Digital Ecosystems in Trade Finance: Seeing Beyond the Technology
Global trade continues to recover following the dip caused by the financial crisis. Of course, trade volumes are currently threatened by a slowing global economy, trade tensions between the US and China, and the real possibility of a no-deal Brexit. But the long-term outlook remains positive. Supply chains are continuing to become more international, drawing on many parties from around the world.
This ought to be good news for the banks that supply trade finance. However, at the same time as trade volumes are increasing, other forces are reducing banks’ margins. Transactions continue to shift from documentary trade, typically involving letters of credit issued by banks, to open account trade. Costs are also proving stubbornly high. This is partly a consequence of increased regulatory burdens. But it also results from a failure to digitize and automate operations. Trade finance remains a largely paper-based and laborious business. A single transaction often requires the interaction of more than 20 entities, and involves between 10 and 20 paper documents and 5,000 data field exchanges.
Several attempts to digitize trade finance have been made over recent years, but they gained insufficient take-up to materially reduce the role of paper and manual data entry across the industry. The latest wave of innovation in this area focuses on “digital trade ecosystems” – digital platforms that connect entities within the trade finance network and facilitate the flow of data between them. Consortia of banks and other large players in trade finance are investing heavily in their development.
Will these ecosystems succeed where other attempts to digitize trade finance have failed? To help evaluate their prospects, BCG and SWIFT – with support from the ICC – surveyed banks and corporates to discover their attitudes towards digital ecosystems: what are they looking for, where do they expect ecosystems to be valuable, and what would it take for them to adopt the technology?