Outdated trade finance processes, mounting geopolitical tensions, a pandemic-induced economic crisis and major trade finance frauds add more pressure to the current plight of international trade. A holistic framework for countries looking to increase liquidity and reduce risk is critical, writes Samir Neji, founder of dltledgers.
International trade is beset with issues. Antiquated processes clog trade finance and operations. Inefficiencies eat into margins, made worse by rising geopolitical tensions between the US and China. As companies are forced to shift supply chain activities away from the PRC, trade flows have been forced to change, and with change comes uncertainty.
To make matters worse, a global pandemic has brought many industries to a halt. The World Trade Organization expects cross-border trade to fall between 13% and 32% in 2020, while the International Chamber of Commerce estimates US$5tn of trade credit is needed for rapid recovery. It warns that trade financing gaps risk hampering a global recovery.
As if that were not enough, multiple frauds rocked the sector in the first half of the year. Oil prices crashed, leaving many commodity traders exposed. In Singapore, despite warnings from the ICC’s International Maritime Bureau (IMB), the industry made headlines with trade document fraud and the now infamous accounts of Hin Leong, ZenRock, Agritrade and Hontop Energy. Those cases amounted to US$6bn of losses, adding further strain to an already struggling sector.
Dearth of liquidity
In response, the financial community raised the drawbridge. Total commodity trade finance revenues dropped 40%. Some banks turned their backs completely. ABN Amro ceased all commodity trade finance activities, BNP Paribas suspended new commodity trade finance deals, while Société Générale announced the closure of its Singapore trade commodity unit. Regional banks stepped in to plug the financing gap, but it is unlikely they can handle demand. For many traders, the result is already a shortage of working capital.
A familiar cycle
It makes for shocking headlines, but this is a familiar story. While businesses have become adept at collaborating, banks in most parts of the world are still reluctant to work together. This is partly down to compliance concerns, but is also the result of decades of deep-rooted practices and independence. By operating in silos, banks are inhibiting the sector’s ability to transform itself. This is certainly the case in trade – one of the most entrenched of all banking operations.
Banks have long understood that trade finance is not profitable. Mountains of paperwork and complex, manual processes make it resource-intensive, driving up cost-to-income ratios. Add to that the ever-present danger of large defaults, and trade becomes an unattractive way to allocate capital. In certain instances, trade is treated deliberately as a loss leader – a way to attract fee-paying enterprises, which have other, more profitable requirements. Eventually, however, along comes another default. Scars are left, jobs are lost, and banks once again sail for the horizon.
A collaborative solution?
Is it not time for banks, traders, and the countries in which they operate to end this cycle? Without access to short-term credit, businesses will collapse. Jobs are already being lost. Smaller operators are impacted most severely, but even the largest international traders and manufacturers cannot escape completely. Higher funding costs, frozen credit lines, loss of working capital, disrupted supply chains, and tighter regulations have become new norms.
Of course, from adversity comes opportunity. The world has seen myriad initiatives, from AI to blockchain, which aim to bring balance – but with an industry-wide problem of this magnitude the answer lies, surely, in reshaping the sector as a whole.
A country-based approach
The technology is there. Billions of dollars-worth of trades have been recorded immutably in blockchain, with participants, documents, contracts, custody transfers, and shipments there for those with permission to see. For financing decisions, blockchain provides unprecedented levels of visibility. What is needed, however, is for the industry to collaborate – to accept digital documents, to base lending decisions on data, and to share risk by committing to transparency.
To be successful, a solution must work for all: buyers, sellers, traders, banks, insurers, logistics providers, and governments. Often these organisations have already undergone digital transformation, but they are isolated.
For trade to progress, these digital islands must collaborate on a shared framework. The tech-savvy might argue that interconnected, blockchain-based trade is the need of the hour.
A recipe for success
For trade to recover from 2020 several factors have to align. Banks must be willing to work together, either country-wide or regionally, to reduce the risk of duplicate financing. This needs support from governments and regulators, and the adoption of a common, secure, digital platform. Meanwhile, trade participants need to digitise. They must subscribe to an inter-connected trade ecosystem based on one, or several, authenticated trade platforms. Finally, this has to be underpinned by a robust, technology-powered funding machine.
The key here is collaboration, without which the outlook is bleak. Executed properly, however, and the potential is a new macro-economic trajectory, based around global trade. For legitimate enterprises it creates a faster, more efficient trading environment. It also weeds out bad actors. This, in turn, reduces credit risk, attracting finance providers and driving liquidity.
Today’s trade problems must be solved with a new, technology-powered approach, which supports genuine trade participants and encourages responsible behaviour at every level.
Why is this not happening faster?
The digitisation journey of cross-border trade is in its infancy. Less than 1% of total volume is managed digitally. In other sectors, technology adoption has been exponential. At the beginning of the cycle, the majority of businesses are reluctant, or unable, to embrace change. Innovation is left to a few early adopters. When those first movers gain an advantage, others follow suit. Soon, the remainder realise they are being left behind and race to catch up. Eventually only a few stragglers remain, destined never to modernise and probably to close.
In cross-border trade, early adoption is underway. It is already widely accepted that, eventually, the industry will turn to blockchain, which is ideally suited to inter-enterprise collaboration, authentication, and transacting with unknown parties. According to surveys by IBM and Deloitte, three years ago only 25% of businesses were even experimenting with blockchain; today 85% expect to be using it by 2023.
Several trade digitisation platforms now exist, some have a narrow focus, others take a broader view. We at dltledgers are one of the more established. Founded in 2017, we are one of the pioneers. Based on Hyperledger, the dltledgers platform has processed US$3bn-worth of transactions, connecting 28 countries on four continents, and covering a range of product types, from soft commodities to merchandise trade.
Trade finance – a less-than-agile sector
Despite this progress and an expanding US$1.5tn trade finance gap, financial institutions have been slow to react. This is perhaps not surprising. They are impeded by scale, opaque trading practices, and manual processes. And although technology exists to help qualify opportunities and assess risk, it is only as accurate as the data that feeds it, and reliable data is in short supply.
As digitisation accelerates, this will change. With greater transparency and data, technology-powered lending becomes more viable. Ultimately, ironically, the financing itself will become the commodity. Those seeking funding will leverage their data to compare different lenders online. They will select the most competitive quotes, then share trade documents from a secure storage facility in the cloud.
Country-specific double finance detection
For data-driven lending to revolutionise cross-border trade, finance providers will need government support, as is happening in Singapore. Here the government aims to eliminate fraud with a country-wide approach.
The Singapore government, through its trade and industry agency, Enterprise Singapore, recently launched its TradeDoc Validation initiative. Led by DBS Bank and Standard Chartered, this involved the launch of a blockchain platform across 15 participating banks. For the first time a central regulator gained a consolidated view of the country’s internal trade finance activities, enabling it, and participating banks, to identify suspicious activity, trigger investigations, and apprehend bad actors. If TradeDoc Validation proves successful, the risk borne by trade finance providers will reduce, creating much-needed liquidity for local businesses.
As the developer behind TradeDoc Validation, we at dltledgers have received several, similar enquiries. This may be an indication that a new approach to trade finance is closer than many believe.
For information about dltledgers, visit www.dlt.sg or email firstname.lastname@example.org