Innovation, digitisation and regulation
The COVID-19 pandemic has exposed weaknesses in supply chains and the financing of world trade. The crisis now affords an opportunity to radically improve processes. Financial institutions such as Standard Chartered are leveraging digital transformation for broadening suppliers’ access to trade finance, while simultaneously reducing the scope for delays, fraud and financial crime.
COVID-19 has exposed the fragility of international trade in a crisis. The pandemic has caused demand for many products to plummet while straining supplies of certain key items, such as personal protective equipment (PPE). Supply chains have collapsed as the global recession stifled cashflows and pushed companies into bankruptcy.1 For global businesses, improving the resilience of their supply networks has become a pressing priority.
To some extent, COVID-19 has accelerated an existing trend of re-shoring, prompted in part by China’s shift from being the “world’s factory” to a major market in its own right, with its labour costs and consumer power rising accordingly, and accelerated by recent international trade tensions.
Globalisation is thus better understood as evolving rather than retreating. Businesses are seeking to diversify their suppliers, in order to prevent overreliance on any single one of them, and to digitise supply chains in order to reduce delays, prevent fraud and increase visibility over the movement of manufacturing inputs. Financial institutions (FIs) have a critical role in supporting this digitisation` and diversification, due to the paramount importance of trade financing: the WTO estimates that 80 per cent-90 per cent of world trade depends on some form of finance.2 A recent survey by the International Chamber of Commerce (ICC) showed that a majority of global banks offer supply chain finance platforms, although this falls to 38 per cent among regional banks and just 13 per cent of local banks.3
Using innovation and digitisation in trade finance
Although trade financing is at the low-risk, high-collateral end of the lending spectrum, COVID-19 has exposed a key weakness in transactions: approvals still heavily depend on paper-based processes. Besides delays, the use of scanned copies of documents, or photos of signatures rather than authorised digital ones, has also created opportunities for fraud. One notable trend observed by Standard Chartered is for traders who were in financial trouble due to COVID providing the same invoices to multiple banks in order to secure double-financing. Some of these were established frauds that only came to light due to COVID-19.
Trade-based money laundering networks have also been both exposed by the pandemic and assisted by it. Inflated prices for emergency PPE shipments have been used to disguise the movement of illicit funds between countries.4 During Standard Chartered’s webinar on supply chains and trade finance on 24 September, a poll of attendees identified fraud and money laundering as the biggest risk to trade. This helps to explain why FIs view digitising trade as particularly important, with 84 per cent of respondents in the ICC survey describing it as an immediate or near-future priority.5
Many fraud and crime risks can be minimised using blockchain-based systems, due to the transparency built into distributed ledgers. In September 2020, Standard Chartered successfully completed the first cross-bank Letter of Credit transaction between Vietnam and Thailand conducted over blockchain, in partnership with Asian Development Bank (ADB) and the Bank for Investment and Development of Vietnam.6 Using the Contour trade finance blockchain, the USD50,000 shipment of plastics achieved a significant reduction in processing time, from up to five days in the past to under seven hours.
At the same time, digitisation is widening access to trade finance. Currently, many small- and medium-sized enterprises (SMEs) find it time-consuming, and difficult or sometimes impossible, to access trade finance under traditional credit risk models. By linking together an entire supply-chain ecosystem, however, blockchain systems can transform their credit profile.
In China, Standard Chartered has partnered with Linklogis to provide Digital Guangdong (GD), a joint venture between Tencent, China Unicom, China Telecom and China Mobile, with this kind of solution.7 By converting invoices from Digital GD’s direct suppliers into blockchain-based electronic vouchers, these e-vouchers can then be passed upstream to the suppliers’ suppliers, supporting their applications for finance because the e-vouchers reflect the creditworthiness of Digital GD itself. This not only reduces their financing costs and delays, but minimises the risk of fraud and gives Digital GD visibility over its entire supply-chain ecosystem.
Mobilising regulatory support
Such innovations are only possible within a supportive regulatory context. In many countries, the use of physical documentation is still required by national law. The legal context is changing, but only slowly. In May, the EU adopted its anti-money laundering action plan, with a public consultation to modify the proposals before launch in 2021.8 It is vital to ensure that emergent regulations make the most of the opportunities provided by digitisation.
FIs can act as a bridge between standards-setters and firms who trade globally, advocating for reforms that facilitate the uptake of advanced digital technologies that can prevent crime, expand the range of suppliers able to access trade finance, and expedite the movement of physical goods even in extreme circumstances such as those created by COVID-19.
For regulations to be effective, however, they must consider not only the role of commercial banks, but also those of traders and multilateral lenders such as the ADB, who provide vital support for suppliers in emerging and frontier markets. Such a reformed regulatory environment will increase confidence and choice in supply chains, unlocking a new, more sustainable and inclusive form of globalisation that makes the most of all countries’ potential.
This article contains insights from Standard Chartered’s Correspondent Banking Academy’s Product Training virtual classroom webinar series.
For additional information on financial crime risks and strategies to mitigate please see Standard Chartered’s Fighting Financial Crime microsite.
1 Matt Egan, 2020, "Bankruptcy filings are mounting. And that's just the tip of the iceberg", CNN, 11 September https://edition.cnn.com/2020/09/11/business/bankruptcies-recession-economy/index.html
2 WTO, 2009, "The challenges of trade financing", https://www.wto.org/english/thewto_e/coher_e/challenges_e.htm
3 ICC, 2020, "ICC Global Survey on Trade Finance confirms industry optimism", International Chamber of Commerce, 21 July https://iccwbo.org/media-wall/news-speeches/icc-global-survey-on-trade-finance-confirms-industry-optimism
4 A.Z.M. ANAS, Contributing writer, 2020, "Bangladesh dirty money fight complicated by coronavirus twist", Nikkei Asian Review, 21 June https://asia.nikkei.com/Politics/Bangladesh-dirty-money-fight-complicated-by-coronavirus-twist
5 ICC, 2020, "ICC Global Survey on Trade Finance confirms industry optimism", International Chamber of Commerce, 21 July https://iccwbo.org/media-wall/news-speeches/icc-global-survey-on-trade-finance-confirms-industry-optimism/
6 Press release, 2020, "We’ve completed our first cross-bank Letter of Credit blockchain transaction between Vietnam and Thailand", Standard Chartered, 11 September https://www.sc.com/en/media/press-release/weve-completed-our-first-cross-bank-letter-of-credit-blockchain-transaction-between-vietnam-and-thailand
7 Press release, 2019, “We’ve completed our first joint transaction on blockchain platform with Linklogis”, Standard Chartered, 5 August https://www.sc.com/en/media/press-release/weve-completed-our-first-joint-transaction-on-blockchain-platform-with-linklogis
8 EU, 2020, "Action plan for a comprehensive Union policy on preventing money laundering and terrorism financing", European Union, 7 May https://ec.europa.eu/info/publications/200507-anti-money-laundering-terrorism-financing-action-plan_en