The team at Finastra outline why the importance of technology to digitise trade finance – and go beyond by bringing interoperability across ecosystems – will eventually enable all players to monetise on the African Continental Free Trade Area.


Of the many impacts relating to the pandemic, one important effect has been to bring more pressure on liquidity within trade finance in Africa. Quite simply, businesses were shut down and could not carry out the volumes of trade they were undertaking before the crisis. Another has been to expose the inefficiencies of manual or semi-manual processes in trade finance, with bank and corporate employees working remotely and unable to access and share documents efficiently.

As a result, there is a realisation amongst corporate banks, driven by growing demand from customers, that digitisation is the way forward for trade finance. Digitised processes are faster, less error-prone and more cost-effective.

However, pressure on trade finance liquidity also equals pressure on the budgets available to invest in new technology. How can banks move forwards with their ambitions to provide better, digitised services to customers in an era when they also need to reduce costs?

An additional element to factor into this conundrum is the African Continental Free Trade Area (AfCFTA), which is set to introduce a tariff-free, unified market for the 55 countries of the African continent. The trade opportunities opened up for corporates and their banks by AfCFTA will be significant, with the World Bank estimating that the market will be worth almost US$450bn.

But if banks are not prepared to support their corporate customers with efficient, digitised trade finance services, they may well miss out on the benefits of what will be a truly game-changing economic event. So where do they go from here?


Today’s landscape

Trade finance teams in Africa don’t currently have access to certain technologies they need to get them through the pandemic and beyond.

To understand the current state of play for corporate banks and their use of technology, we surveyed over 200 trade finance professionals in partnership with banking insights and analytics firm East & Partners.

The research reaffirmed that the pandemic highlighted the lack of some technologies that would help when teams are working remotely. Notably, almost a third (32.4%) said that e-documentation was the most important digital functionality they did not have access to, but that was urgently required.

This was followed by digital signatures (26.4%) and cloud technology (11.5%). When we asked which technology banks had invested in during the pandemic, we found there was a clear gap between the ability to take the relatively simple step of using digital signatures (23.5%) and the more complex one of adopting e-documentation (14.7%).

Banks perhaps haven’t invested in sophisticated digital trading platforms in the past. One of the points that has come out of our research is that 85% of respondents had developed systems in-house, for example.

The lack of engagement with fintechs or cloud vendors means that banks are often relying on a plethora of bolted together systems which don’t necessarily work particularly well on an end-to-end, front-to-back basis.

There’s also a lot of duplication and manual processing that’s going on in that space. You have to wonder whether there’s now a pivot point in terms of reaching the end of what banks can do from an in-house perspective, stepping back and having a look at working with fintechs on a more wholesale – rather than a piecemeal – basis, to digitise their trade propositions.

There’s a growing argument that the more cost banks can strip out – and the more automation and integration they can create in their trade finance platforms – the better placed they will be when liquidity returns to the market, accelerated by AfCFTA.

Priorities for corporates

Trade finance teams’ priorities for digital transformation in the next five years will be front-office execution, account validation and regulatory compliance.

Our research revealed that banks are indeed gearing up for change, despite the recent unavoidable constraints on trade. Their priorities demonstrate the importance of bringing in a more integrated approach to trade finance, with an overwhelming majority (94.1%) of respondents aiming to digitise front-office execution.

Account validation is the second biggest priority for three quarters (76.5%) of trade finance professionals followed by regulatory compliance, cited by 55.9% of respondents. Their plans are most likely to be driven by the need to improve cost efficiency (70.6% of respondents), an objective to provide mass products (55.9%) and ongoing platform integration (52.9%).

The findings highlight the journey that many African corporate banks are now taking towards a more holistic approach to technology adoption, where they will increasingly embrace platform computing and collaboration with fintechs.

Of course, these intentions will require a greater investment in technology, and the majority (88%) of African banks report that they will be looking for an increase in budgets over the next five years. The percentage increase per year that they anticipate over that timeframe averages at 24.4%. A small number of banks responded that they were currently unsure about future spending on technology, but not a single bank reported that they would make zero additional investment.

While banks are looking to cut costs and by digitising their processes, there’s the added benefit of going to market with automated services that will help attract SMEs and micro-SMEs as well as corporates in the new open trading environment heralded by AfCFTA.

The twin drivers of the pandemic and the introduction of a single trading bloc are no doubt encouraging an acceleration in digital transformation.

A senior bank manager for trade finance, speaking at a recent Finastra roundtable event to debate the impact of AfCFTA, explained that in the current trading paradigm, exporting goods is “costly, it’s time-consuming, and it takes a long period to complete”.

What’s needed, is a pan-African payment and settlement platform which allows banks to offer direct intra-Africa payments with same-day settlement, at a lower cost and reduced FX margin. Without technology, we cannot realise the full benefits of the AfCFTA.

Open technologies and collaboration

Although many of the challenges for banks in Africa are the same as they are for financial institutions the world over, it’s also true that those banks face some unique characteristics that create additional hurdles to navigate.

One is that there is not yet a single trading bloc, complete with a single currency and a single set of regulations. Another is that regulators have not caught up with the modern need for cloud computing and for data processing in the public cloud. And as a result of these factors, together with the fact that only 15-16% of African commodities are traded within and between African countries, there isn’t a robust trading infrastructure or network in operation as exists in Europe or the US.

As one of our participants, a senior leader at a large African banking group, said during the recent Finastra roundtable, “AfCFTA means that corporations in Africa will be in a better position to thrive and, in turn, provide better livelihood to communities”. “The value that is generated in the continent is also consumed in the continent,” they said.

“The buyer and the seller are within the African continent and create value instead of just exporting raw materials.” Yet the true value of the changes introduced by AfCFTA will depend on interoperability between regulatory regimes as well as the different digital initiatives currently underway.

With such opportunities and prospects on the horizon, companies both small and large can look forward to a bright future. The same can be said for the banks that serve African businesses and that will provide the trade finance services they will need moving forward.

To achieve success in the years ahead, banks will need to get internal systems in shape, so they are as prepared as possible for the demands presented by a new, increasingly vibrant African economy.