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Slow process in the digitalization of international trade
Hello Ms. Sankova, while digitalization is advancing rapidly in most sectors, international trade still largely relies on analog processes. Can you explain why paper documentation is still the medium of choice in international trade?
The financial industry is in an exponential phase of digital transformation. In many areas, such as payments or liquidity management, we observe a sharp decline in paper-based processes. In trade finance, by contrast, digitalization is progressing only slowly due to outdated systems and internal processes.
This is mainly because trading is a complex business and is often conducted across national borders. Therefore, the shipping of goods requires extensive documentation, e.g. in the form of consignment notes or packing lists.
For electronic documents (eDocs) to be used effectively and efficiently in this context, all parties involved must be able to process and create them. As this is often not the case, eDocs have not become prevalent yet. In addition, there has been a lack of legal certainty regarding the acceptance and handling of eDocs.
Model Law on Electronic Transferable Records: opportunities and challenges
The “Model Law on Electronic Transferable Records” (MLETR) was introduced in 2017. Among other things, it is aimed at digitalizing documentation processes in international trade. How could the MLETR potentially influence the status quo?
Paper documents and wet ink signatures are costly and neither sustainable nor secure. They are easy to forge and are considered the main cause of friction losses in trading. The MLETR now provides a sound legal framework for electronic documents, thus paving the way for the further digitalization of trade.
In 2023, the MLETR will come into effect in the UK as well as other markets. This will have a significant impact on international trade, for example by making it easier and cheaper for companies to conduct international purchases and sales. The law is also expected to reduce trade financing gaps for SMEs. In addition, improved access to digital data in tandem with technologies such as AI will enable banks to automate processes such as lending decisions.
By reducing access barriers, costs, and friction in trading while improving accessibility and availability of liquidity, companies can grow faster, increase their trading volume, and thus contribute to stronger economic growth.
Despite these benefits, only a few countries have already implemented the MLETR and introduced solutions for digitalizing trade documents. What are the current challenges (e.g. for policy makers) and how could acceptance be increased?
The digitalization of trade is not an easy task. Transferable financial documents must meet specific requirements. In addition, processes are often fragmented and complex and vary from country to country due to different legal frameworks. Adopting new trade rules is therefore a complex endeavor that can only be accomplished in collaboration between the various stakeholders and involved parties. These involved parties include, for example, lawyers, industry representatives, customs officials, shipping companies and port authorities.
To create broad acceptance for the MLETR, close cooperation between the public and private sectors is of the utmost importance. Many experts from the public sector are currently preparing for the MLETR, while most of the financial sector and SMEs are not yet ready for the changes. Therefore, it is necessary to create awareness of the new initiative, especially in the private sector, as well as to adequately inform and convince everyone involved.
The UK is currently introducing its eDocs Bill to Parliament, which could kick-start a global transformation. Since a large portion of the world’s trade transactions is based on UK law, it is expected that once the legislation is passed, many other regions will follow suit and introduce their own laws similar to those of the UK. The ultimate goal is to establish a universal system for handling eDocs that is valid in all countries, which would accelerate adoption and promote a modernized and seamless global trading economy.
Distributed ledger and blockchain as key technologies for the digitalization of trade
Which technologies do you think are most important for the digitalization of trade finance? Do you see a potential use case for distributed ledger technology in this area?
Distributed ledger and blockchain are considered key technologies for the digitalization of trade, as they enable all parties involved along the supply chain to exchange information securely and quickly. In this context, the main advantages of these technologies are the ability to produce forgery-proof and transparent documentation as well as the possibility of automating transactions and processing them in real time through smart contracts. Distributed ledger technology can also be used to track goods, which is very useful for assessing their authenticity or the sustainability of their production.
Another important technology for the digitalization of trade finance is digital identity, which significantly reduces the time and resources spent on compliance in loan processing and thus the overall processing time. Digital identity technology is particularly beneficial for SMEs, whose credit applications are often rejected in the know your customer (KYC) or anti-money laundering (AML) phase due to missing proof if identification despite having good credit ratings.
The future role of banks in international trade finance
The role of intermediaries in international trade could change significantly due to the expected digitalization. How can banks ensure their continued relevance in this area in future?
The MLETR will make the international trade ecosystem more open, digital and transparent. An increasing number of transactions will be processed frictionlessly across borders. This development will place new demands on banks and their role in international trade. For banks to stay relevant and not be replaced by other providers, they must ensure that their middle- and back-office processing systems are up to date and allow for the implementation of new processes, technologies and improved data access.
However, digitalization is not just about the software – additional partners are needed to help banks improve their end-to-end processes. Moreover, the road to interoperability is long and arduous. Banks should promote digitalization by creating an ecosystem that enables the integration of third-party services and the transfer of information between institutions in a standardized way.
Open APIs and open finance systems can improve the collaboration, integration capabilities, and communication within the industry by connecting “digital islands” and thus creating a truly digital and integrative trade finance sector. It is essential to remain open and dynamic. That is why at Finastra we focus on developing an ecosystem of solutions that we can constantly expand and diversify.
How do Finastra’s solutions help banks position themselves for a successful future in international trade finance?
Our trade finance solution, Trade Innovation, provides banks with a platform to keep up with new compliance and industry requirements, facilitate digital and open trade, and implement new technologies such as blockchain, big data cloud and open APIs. With our Trade Network Connector, we can integrate Trade Innovation with networks such as Contour to enable the processing of transactions from multiple sources.
Our open collaboration and innovation platform “FusionFabric.cloud” enables banks to seamlessly integrate value-added services provided by fintech companies, which can help them optimize processes such as AML and KYC checks. The demand in these areas is increasing; therefore, we are always open to new commercial or technical collaborations with other fintech companies and solution providers.