Trade finance: Clients prove slow to embrace digital

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By:
Kimberley Long
Published on:

Although banks like talking about bringing digital services to trade finance, a surprisingly low proportion of the 7,000-plus participants in Euromoney’s annual trade finance survey are actually using the technology.

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Asked about their usage of digital trade finance products in the Euromoney Trade Finance Survey 2018, very few group treasurers and CFOs said they were already operational.

Swift’s MT798 gained the highest response rate, with 28% of respondents saying they use the product. Meanwhile, the Bank Payment Obligation (BPO) recorded 23%, and electronic bills of lading saw 20%. Blockchain recorded the lowest take up of all, with just 6% stating they have used the technology.

Swift is responsible for much of the push towards change in trade finance, being behind both the MT798 and the BPO.

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Huny Garg, ‎Swift

Huny Garg, ‎head of trade and supply chain at Swift, says the organization is pleased with the usage figures it has seen to date: “Some global corporates are adopting solutions like MT798 to streamline their communication with banks. MT798 has seen good year-on-year growth, with 36% volume growth in 2016 and 46% in 2017 so far, leading to more interest from banks to adopt as well.”

Swift says it is seeing a pick up in the use of BPO, but this is only happening in specific circumstances. “BPO continues to steadily increase volumes and we see new deals in multiple markets,” explains Garg. “While it is a versatile instrument, BPO has different appeal for different situations and it is not a silver bullet for trade digitization.”

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Raphael Barisaac,
UniCredit

On BPO, Raphael Barisaac, global co-head of trade finance at UniCredit, sees a lot of positives in the take-up. The bank has been a strong supporter of BPO from the outset, despite it coming under criticism. 

“The results of thesurvey demonstrate that BPO – often talked down in the media – is seeing similar levels of adoption to its more-hyped peers,” he says.

Each of the systems in the survey represents only a small aspect of the overall trade cycle. Each addresses a specific problem and does not bring about a wholesale replacement of the trade finance ecosystem.

The use of electronic letters of credit works for open account transactions, where there is already an established relationship between the counterparties. BPO is a payment on the ISO 20022 standard that allows the bank to supply secure financing from the moment the trade is agreed.

MT798 meanwhile provides a messaging service that links up the multiple banks used by one corporate in their trade operations to transfer letters of credit and guarantees.

From the banks’ perspective, the take-up is not slow by the standards of the trade finance market.

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Murat Demirel, Citi

“Digitization in trade is not happening very quickly,” says Murat Demirel, head of trade finance EMEA, treasury and trade solutions at Citi. “One of the reasons for this is that there are many parties involved in a trade transaction, and these parties have different levels of capabilities and technological sophistication.”

Hubert Jolly, global head of financing and channels, global transaction services, Bank of America Merrill Lynch, says the actual process of bringing a new platform onboard can be a stumbling block.

“We have seen interest from clients wanting to use the MT798, but due to the complexity of implementing it for trade, the solution hasn’t reached the same adoption levels for trade that exists for other treasury products,” he explains.

UniCredit’s Barisaac says banks need to get behind the new technology: “The limitation here is that, for the full benefits to be realized, these products need to be offered by a significant number of banks.

“If not, they will struggle to achieve critical mass and clients will only be able to use them in a limited number of situations.”

The main problem is the nature of the market, bankers say – every transaction is unique.

“Compared to payments, the digitization process of trade finance is more complex,” explains Garg. “This is due to the large number of parties involved; as a result of which there can be up to 20 sets of documents per transaction in trade. These are issued by various entities in the process, and not all of them may see the benefits of digitization.”

Then there is the diversity of global trade and the diversity of trade regulation. For example, not every jurisdiction will accept the validity of electronic signatures.

“It is not realistic to say that we can fully digitize when so many jurisdictions still require paper documents to be submitted. But progress is definitely happening,” says Garg.

Peer pressure

Some corporates are looking to move matters along in other areas of transaction services. Swift’s global payments initiative, used for cross-border payments, received endorsement in July when six multinational Swiss corporates published an open letter calling on the every part of their supply chains to make the most of its increased functionality.

Could this kind of peer pressure work just as well for trade finance?

“Corporates and banks do see the benefits in terms of risk management and in terms of reducing the amount of paper used in processes in general,” says Garg. “Banks are especially focused on improving back-end processes through automation. For digitization to work end-to-end, all parties need to come on board – not only banks and corporates but also shipping companies, insurers and governments.”

Meanwhile, leading banks are not just leaving it to third parties.

In a mirror of the move to online trading of foreign exchange 20 years ago, they are putting together their own digital platforms. UniCredit has its we.trade solution, developed alongside other European banks including Deutsche Bank and Société Générale, to conduct domestic and cross-border trade via distributed ledger technology.

Similarly, BAML’s internal CashPro platform was developed to bridge the gap from paper to digital in a format customers are familiar with.

“CashPro gives clients access to a variety of digital data options,” says Jolly. “For example, clients can conduct letters of credit processing electronically through the platform. We’re able to link clients to many external data sources through CashPro, and this allows them to transact electronically with their other banking partners more seamlessly.”

Collaboration

However, Citi’s Demirel says there are greater benefits from working through external organizations: “Products being developed by different banks are typically not connected with each other and this limits their widespread usage. Seeing greater take up will require far more collaboration between financial institutions.”

In the end, it is clients that will decide the future path of trade finance. And many of those clients still need to make their own decisions. Are they most concerned with saving time and money, or are they more worried about managing risk and security? With finite resources available, what will they prioritize?

BAML’s Jolly thinks there need to be solid economic reasons for change to be affected.

“In order for change to happen, it’s got to get to a point where not being digital puts a business at risk. If the top-tier corporates are unable to operateefficiently and securely, it will force their entire downstream supply chain to change.”

The results of the Euromoney Trade Finance Survey 2018 will be available online on January 9.