The future of trade finance is open and inclusive

Estimated reading time: 5 minutes

ESG is certainly not a new development, but its growth and importance in financial services have never been higher. Whilst there has been a big focus on the “E” in ESG, we’re also seeing a lot of progress in tackling other aspects, such as social action to address societal challenges. One of the biggest social challenges in global trade is the huge, and growing, finance gap.

At our recent corporate banking event in London, Finastra’s Lending EVP, Isabel Fernandez, Chief Revenue Officer, Lekshmi Nair, Solution Consulting Senior Manager, Elena Sankova, and I were joined by industry experts to discuss the latest trends, challenges, and opportunities facing financial institutions today. ESG and digitalisation were two major themes underpinning the sessions. 

One of the topics explored by the speakers was trade finance digitalisation. Creating seamless trade finance processes across various jurisdictions, whilst considering different standards and measurements worldwide, is a long-standing aspiration. 

Bridging the gap with tech and integration

The speakers agreed that the processes are highly complex, especially for SMEs, and both technology and policy should be aligned to achieve this critical goal. 

Overcoming these challenges is crucial for tackling the extensively documented trade finance gap. This gap is growing rapidly – from an estimated $1.5 trillion in 2018 to $2 trillion in 2022 – and is locking many SMEs out from being able to take advantage of global trade. According to The World Economic Forum, this gap may widen in the following years. 

The answer to addressing the trade finance gap lies with the integration of technology to fundamentally change the way the industry works, and to open up trade and working capital finance on a scale that has previously been unachievable without digitalisation or automation. 

For example, using technology to increase access to more data can help banks to evolve traditional credit-decisioning models, and digital identities can help SMEs pass Know Your Customer (KYC) or anti-money laundering (AML) checks, particularly when they lack the robust credentials required of businesses. 

The UK’s Electronic Trade Documents Bill is also a positive step, setting out to make digital trade documents (eDocs) legally recognised, making it easier and cheaper for UK firms to buy and sell internationally.

Panellists discussed that moving from paper to data, embracing interoperability, which means moving from silos and closed-loop systems to open schemes and achieving globalisation of standards are all prerequisites for digital trade. 

Bringing bills of exchange (BoE), promissory notes, letters of credit (LCs) and other negotiable instruments into the digital world is crucial and there have already been great strides towards this, such as the Contour network’s digitalisation of letters of credit.

The speakers paid tribute to the work many technology companies and financial institutions are doing, and the important steps are taken to digitise trade finance. According to a PWC study, 75% of finance leaders are planning for a more agile business environment.

Consequently, a massive opportunity is ahead. Banks can benefit from distributing their services through new channels and generating new revenue streams if they accelerate their transformation journey.

Ok, so what’s next for trade tech?

What is the future going to look like, according to the speakers? Inclusive, open, and with win-win solutions for all parties. They agreed that future supply chains will be centred around data insights driving decisions, managing risk, and enhancing sustainability. This also implies a new interconnected and automated supply chain process. 

Technologies like Cloud, APIs, and AI/ML are essential enablers that allow integration on a horizontal level. Investment in Cloud continues to be very robust, and the benefits are visible – on-demand capabilities, scalability, harnessing computing power when needed, lower service cost and reduced carbon footprint. More than ever, banks need to evolve from on-premises to Cloud so they can tap into an ecosystem of services that support the digitalisation of the full transaction lifecycle.

The tech already exists, and this is where tech and fintech companies come into play. They have the power to orchestrate whole ecosystems that help banks future-proof their models and make the industry more inclusive. 

For instance, Finastra is working closely with The International Chamber of Commerce (ICC) to pilot ICC TradeComm, powered by Finastra, a financing marketplace that gives SMEs access to broader alternative financing resources. The vision is to harness emerging digital innovations and improve access to finance by matching supply and demand via single connectivity, as well as evolving risk evaluations with a “Know Your Transaction” approach.

The panellists acknowledged the benefits of fintech ecosystems that enable banks to leverage open APIs to implement a range of value-added applications, for example, AI tools to improve KYC processes, document checking, and integrations with emerging distributed ledger networks. As a result, banks can ensure compliance with regulatory requirements, improve efficiency, and reduce costs. 

Digital trade is here to stay and represents a significant part of the puzzle. The transformation journey will only progress if the industry works together to embrace technology and build a bridge towards more sustainable and open trade. The time is now for the industry to work together to break down these barriers and bridge the gap once and for all. 

To help drive this forward, The World Trade Board recently announced the opening of a consultation on a major new framework to increase access to trade finance for MSMEs and create a better future for all. Find out more here.