The trouble with trade finance digitisation

Trade Finance is undergoing a massive transformation as global banks and their clients push toward digitisation of trade documentation. While the space seems to be taking baby steps toward a paperless future, there have been growing pains — and they will likely continue. The biggest challenge is to get all parties aligned to make it effective — the industry is only as strong as the weakest link in the chain. In other words, I would not declare the digitisation movement a success just yet.

But the industry is clearly pushing forward on digitisation.

For example, we have increasingly seen roll out and adoption of new technologies such, as blockchain and SWIFT's trade utility. However, the uptake of these innovations has been limited to pockets, and not on a large enough scale to have a significant impact.

The key challenge here is how to incentivise industry players to digitise Trade Finance on a singular standard, especially when there is currently no existing global standard.

I see four key drivers that would make it work.

The first one is external; clients. They want new solutions in trade and look to established regional and global banks to address issues — from cost-cutting to increasing efficiency.

The second is internal, banks themselves. Digitising their business helps reduce costs, increase efficiency and enhance scalability, not to mention prepare banks for the future.

Third is the emergence of non-traditional players such as fintechs, which tend to solve very specific problems for clients. There are many of them working on individual solutions, but no one is aggregating and providing the overview. The day that these platforms collaborate, integrate and get interconnected is when it will be a big driver for successful digitization.

Finally, regulators are pushing for the connected players within trade to digitise the process — before stepping in to make it a requirement, which is a distinct possibility in the next five to ten years.

The nature of Standard Chartered’s business model makes it ideal to be at the forefront of this trade finance transformation. Though based in the U.K., the bulk of our business is in Asia, Africa and the Middle East. We focus not just on multinationals (MNCs) in developed markets but also on small to medium enterprises (SMEs) in emerging markets. We call it “banking the ecosystem.” Standard Chartered wants to be the glue in the supply chain.

As banks increasingly digitise, the implications for clients of all sizes will grow as well. We believe the key is to provide outstanding services to MNCs and equally important to cater to needs of smaller entities. They are focused on capital generation to keep the business ticking and securing new sources of credit -- and we aim to help them address those needs.

That’s why digitising the information supply chain — not just the physical and financial supply chains is invaluable. The information supply chain is all about leveraging data to make credit decisions faster and more efficient. On one hand the transparency of information helps banks to better understand the risks involved and on the other, helps SMEs to secure financing at a cheaper cost.

To that end, Standard Chartered is investing in four key areas: product capabilities, making connections, back-end operations and leveraging data.

Documentary trade finance has been dying a slow and painful death for decades, but it is not going extinct. Trade will be serviced very differently, and it will not just be financing. Risk mitigation, technological efficiency, and leveraging data analytics will be increasingly more important.

The model around pure financing will be challenged, so banks will have to innovate and add other services to remain relevant to clients. Leveraging and unlocking the power of data analytics will be key. I expect there to be more collaboration between banks and fintechs hence broadening offerings; from financing to include credit decisions to use of digital currencies.

Looking forward, I am cautiously optimistic.

Fintechs are still seen as competitors and alternatives to banks. However, there are obvious synergies and both sides will increasingly have to collaborate and co-exist.

A split-personality will develop between competition and collaboration as the boundaries between how banks define trade and cash will continue to blur.