A crop of technology is fast emerging which is set to disrupt the multi-trillion trade finance market, and banks have a substantial opportunity to capitalize on it. Banks have always played a vital role in underpinning global trade where they are “trusted” parties, issuing letters of credit and financing trade flows.
Without banks, the international trade endeavours of nations and businesses would not be possible. Yet today, global trade and shipping is facing a major new challenge. Exacerbated by COVID-19, the global trade finance gap has ballooned to over $3.4 trillion, mostly due to centuries-old practices and the use of paper that still dominate most of global trade and shipping today.
However, the game is changing. Global trade and shipping are on the cusp of a digital revolution, characterized by a direct leap towards advanced technologies such as blockchain and other privacy-enhancing technologies to allow data sharing. Banks are presented with a unique opportunity to harness this once-in-a-generation digital leap and reverse the growing trade finance gap, reports Finextra.
The 700-year-old plus Bill of Lading
From the beginnings of global commerce, merchants and firms had to secure working capital to finance their trade and minimise the risks involved with goods being shipped for months across the seas. Central to trade finance is the Bill of Lading, a legally binding document given to a shipper by the carrier that details the shipment and serves as a means of transferring the title of goods.
Although the earliest known Bill of Lading emerged in the late 1300s, little has changed over time and 99% of trade is still conducted using paper-based Bill of Lading today. Processes related to trade finance are yet to be properly digitized.
Of the parts that are digitalized, data are still entered manually without automated verification, and the submission of financial data often consists of spreadsheets or scanned documents, making such processes cumbersome, inefficient, and prone to errors.
Boston Consulting Group estimated that a single trade finance transaction requires interaction between over 20 entities, 10 to 20 paper-based documents, and 5,000 data field exchanges. It would be disingenuous to claim that there have been no attempts to digitize, albeit often they have not taken off perhaps with good reason.
Shipping’s great digital renaissance is happening now
The good news is global trade and shipping sectors have begun embarking on a digital revolution, which has been accelerated by the pandemic. We are witnessing a leap in the adoption of blockchain technology as blockchain-based platforms can securely process data, support different applications, and enable trusted collaboration between competing parties – including banks.
Spurred by the country’s 14th Five-Year plan, China’s Ministry of Transport has been rolling out its “Chang Xing” Programme to digitize both its ports and the shipping industry by adopting blockchain-based platforms such as GSBN to drive greater efficiencies. For example, import cargo release has reduced from days to hours.
Building on these blockchain-enabled platforms, electronic Bill of Lading (eBL) applications are also being introduced. These electronic versions of the Bill of Lading harness the immutable nature of blockchain to provide the previously mentioned qualities offered by physical paper as well as the inherent trust by design of the technology. This provides a way in which the Bill of Lading can be digitized and thus tracked, transferred, and processed in seconds rather than weeks.
Although these developments represent a major milestone, there are still many hurdles to overcome. An eBL solutions’ rulebook must be approved by the International Group of Protection and Indemnity Clubs (IG P&I Clubs), for insurers to cover a shipment. This means that for a solution to deliver value, all participants involved (corporates, shipping line, banks) must sign into the same rulebook. A single missing partner will prevent the usage of an eBL solution.
As eBL has been identified as a key trade digitization enabler, there have been many efforts to accelerate the adoption and overcome the anti-network effects. On one hand, ICC has been promoting the UNCITRAL Model Law on Electronic Records (MLETR) with the goal to have countries adopt new legislation to bestow the ability to exchange original documents through a digital channel. On the other hand, Digital Container Shipping Association (DCSA) is conducting technical interoperability proof of concept (POC) with existing eBL solutions.
The reality is those initiatives will likely be necessary but not sufficient to enable the mass adoption of eBL. It is crucial that trade participants reassess the value proposition of an eBL, so that adoption can be jumpstarted, and anti-network effects can be switched to network effects.
GSBN’s Trade Finance Advisory Group of banks is already actively exploring how trade finance processes can be re-engineered under this new class of infrastructure for the global trade sector, as well as how eBLs can be fully integrated.
Last month, IQAX eBL application built using GSBN’s API has obtained the approval of the coveted IG P&I Clubs. To further streamline trade finance processes, GSBN will actively promote the adoption of eBL within the shipping industry.
The role of banks in global trade over the next decade
If the fintech revolution of the past decade was centred on consumer payments and neo-banks, the next decade will be powered by business-to-business growth. Fuelled by the rapid digitalization of global trade, banks will play an increasingly important role in closing the global trade finance gap. During this period, we can expect to see three trends emerge.
First is that the platform infrastructure behind eBLs will become undifferentiated, or “dumb pipes”. While it remains to be seen in which direction, it makes sense for this infrastructure to converge towards blockchain-based infrastructure since data can be safeguarded and be inherently trusted by disparate parties.
For banks, this presents an opportunity to compete at the application-level building upon this infrastructure, as well as address the needs of customers, shippers and other parties in the supply chain. Solutions will cater to specific industries and compete on user experience, rather than on the technology infrastructure.
Second, we will see more banks connect through APIs to these platforms. Banks can rely on the security and data on these platforms and focus their efforts on building their core competencies.
For instance, the emerging stressors in global supply chains are already having an impact on finance, where the previous wisdom of running just-in-time models is shifting towards just-in-case. The increasing need for maintaining buffer inventory will have an impact on working capital and subsequent financing needs. Through API connectivity, banks can directly access supply chain information and provide customers with insights as well as financing to create a “just right” approach.
Finally, banks will be at the heart of greater connectivity between finance and supply chains that have largely been segregated in terms of data and processes. This means greater linkage between the physical movement of goods and financing. Over the next decade, we can expect to see banks develop novel, high-value services, which marry supply chain and finance needs for end customers.
A crop of technology is fast emerging which is set to disrupt the multi-trillion trade finance market, and banks have a substantial opportunity to capitalize on it. Banks have always played a vital role in underpinning global trade where they are “trusted” parties, issuing letters of credit and financing trade flows. Without banks, the international trade endeavours of nations and businesses would not be possible.
Yet today, global trade and shipping is facing a major new challenge. Exacerbated by COVID-19, the global trade finance gap has ballooned to over $3.4 trillion, mostly due to centuries-old practices and the use of paper that still dominate most of global trade and shipping today.
However, the game is changing. Global trade and shipping are on the cusp of a digital revolution, characterized by a direct leap towards advanced technologies such as blockchain and other privacy-enhancing technologies to allow data sharing. Banks are presented with a unique opportunity to harness this once-in-a-generation digital leap and reverse the growing trade finance gap.
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Source: Finextra
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