From Uniform Commercial Code (UCC) amendments to electronic signatures, digital trade developments in the US have taken a significant step forward. While questions around interoperability, regulatory risks and standardisation remain, there is strong momentum behind trade finance digitisation.
One year into the post-pandemic landscape, US financiers are pushing ahead with the digitisation agenda to support their corporate clients in this fast-changing environment. There is strong momentum behind trade finance digitisation, as optimising working capital remains a top priority.
The pandemic prompted the drive to digitise many trade finance processes. Whether its Letters of Credit, Bills of Lading or other trade documents, these processes are typically manual and heavily dependent on paper. Today, the solutions exist to digitise many of these processes.
At the GTR US event in November 2022, the message was crystal clear. There is energy behind digitisation, and now is the time to act if you’re thinking about the business case for trade finance digitisation.
To digitise or not? Building the business case
There are challenges to realising that digital future, whether it’s legislation like the eUCP and the recent revision to the UCC in the US, or standards. But if the world waited for standards to be formalised, there would be no productivity! I’ve said this before, but it is worth repeating – if there is a standard to use and has acceptance, these solutions will have to figure out how to work towards a standard and collaborate.
This is exactly where things stand with the electronic Bill of Lading (eBL). At present, only 2% of this segment is digital and commercial companies will have to look at the standards and adapt to them. This, in turn, will digitise a bigger piece of the pie and help that title transfer for the banks.
There are three considerations that one of my fellow panellists shared on making the business case for digitisation, and I agree with her. Firstly, refresh or redesign your operating model to take advantage of the momentum behind digitisation. Secondly, make the right investment in technology by taking check of your systems and tools and how it compares to what you think your digital landscape should be. And lastly, developing talent is a critical piece to build this expertise.
Collaboration, not competition
One exciting prospect for the industry is the shift in how financial institutions view fintechs. There is now more collaboration, versus competition. The approach from banks used to be wanting to problem-solve and build solutions internally, but they have now come to the realisation that it is costly and unsustainable in the long run. A solution by one bank is also unlikely to be adopted industry-wide and collaboration is crucial to building a platform that is bank-agnostic.
As a leading fintech that is building the trade finance network of tomorrow, this shift is noticeable. Here at Contour, we see it as an opportunity to work with US banks, to collaborate and build products, as well as an ecosystem, so they can go to their customers – exporters and importers – with new and innovative solutions that solve legacy problems.
Back (office) to the future: How fintechs can lower the cost
A single bank cannot build a global platform and have everyone join; it doesn’t work that way. This is where fintechs can offer a few things – by streamlining processes, reducing costs in the back-office, and driving connectivity between the financial and physical supply chains.
If you can build a global platform by mutualising that cost among various players, it is an opportunity for both big and small banks to come on board. In addition, trade finance is expensive to manage and as we digitise those manual processes, we can reduce the cost to serve. There is an opportunity not only to delight the customer with better service, but also offer new products in the future.
Our partnership with Finastra is an example of how we’re working together to integrate two crucial elements – a core banking platform for internal processes with an external decentralised network for bank and corporate customer communication. The result is a solution that offers transparency, visibility, and frees up working capital for corporates while improving returns for banks.
The US market is unique. Large banks are not the only ones involved in trade finance transactions. Regional banks offer more insight into their local business communities, which are often involved in cross-border transactions. However, these banks may not have the capacity to provide transaction-based financing tailored to the working capital cycle of an individual company. In addition, their small and mid-market clients do not have the resources to work on solutions to solve the pain points. This is where technology can be a game-changer in reducing this cost to serve and giving smaller banks the opportunity to leverage technology to even the game with the larger banks.
Digital Assets: An emerging opportunity for growth in the US
There has also been a lot of excitement about digital assets, especially in New York, the financial capital of the world. This is an area we are prioritising this year as it provides an opportunity for the industry to increase the flow of capital and improve access to trade finance, especially for smaller players like SMEs. And by leveraging distributed ledger technology (DLT), we can support and distribute these assets through our ecosystem, easing the process of distribution.
Digitisation is the only way forward in trade finance and it is exciting to see such strong momentum behind this in the US. In a world where the external environment is changing ever so quickly, increasing digital adoption will not only add to an organisation’s resiliency, but growth for the trade finance industry as a whole.