Trade digitization: where are we now?
by Thierry Roehm, Senior Advisor Trade & Innovation Trade Finance for SG GTB
“The concern about the necessity to digitize documentary trade finance is shared by more and more actors. The consequence is the multiplication of initiatives, think tanks, ideas and pilots, but that is the price of innovation. The complexity of the trade finance business, however, is more on the business side than on the technology side. We can imagine IT solutions, the technology is already there and new ones are coming. But the main issues to tackle are legal, compliance, standards and interoperability.”
Trade Finance involves many different parties, and is still very paper oriented. But digitisation of Trade Finance has already started and will become a reality. In this session the panel will discuss the challenges, outline the drivers and take a look at the short term developments in this area.
- International banks are under pressure to review their trade finance business models, organization and processes. Profitability is falling, country risks are increasing and regulatory compliance has a growing role. Various factors such as the decrease in trade, the decline in the letters of credit (LC) business and fluctuating commodities pricing are intensifying the competition between trade finance banks. Banks are reviewing their business models and better manage, anticipate and mitigate changing levels of country risks in the context of lower profitability. AML, counter-terrorism, international sanctions and KYC regulations are also forcing changes to business models. Banks must complete increasingly complex checks while accelerating turnaround times without incurring higher costs or creating mistakes.
- Digitization will help to streamline relationships between all the actors of the supply chain, integrate front to back processes, automate processes – particularly document and compliance checking – and provide up to date management of data to follow up the transactions and meet regulatory and client reporting requirements. Despite the benefits of digitization, SMEs, small banks and customs organizations seem less willing than larger banks to move towards digitization.
- In digitizing trade finance, the industry must ask itself whether it adopts solutions to digitize the paper documents or whether it should go directly to full digital solutions. Should existing business practices be replicated in digital formats or should we create new products such as the Bank Payment Obligation (BPO)? Moreover, should a quantum leap be made to new technologies such as distributed ledger, or blockchain? Societe Generale believes the industry should undergo “progressive transformation” in digitizing trade finance. This is because at present, there is not yet a standardized and integrated solution and there is no apparent willingness among market participants to adopt digital practices.
- Regarding documentary trade finance, a first step could be for banks to improve their processing efficiency to reduce costs and increase security by using new technologies to digitize the paper and enable operating processes and compliance checks to be optimized. Such a project is manageable because it is internal to a bank and does not depend on third parties. Typically, the return on investment of such an approach is good. Many actors have already done this first step by implementing electronic document management (EDM). The next step is to use the data that has been scanned and this involves OCR technologies and image recognition, artificial intelligence and machine learning, and data manipulation algorithms.
- A more recent development in trade finance is the recent initiatives to , enable the electronic presentation of documents ( Bolero, Essdocs ,Blockchain,…). This should create a less paper-intensive world as documents are transmitted in real time between importers, exporters and banks. A consequence could be a dramatic reduction in the number of letters of indemnity. Moreover, documents arrive before the goods, which avoids demurrage costs and enables buyers to get their goods faster.
- Concerning Blockchain , although Societe Generale’s IT and innovation experts don’t fully agree with all of the assessments made by SWIFT in its position paper on DLT technologies, the points that were raised about requiring standardization and strong governance will be important in encouraging adoption of blockchain and DLT in trade finance. We believe that current blockchain initiatives are driven more by technology than by business. The industry is in a tech pilot phase, which doesn’t answer the questions about the future use of these technologies in trade finance, the legal framework or the compliance issues which are to be addressed. Moreover, blockchain seems a complex technology to integrate into the information system of the actors and is far from a plug and play solution. While DLT claims it can remove third parties there is a question about who will provide the guarantees. Without dedicated key infrastructure repositories guaranteeing KYCs behind users in a blockchain, compliance with our banking world will remain difficult. Finally, the technical maturity has still to be improved: high performance and volumes, ability to remove old data, possibility to hide confidential data from competitors, user friendly interfaces etc all must be addressed.