China Systems has been digitising various aspects of trade finance operations and functions for more than 30 years. Stefan Tryggvason, CEO of China Systems Corporation, shares his views on the evolving landscape of digital trade.

 

The digitalisation of trade is a phrase that we have all become familiar with, especially over the past two years. Many commentators have declared that Covid-19 was the tipping point for the movement and the advancement of the fintech ‘revolution of disruption’.

While it is true that the pandemic may have accelerated the adoption of advanced technology-driven solutions, the reality is that many of these solutions, or variations of them, were already in play across the global trade and supply chain finance ecosystem. Traditional trade and supply chain finance solutions providers have been digitalising various aspects of trade and supply chain finance operations workflow and functions for decades.

 

An evolving landscape

Most trade finance is transactional in nature, involving a buyer and seller with a bank (or banks) intermediating in the capacity of risk takers and liquidity providers. Add to this the fees plus interest margins – that’s about it. That is the way it has been for hundreds of years, and that is the way it is today – no change.

The difference now is that innovation through advanced technology brings efficiency and scalability, which empower trade finance providers with the right technology to achieve global reach and in doing so capture greater market share. This, in turn, brings in greater income and returns to stakeholders.

China Systems has been delivering advanced technology that has enabled and empowered banks to do this in the most effective manner for more than a quarter of a century. We are on a journey, with the pace of change now gaining momentum like never before.

Although the shift towards digitalisation and the use of advanced technology to transform trade has gained momentum of late, the major shift came with the global financial crisis of 2008.

Before the onset of that crisis, global trade was expanding at close to 10% per annum and commodity prices were expected to remain on an upward trend.

This meant that banks active in commodity-driven emerging markets generated significant margins and, in turn, profits from trade finance operations. Consequently, large budgets were available to invest in the best, most reliable trade finance processing systems at that time.

The larger banks with the more significant budgets gained significant market share and much of their success was driven by having reliable and advanced technology to support and expand trade, and to a lesser degree, supply chain finance operations, especially into emerging markets.

China Systems, like other traditional trade system providers, benefited from this phenomenon. The key variable back then was reliability and scalability of the systems and support provided to trade banks, and this remains substantially true today.

Trade finance processing is extremely complex – it relies on international messaging standards and often intricate international trade rules. The fact that the system architecture was robust and did what it said on the tin differentiated the winners from the losers.

Today, trade and supply chain finance ecosystems are changing fundamentally, and the pace of change is accelerating.

Trade wars, followed swiftly by the pandemic, induced a collapse in global trade in 2020. The bounce back came with the value of global trade reaching a record level of US$28.5tn in 2021, an increase of 25% on 2020 and even 13% higher than pre-pandemic in 2019.

More recently, the fallout from supply chain bottlenecks, unfolding political challenges and elevated commodity prices alarmingly continue to take their toll. We are now seeing a dramatic surge in inflationary pressures, which have resulted in an increasingly complex trade environment. We will soon experience an illusion of expanding and apparently encouraging global trade values due to the inflationary impact on the value of goods being shipped. Interest rates will rise, which means banks’ margins can increase. But it is likely this may well be more than offset by the impact of geopolitical risks not seen before in recent times.

 

A financing gap

The trade finance market has been going through disruption, fragmentation and transformation since 2015/16. This has had a damaging impact on banks’ returns from trade and supply chain finance activities. Until recent times, this had been compounded by growing competition, lower interest rates and reduced margins on financing trade transactions.

Data from the World Trade Organization forecasts trade to grow at 3% in 2022. While this is going in the right direction, in my mind, it is not good enough to sustain global growth and development and narrow the trade finance gap, which recent estimates – incorporating inflationary impacts – now put at more than US$2tn.

Technology that can dramatically increase trade connectivity for companies, especially SMEs, with trade finance providers can be truly transformational and will narrow the trade finance gap, particularly in emerging markets. Connectivity between banks is in a mature state; not that this cannot improve. However, connectivity for corporates and SMEs to banks is at a relatively low level. Tackling this challenge is a key priority for us at China Systems.

In terms of trade technology providers, these fundamental market changes also mean that traditional vendors are now exposed to market challenges as well as market gaps and indeed opportunities that never existed before.

Not so long ago, the demise of the traditional providers was anticipated by some experts due to possible displacement by the arrival of new fintechs. That has not materialised. Furthermore, it is interesting to see that blockchain is no longer the darling of the gurus speaking at trade conferences. At China Systems, based on successful interventions with distributed ledger technology, we can see that blockchain will have a role to play but that it will only be one part of a complex international trade jigsaw.

 

New players

No doubt, the arrival of the fintechs has challenged traditional providers like ourselves to lift our game. We have welcomed, and indeed, have risen to this challenge.

It is fair to say that some of the fintechs have invested wisely in focused areas of R&D and consequently developed trade components and intelligent solutions that complement and truly add value to the existing trade and supply chain finance ecosystem. In fact, while the number of real success stories may be limited, some of the breakthroughs are truly impressive and have the potential to be game changers in the digitalisation of trade.

It is also interesting to observe that some fintechs that made the most significant promises have become casualties of possibly creating unrealistic expectations in a world where trade solutions must lend themselves to global applications that solve real world problems as they currently stand.

Those who are thriving have learnt that working together is the key to success.

At China Systems, we are now pushing forward with two priority streams:

1. Through partnerships, and

2. By refining and enhancing our product offerings.

China Systems has been digitising various aspects of trade finance operations workflow and functions for more than 30 years. Secure web-based remote customer access for trade finance operations, such as letters of credit or guarantee applications, were front-end innovations spearheaded by China Systems quite a long time ago.

In recent times, this market-led approach has pioneered the development of applications that enable customers to electronically sign reimbursement or customer service agreements with their banks, which in turn facilitate trade transactions across a multitude of jurisdictions.

We are playing a coordinating role in one country-wide digital project for the issuance of guarantees where the customer-to-bank interaction can be totally digital and the actual guarantee may be issued in paper, Swift MT760 or totally digital format, driven by business needs and the surrounding legal framework in the relevant jurisdictions of guarantee beneficiaries.

Our core system provides the foundation connectivity and workflow, but the specialised technologies of partner fintechs deliver additional value-added elements to the trade ecosystem in an increasing array of specific use cases.

This partnership approach is now paying dividends, with the progress being achieved more akin to evolution than revolution.

In conclusion, the demand from banks, large and small, for innovation and technology-driven processing that enables new levels of efficiency and global reach with corporates and SMEs is growing. This renewed focus on the benefits trade technology can bring to business, as opposed to the brilliance of the technology itself, is a welcome development.