Original article by Corporate Treasurer
The impact of Covid-19 on global trade finance cannot be overstated. Yet, as one of the last holdouts in the march towards a digital future, the industry still faces an uphill battle in rallying around a common digital standard. Costs remain a significant barrier, and yet Covid-19 has been a catalyst for change – some say that it has fast-tracked digitization by a decade – having exposed weaknesses in the status quo, and putting some companies out of business. It is clearer now than ever that firms that wish to survive will have to adapt to a digital future.
In collaboration with DBS, East Partners conducted a comprehensive survey revealing some key insights into market developments, and CorporateTreasurer spoke with experts in the field about what the future holds for treasury digitization. By in large, many corporates are embracing API technology to connect with their banking partners – among the region’s largest companies by turnover, 34.8% of corporate treasurers said in 2019 that they were using APIs, with 42.6% expecting to use more of this method of communication in 2020.
THE SEARCH FOR STANDARDS
In finding common ground for digitising processes, key considerations include contract enforceability, legal liability at each stage, and the jurisdiction for any potential resolution of disputes. New digital solutions must pass compliance and legal requirements before they can be widely adopted by stakeholders. At the same time, there remains a lack of unified digital standards within trade. This leads to the question – what role can banks play in building a consensus around what digital standards to implement?
“Banks carry the regulatory burden and remain gate-keeper to the funding markets for most corporates,” says Axel Hauke at Agrocorp International Pte Ltd, noting that consensus in bank requirements would help. “I think the respective regulators are ideally positioned to nudge banks into action here.”
“Financing is the lifeblood of global trade, and banks clearly play a pivotal role, says Jinelle D’Lima at dltledgers. “Like it or not, digital technology will define the future of trade and trade finance, just as it has in other industries,” she adds, noting there is no universal system for e-document submission while electronic documents such as e-Bills of Lading (eBLs) are simply not accepted in some jurisdictions.
“Banks involved in trade finance must support collaboration amongst industry players and government agencies to advise on the feasibility and scalability of new rules and practices to enable trade digitalization,” says Sriram Muthukrishnan, Group Head of Trade Product Management at DBS. “Ultimately, what the industry may require is for all players to agree and codify these into some form of international standards, such as UCP 600 for Letters of Credit.”
LEADING INDUSTRY COLLABORATIONS
While no viable solution has yet gained the critical mass yet to convert an entire industry to digital, banks such as DBS have led and co-created solutions at both industry and customer levels. “We have seen increased interest from our corporate clients to collaborate in creating new digital solutions that can benefit their ecosystem of suppliers and customers. There is also a greater appreciation that collaboration amongst banks, that might otherwise compete, is possible in specific areas for the greater good of creating an efficient and robust environment for all,” says Muthukrishnan. In risk management, DBS led an effort with Standard Chartered to create the Trade Finance Registry – a pilot industry “proof of concept” utility for fraud detection which was hosted on #dltledgers’ platform. “We have also collaborated with customers such as Rio Tinto on the blockchain Contour platform to facilitate the use of digital letters of credit,” he says.
Trade finance is complex and multilayered – with multiple platforms competing in each area to become the next industry standard. SWIFT currently links over 11,000 financial institutions and corporates around the world, and recently signed a Memorandum of Intent (MOI) with Singapore’s Infocomm Media Development Authority (IMDA) on global trade digitalization.
Meanwhile, new ventures attempt to disrupt this incumbent model, giving the decades-old consortium a run for its money. “We may get regional platforms, such as one for Singapore or one for the EU, or industry specific-platforms,” says Hauke, noting “I don’t think anyone can tell at this point which one will eventually prevail. You see lots of venture capital activity in this space for that reason.”
“Such a solution would have to be robust, secure, and reliable, accepted by regulatory and governing bodies in multiple geographies, become the world’s largest network of its kind, and maintain its supremacy by sharing its success with its users,” says D’Lima. No easy task indeed. When it comes to return-on-investment, there are some processes that stand to benefit the most from implementing digital – and with the help of certain standards and platforms, can often be the easiest to implement. For example, UCP 600 has created a global standardization and legal certainty to allow platforms like Mitigram to create a global marketplace for bank Letter-of-Credit distribution. “They reduce distribution costs by giving corporates access to a wider funding network, resulting in competitive pricing with low onboarding and annual costs,” says Hauke.
For cross-border transactions, the paperwork involved can be considerable, and surprisingly, much of the work is manual – with documents moved between parties in hard copy via courier. As such, digitising contracts and documents can save days or even weeks. Taking this a step further, implementing blockchain creates a single source of truth for participants, removing ambiguity and eliminating delays caused by paper documents. “On average our clients benefit from reduced cycle times by 80%, improve traceability and access to finance, and save an average of $2500 per trade,” says D’Lima.
The most effective route to cost savings though is of course digitising data at the source – when invoices and purchase orders begin their journey in a digital format. “For banks, we have had to digitise our front-end channels for a seamless customer journey, as well as updating our internal systems to accept and process digital data to improve turnaround times and maximise customer value,” says Muthukrishnan, noting that this approach has enabled more efficient straight-through-processing as well as more intelligent data-based risk mitigations and financing. No matter where you start, though, the journey towards a digital future begins with a single step.