The way the world does business is changing dramatically, but banks and their corporate customers are struggling to move the financing of trade into the 21st century. Trade patterns are shifting (south-south trade is estimated by the World Trade Organisation to represent 30% of world trade by 2020) and today’s supply chains are ever more complex, involving multi-locational assembly and more SMEs (the imported content of exports is estimated to grow to 60% by 2030, according to research by Standard Chartered). </p> The regulatory environment is also more challenging. Basel III impacts capital allocation for trade finance transactions, disadvantaging emerging markets in particular: in Latin America, for example, a risk weighting of up to 150% may be levied on short-term loans related to trade finance, while weighting for developed countries is closer to 20%. </p> Add to this the impact of know-your-customer obligations and other regulations on correspondent relationships and it is no surprise that banks are not always able to meet customer needs by taking up financing opportunities. A recent survey conducted by the International Chamber of Commerce (ICC) identifies that, while there is no lack of liquidity in the market overall, SMEs and businesses operating in emerging market economies struggle most to obtain trade finance. According to the ICC, while trade proposals from large corporates were accepted on 79% of occasions, 53% of SME trade proposals were rejected. From a geographic perspective, rejection of trade finance proposals is highest in Asia (31%), Africa (18%) and Russia/CIS (15%). </p> Is technology the answer?</strong></p> While development banks, credit insurance and non-bank investors are helping to close these gaps, banks and their customers are looking to technology for at least some of the answers. The story of “digitising” the web of documents along a supply chain is already a very long one; critical mass has failed to build for many initiatives, due to the difficulty of getting different players, industries, geographies and commercial interests to agree. </span></p> But incremental progress has been made. For example, the MT798 messaging type makes it possible for corporates to exchange trade data with their banks over SWIFT with the ease and automation of open account transactions. Nokia has been using MT798 for export letters of credit (L/Cs) and guarantees since autumn 2015. Says Jari Hänninen, head of structured finance, credit products at Nokia: “We’re using MT798 for trade finance-related applications and transactions with up to ten banks and it works well. Banks which are not able to send or receive MT798 messages yet are able to use a web interface, which is free for banks and speeds up the adoption process.” </p> Today’s technologies and standards are cheaper, more agile and more democratising than ever. And there’s no shortage of innovators and FinTechs looking to help banks meet the challenges of digitising trade finance. A recent report from the Euro Banking Association4 makes the case for crypto-technology (an umbrella term that includes blockchain, public and private distributed ledger technology (DLT), smart contracts etc) to deliver transparency with security and accuracy. Banks and FinTechs are actively pursuing pilots and use cases. </p> With 90% of transactions now on open account, Michael Vrontamitis, head of trade product management, transaction banking at Standard Chartered, says achieving visibility throughout a transaction – from presentation of a purchase order to an invoice being accepted – is key to closing the financing gap currently experienced by SMEs and emerging market players. “If financiers have visibility through the supply chain, they can approve and provide cheaper purchase order or invoice financing,” he says. The ability to then build a credit history based on individual transactions can be particularly useful for SME financing, he adds. </p> Standard Chartered has worked with DBS Bank and Infocomm Development Authority of Singapore to realise a proof of concept called TradeSafe to safeguard against duplicate invoice financing. The initiative creates a single source of invoice financing status, while preserving client and commercial confidentiality. </p> Barclays is partnering with Wave, an Israel-based startup, on an electronic bill of lading solution using blockchain technology. Another startup, USbased SkuChain, is developing products to support trade and supply chain financing using blockchain-based smart contracts, called brackets, covering data L/Cs, a blockchain-based obligation, deep tier financing and cash flow scrips. </p> Dealing with today </strong></p> Angela Koll, vice president, specialist trade and supply chain finance at Commerzbank, notes the applicability of DLT to trade finance, but says: “It’s early days for DLT and it will take years to offer suitable solutions. But innovation by digitisation in trade finance needs to happen now. Also, suppliers in emerging markets urgently need supply chain finance solutions to obtain liquidity.” Commerzbank is actively promoting the Bank Payment Obligation (BPO), developed by SWIFT in conjunction with the ICC, as a digitised solution that can provide risk mitigation through secure matching of agreed data online and facilitate financing in favour of the supplier. “BPO is a hybrid instrument, positioned between an L/C and open account that offers lots of potential; it’s wrong to think of it as an electronic L/C,” she says. Commerzbank’s first BPO transaction was between a German SME and a counterparty in Thailand. </p> SWIFT is working with essDOCS, a paperless trade solutions provider, to enable use of trusted data from digitised title documents, e-bills of lading, as well as automating the transfer of title when data has matched or has been accepted, for an extension to the BPO, the Bank Payment Obligation Plus. </p> Although SMEs might be finding it harder to secure trade finance support from their banks, they may find it easier to adopt new solutions. “SMEs account for more than 50% of global GDP and two thirds of the global workforce. Retail and SME segments can adopt technological changes more easily and quickly and are more likely to turn to nonbank financing options such as peer-to-peer and crowd funding,” says Raphael BarIsaac, head of trade products at UniCredit Group. </p> BarIsaac also sees the BPO as highly relevant to the financing and risk mitigation needs of smaller and emerging market corporates because it provides a level of certainty to support open account transactions. “Once understood, our customers really like the BPO and are expanding their use,” he says. One drawback, he suggests, is that the BPO is currently designed for use with a single transaction. “We need a way for customers to develop a BPO stream,” he says. </p> Like any initiative that requires collaboration among multiple counterparts, CommerzBank’s Koll admits critical mass for BPO cannot be achieved overnight. “Banks are the biggest bottleneck; we need to talk to our correspondents as well as our corporate customers and transfer knowledge about the benefits and the handling,” she says. </p> The new technologies may yet dramatically improve processes, communications and efficiency and help to unlock financing for SMEs and emerging markets players, but innovation is not an easy path, particularly in the context of the fast-evolving regulatory landscape facing banks. </p> “Innovation isn’t just doing something new with technology, it’s really about going into something without a guarantee of success,” says UniCredit’s BarIsaac.</p> Find out more from industry experts at ‘Trade digitisation: Where are we now?</a>’, which takes place on Thursday 29 September at Sibos 2016 in Geneva.</p> </p>