Trade goes digital

Trade and trade finance were already undergoing a digital transformation before the Corona crisis. Now the crisis could be a catalyst for a faster and deeper transformation of the industry, with implications for entire trade ecosystems.

The Corona crisis has affected all areas of trade. According to an ICC survey, companies were confronted with three main issues: Staff shortages, problems with printing documents and delays in or inability to deliver. In addition, core instruments of digitisation – such as the creation of digital signatures – had to be developed very quickly. This applied not only to companies and their banks, but also for public authorities.

Some countries, such as India, Peru and Oman, have introduced the transition from paper to digital technology. In Peru, the government gave companies 180 days to switch from traditional procedures to digital processes. As a result, providers of digital trading platforms noticed a significant increase in acceptance and demand. For example, a new platform for digital proof of origin was able to register 60 chambers of commerce worldwide within three months. And even for waybills, which take a long time to digitise due to the necessary legal changes, a quarter of the 123 steel traders in China joined a digital platform in just three months.

Adapting to the new normal

The acute phase of the crisis response now turns into a review of the situation. Although home office and remote access are currently “normal” – to what extent and for how long these working practices will be standard is still open. Cooperation with trading partners is also being reviewed and companies are already preparing for a new normality with digitisation as a core element. A recent survey by Standard Chartered shows that 87 percent of the customers surveyed expect the pace of digitisation in trade and trade finance to accelerate, with digital solutions no longer seen as optional but as essential. The result: a strong and sustained second wave of digitisation.

While digital transformation may be a priority for all trading participants, there will not be one solution or one single, comprehensive digital platform. Instead, we expect a multi-track approach. Currently, trade finance platforms fall into one of three categories:

Third party platforms, that act as a network to allow several participants to interact with each other. SWIFT for Corporates, for example, enables a company to initiate letters of credit and guarantees with all its banks.
Multi-investor consortia, whose aim is to reinvent the traditional infrastructure and processing of trade finance through an industry-wide platform. Examples are Trade Information Network and Contour.
Point-to-point connectivity that allows one party to interact with another (e.g. a banking system) to allow digital initiation of transactions.

However, as platforms have different levels of maturity and often address only specific elements of the trade process, their compatibility will be crucial. Here, the development and implementation of standards, such as the Digital Standards Initiative of the International Chamber of Commerce (ICC), will play an important role.

Overall, the development is currently showing a mixed picture with strong differences between authorities and trade participants. This increases the risk of “digital islands”, for example through the digitisation of selected processes with manual elements in between that limit value across the entire supply chain. This risk is likely to increase without a strong industry commitment to standardisation and connectivity.

A hybrid model is likely to emerge as an interim solution. Solutions such as Contour, which offers both end-to-end electronic letters of credit and, where possible, activates digital processes, but also handles paper-based processes. What is crucial is a continuous data flow, even if a single element is analogue.

However, the development at private trade participants must also be reflected in structural measures at authorities such as customs. Given the complexity of processes and the diversity of participants, the change will take time – governments may take years.

To speed up the process, the ICC’s Trade Standardization Group has published a roadmap for digital trade. This document outlines the key steps for governments and authorities, the ICC and the entire industry. The aim is to accelerate the transition to digital by revising the legal framework and simplifying bureaucracy. For example, this includes requiring trade documentation to be submitted digitally, aligned to the UNCITRAL Model Law on Electronic Transferable Records.

At present, many companies are still busy securing access to liquidity and their survival. Once the pace and direction of recovery from the pandemic becomes clearer, we expect to see a revival of digitisation initiatives across the entire spectrum of trade participants

Initially, the focus will be on short-term objectives, such as digital supply chain solutions and bill of lading documentation. Thereafter, however, the focus must be on robust and long-term approaches. Companies will consider longer-term changes to their supply chains and how best to diversify and increase their resilience. Decisions on new business models will also need to be made. All these decisions will be based on how to ensure consistency and automation of processes while avoiding additional complexity.

Märkte der Welt: Op-Ed by Marion Reuter, Regional Head of Transaction Banking Sales Europe und Head of Transaction Banking Germany & Nordics der Standard Chartered Bank