For centuries, trade finance has been essential for the majority of cross-border trade transactions. However, as global trade has evolved over the years, traditional trade finance instruments such as letters of credit and loan guarantees have come to rely heavily on manual and paper-based processes that can be costly and time-consuming. Paper documents are also vulnerable to delays, human error, and fraud due to their complexity and the number of parties involved. Today’s digital economy is poised to bring about a transformation of trade finance.
Digitalization promises to reduce time and economic costs for small and medium sized enterprises (SMEs), allowing them to generate more predictable cash flows from export sales and better allocate working capital in a time-efficient manner. Digitalization also promises to improve the competitiveness and efficiency of SMEs in the modern world economy, making it easier for them to participate, as direct or indirect exporters, in global value chains, which are global production and trade networks developed by multinational corporations. New technologies, such as advanced electronic documentation and blockchains are beginning to transform due diligence and compliance requirements.
Artificial intelligence with big data analytics allows for more precise credit scoring and better pricing options. As trade finance providers actively explore ways to streamline operations and digitize documents, SME exporters stand to benefit from expanded access to financing at reduced costs, faster transaction processing, and more efficient credit assessment of foreign buyers in the not-too-distant future. However, the lack of a global electronic infrastructure that can interconnect all parties involved in cross-border trade transactions remains a major challenge.
With multiple parties located in various jurisdictions, an interoperable system is needed to fully unlock the benefits of new digital technology solutions. Nevertheless, exporters should be aware of the emerging trade finance trends so they can be ready to take advantage of new opportunities.
A Quick Glance
Digitalization of Trade Finance: The leverage of emerging technologies to transform burdensome paper-based trade finance instruments and processes into more cost-efficient and less time-consuming digital systems.
Emerging Technologies: Advanced electronic documentation, blockchain technologies, and artificial intelligence with big data analytics promise to offer new improved efficiencies and economic benefits to trade finance providers and their SME customers.
Opportunities: Prospects for faster, less costly trade finance transactions. Potential for increased access to trade finance for SMEs.
Challenges: Current lack of an interoperable global infrastructure for trade finance instruments. Some technologies are still being developed and tested.
Key Points
• A transformation of trade finance is unfolding around the globe by leveraging emerging technologies to convert traditional, burdensome paper-based instruments and processes into more cost-efficient and less time-consuming digital systems.
• Examples of currently emerging technologies include: (1) advanced electronic documentation, (2) blockchain technologies, and (3) artificial intelligence with big data analytics.
• Digitalization promises to offer new, improved efficiencies and economic benefits to both trade finance providers and their SME customers.
• Digitalization also promises to increase participation of SMEs, as direct or indirect exporters, in global value chains by helping to improve their competitiveness and efficiency in today’s modern world economy.
• As digitalization transforms trade finance, SME exporters stand to benefit from expanded access to financing at reduced costs, faster payment processing, efficient foreign buyer credit assessments, predictable cash flows, and improved confidence in exporting in the not-too-distant future.
Emerging Trends
• Advanced Electronic Documentation: Electronic documentation of traditional paper-based cross-border trade transaction processes, such as bills of exchange, bills of lading, and electronic passports, is driving trade finance providers to centralize their systems to more efficiently meet Know-Your-Customer (KYC) and other compliance requirements in a globalized world. Thus, emerging advanced electronic documentation tools have the potential to further make compliance easier for SME exporters while eliminating time-consuming efforts to verify business information.
• Blockchain Technologies: Blockchain technologies promise to reduce the complexity and costs of trade finance instruments. With shared, immutable databases that are visible to all parties, blockchains can help develop trust and transparency among parties who do not know each other well but must work together through common documentation. As such, trade finance, with the involvement of multiple parties – the exporter, the importer, the correspondent banks, and other third parties – is a suitable application of blockchain technologies. In addition, blockchains can enable speedy verification of digital documents, simpler KYC compliance, and smart export sales contracts with automated payments.
• Artificial Intelligence with Big Data Analytics: Artificial intelligence (AI) with big data analytics can enable trade finance providers to make faster and more accurate credit decisions in cross-border trade transactions. In other words, AI can help trade finance providers conduct more thorough due diligence of business information, which could result in granting more favorable financing and credit terms to their SME customers. AI can also enable trade finance providers to conduct more thorough and accurate compliance checks, which reduce asymmetric information differences while lowering costs for SME exporters.
New Fintech-based Trade Finance Providers and Innovative Solutions
Digitalization of trade finance is expanding the portfolio of both trade finance providers and trade finance solutions. Web-based real-time updates and smart contracts can allow for innovative and less costly trade finance solutions. New fintech-based trade finance providers are appearing outside of the traditional global financial system. Many of them are launching online only platforms that are connecting exporters and importers to provide both traditional trade finance instruments and innovative fintech-based solutions.
Risks of Digitalization
While the benefits of the global digital economy are undisputable, U.S. exporters should also be aware of some of the risks that come with innovation. Like any financial innovation, changes in trade finance can lead to unanticipated risks that could result in sudden and serious liquidity problems for new non-deposit taking fintech-based trade finance providers. The advancement of digitalization also increases the chance for cybersecurity risk, either due to human error or intentional interference from malicious actors.
Tips for Exporters
• Be mindful of emerging trends that could reduce the complexity, cost, and processing time of trade finance transactions.
• Inquire with your current trade finance provider about available or planned digital options that could enhance efficiency and reduce costs.
• Explore trade finance options, including consulting new fintech-based trade finance providers about both traditional instruments and innovative offerings.
• Be cautious of potential fraud and cyber security risks that may accompany new technologies and online trade finance platforms.
These links updated: 4/23/18. This website has been funded in part by the U.S. Commercial Service. Copyright (c) All Rights Reserved by the District Export Council of Georgia. Image:: Fotolia_47136361_Subscription_XL .