystem will effectively digitise trade only if most of these actors adopt it. Players are unlikely to bear the cost of adopting the technology unless they have some guarantee that they will be able to connect with their counterparties. Because a wide network is required to make the technology worthwhile for users, it is difficult to achieve the necessary scale.
As one corporate respondent put it, “digitising trade finance is not a technology issue. The issue is mainly (if not only) about all participants of a global trade transaction being [accessible from] the very same digital platform. The technology to digitise trade has been available for 20 years. It need not be blockchain-based”.
The need for network effects is not a new challenge; it has been an obstacle to the adoption of BPO. And now there are even more platforms and solutions competing for partners.
We are starting to see some ecosystems react to the need for network effects by seeking cross-platform partnerships. For example, we.trade has been collaborating with eTradeConnect in Hong Kong to extend its geographical reach and bring connectivity to 12 banks and 18 corporates in Asia. Similarly, Voltron are partnering with essDOCS to bring together Voltron’s blockchain-based trade finance solution with essDOCS’ e-documentation and provide a more complete offering to customers.
Until such cooperation becomes more widespread, smaller or more cautious banks and corporates are likely to “wait it out” rather than betting on a platform that may not be a winner. One corporate surveyed said that it plans to “wait for the ecosystems to consolidate until [they] commit to any of them”.
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5.3. Lack of standards
Trade finance products must allow multiple parties to trade easily, securely and legally across borders. This requires common operational and legal standards. By introducing new and technologically diverse platforms and shifting from paper- based contracts and other documentation to “digital equivalents”, digital eco-systems create new challenges with regard to standards. Eighty percent of bank respondents considered the lack of standards a “significant barrier” to digitisation.
Various industry players and bodies are responding to the challenge.On the technology front, Marco Polo, R3, and TradeIX are spearheading the Universal Trade Network (UTN) initiative to harmonise the diverging technology landscape created by these new trade finance ecosystems: for example, by developingcommonly agreed message structures, standards, and codes. The InternationalChamber of Commerce (ICC) plans to further build on the above industry efforts through what will become the Digital Standards Initiative (DSI). This takes advantage of the ICC’s position as a neutral party to develop standards and protocols that will enable the next digital era in trade.
As part of their overarching work, the ICC has launched a number of initiatives. Earlier this year, the ICC released a set of eRules – its revised eUCP and eURC –that act as annexes to the existing ICC rules for Documentary Credits and Collections, specifically to accommodate the presentation of electronic records (either alone or in combination with paper documents). In addition, the ICC has set up a working group to develop a ‘blank sheet’ set of rules for digital trade, known as Uniform Rules for Digital Trade, as well as a broader digital trade roadmap, that articulates how different groups of stakeholders (e.g. governments, industry, and the ICC, etc.) need to collaborate on the overall trade digitisation journey.
Another project on the horizon is Alibaba’s Electronic World Trading Platform (eWTP). Partnering with the WTO and World Economic Forum, the nascent initiative aims to build rules and standards and to provide logistics, financing, and technological infrastructure that make it easier for SMEs to trade internationally. Big tech firms have not yet established a place for themselves in the trade finance space, and it will be interesting to see what role Alibaba, Tencent and Amazon may play in the future.
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5.4. Technology capabilities and maturity
In the short-term, the growth of digital ecosystems will be limited by technology. Distributed ledger technology (DLT), which underpins many of these platforms, still has few commercial applications at scale and is constantly developing. More than two thirds of bank respondents felt that technology maturity is a material barrier. However, the removal of this obstacle, unlike the others, is probably just a matter of time.
From conversations, several banks feel that they have made large investments in DLT that have not yet paid out – there is a risk that the industry may suffer “blockchain fatigue”. As the industry becomes increasingly agile, the tolerance for projects with 3+ year returns will likely decrease further. Indeed, it may turn out that DLT is not an essential ingredient of digital trade ecosystems and they can advance without it – similar to how SWIFT GPI reinvented cross-border payments through mostly behavioural and relatively modest technology changes. The same approach could potentially be applied to documentary trade as a ‘quick win’.
Beyond technology, the maturity of the ecosystem itself is also a challenge. As explained in the BCG report “The Emerging Art of Ecosystem Management” (2019), ecosystems can exist in three forms: digitiser networks, platforms, and super platforms. Bolero, in its original form, is reminiscent of a digitiser network, while the next generation of ecosystems (Marco Polo, we.trade, Voltron) resemble platforms. The question is when we will see the first trade super platforms, and how financially and politically viable they will be.
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5.5. Uncertain demand
Adopting digital trade ecosystems requires material financial and human capital commitments from banks, and – to a lesser degree – corporates. Almost half of bank respondents felt that the lack of demand or investment from banks and corporates was a significant barrier to adoption (see Exhibit 8). Even more bank respondents felt that the scale of effort required by corporates to move to ecosystem-based trade was a barrier. Corporates seemed to have similar views.
The challenge here is proving value. Many trade ecosystems have successfully developed technology and onboarded partners, but few have truly demonstrated that they are the silver bullet to simplify trade. As one banker commented, their strategy is to wait until trade ecosystems have “been proven to be of necessity and cost-effective”.
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