Why this pandemic has shown how critical it is to go paperless
Since lockdown began in spring, there has been no shortage of discussions exploring how much the world has changed – or how much it ought to adapt to the “new normal”. Trade finance falls into that second category, and many have rightly pointed out that Covid-19 presents an opportunity to reflect on current practices within the industry – most noticeably on the overreliance on paper-based documentation. As the world continues to adapt to new ways of working, those dealing with trade finance need to enhance their processes to meet the needs of the modern world.
There is a great urgency to do so. The World Bank expects global GDP to shrink by 5.2% this year – the worst recession in eight decades. It also predicts that per capita incomes will fall in a vast majority of emerging and developing markets, pushing as many as 100 million people into extreme poverty.
Countries where the pandemic has been the most severe, and where there is heavy reliance on global trade, tourism, commodity exports and external financing are likely to suffer the biggest economic toll, the bank said.
As trade accounts for 60% of global economic activity, getting this engine of growth running smoothly again is crucial to turning things around in many markets. However, even in its optimistic scenario, the World Trade Organization (WTO) predicts a 13% decline in the global trade of goods this year.
In some emerging markets, the economic damage already wrought by the pandemic has been stark. India, which has the most Covid-19 cases in the world behind only the United States, saw its GDP plunge a record 24% in the second quarter year-on-year. Its exports in the second quarter fell by 30% and imports by 47% from the first quarter after the imposition of one of the strictest lockdowns in the world in March.
The International Chamber of Commerce (ICC) estimates as much as USD 5 trillion in trade credit is needed to spark a rapid economic recovery from the pandemic. To make that happen, it is calling on governments to implement various reforms, including scrapping legal requirements for trade documents to be presented in hard copy.
Technology that enables a paperless trade finance industry certainly exists. It has been tried, tested and proven to work. Yet the industry is held back by continuing to rely on physical documents due to the trust in ‘wet ink’ on the page. This not only impacts day-to-day operations but stunts the growth of global trade as a whole.
Paper-based processes are complex, fragmented, costly, and prone to delays for both banks and corporates. In contrast, digitised trade finance could drive trillions in new global trade flows and extend the benefits to all corporates by removing these barriers and streamlining administration.
Going paperless and digitising is not innovation for its own sake; it’s also an important step to overcoming the safety and security concerns that have emerged from the pandemic.
At a time when we’re all more conscious of what and whom we come into contact with, the idea of eradicating paper-based processes seems like a logical step. While transmission via paper may seem extreme, it’s important to recognise that people’s mindsets have changed dramatically because of Covid-19. Even if the chance of contracting an illness through handling paper is low, people will naturally be cautious about taking the risk and will be seeking ways to mitigate it entirely.
At the same time, working remotely carries significant security concerns as well. The office is now fragmented, no longer using the same internet connection or located in the same physical space. An overreliance on paper-based documentation creates serious vulnerabilities in a company’s processes – ones that weren’t there before. Even if trading is conducted over the internet, it is much harder to guarantee a secure server when people are working from home using their Wi-Fi.
This is where using blockchain technology becomes indispensable. A blockchain network is auditable by design, meaning that any change can be traced and tracked in real-time, decreasing the risk of fraud. In turn, this lets banks and corporates transact and share information with confidence, as both health and cybersecurity risks are much lower when these documents are on a secure digital network.
The efficiency argument
Let’s not also forget that trade finance wasn’t the most efficient industry even before lockdown. Invoices, packing lists, insurance forms, and many other documents were printed, signed, stamped, and hand couriered to banks or trading partners. This error-prone practice took at least a week and, if any issues were found, the process would be delayed much further. Managing these documents digitally would save time and be much more suited for the remote working environment industries are finding themselves in.
In the simplest of terms, an interconnected global network drives out inefficiencies and streamlines processes while improving data transparency and enabling interoperability between all trade participants. Going paperless is the first step towards this, and the impact of the pandemic has made it a necessary one.
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