Banks and corporates must keep an “open mind” and embrace new digitised platforms to secure the future of trade finance.
The need to digitise trade finance has never been more urgent than during the Covid-19 pandemic as supply chains came under pressure and the inherent weaknesses of traditional paper-based letter of credit transactions were laid bare.
This was according to industry experts speaking at the online Working Capital Forum Debate on May 25 discussing ‘The Future of Trade Finance’, supported by Marco Polo
“It has been a time of unprecedented disruption,” said Melanie Cutlan, MD, global co-lead, blockchain, and multi-party systems, at global consultancy Accenture.
Obtaining the usual wet-inked signatures on trade documents became even more cumbersome with staff members working remotely, banks operating with limited back-office capabilities, and trade slowing down due to factory shutdowns.
These operational difficulties were coupled with concerns around the lack of efficiency and fraud risk that have long circled around the use of paper-based trade finance tools, panelists said.
But change is afoot, said Cutlan. “Supply chains are under so much pressure from Covid and the need for supply chain resiliency has never been more important.
“People are investing at an extreme pace that we haven’t seen in decades in true supply chain solutions.
That is driving new adoption of new tools that bring suppliers, buyers, and banking partners together…[this] is really the focus right now,” she explained.
These new tools include digitized platforms based on distributed ledger technology and blockchain.
While many banks and corporates may have some form of online platform to run part of their trade business, these systems are rarely connected with each other. Each corporate and bank might have to connect to multiple platforms.
Not only is this time-consuming and costly, but it raises privacy concerns around the use of data, said Daniel Cotti, MD, banking, and trade at digital trade platform Marco Polo.
He is driving the company’s efforts to get its Marco Polo network to become the “go-to” option for corporates and banks looking to digitise their trade business.
The company’s blockchain network is powered by software company R3’s Corda blockchain technology. It is an open network that supports a distributed platform which in turn hosts the TradeIX programme that supports trade, payments and working capital finance solutions.
“It has the potential to do for trade what the internet did for information,” he said.
“All parties – banks, buyers, insurers, logistics, suppliers – can all connect to the network and communicate with each other. There is no host-to-host connection, no PDFs, no email. It really leverages blockchain technology which allows the seamless and automated exchange of information,” he explained.
Currently, the platform allows for payment commitment and receivable discounting tools, with a ‘supplier pay’ function to be introduced in the third quarter this year.
Commerzbank was one of the first banks to recognise the benefits of a distributed open network.
“Blockchain is a very clever technology that will offer a lot of potential for trade finance business,” said Angela Koll, senior product manager, trade finance at Commerzbank.
The German bank and its client Brückner Group piloted a transaction on the Marco Polo network in November 2020 involving a Turkish corporate and its bank Isbank.
The transaction supported the export of machine parts from Germany to Turkey and used Marco Polo’s payment commitment solution.
This product acts as an irrevocable and independent undertaking of the buyer to pay at maturity the seller’s bank via the Marco Polo network. The matching of the uploaded digital data is underpinned by a transparent process visible at any time to all those involved in the transaction.
“It is a state-of-the-art technology,” said Josef Huber, team lead, group treasury, at Brückner Group. “I am very satisfied with all the functions and what is to come next.”
And yet the future success of these networks is dependent on everyone getting on board.
“It is very important that a huge range of banks, institutions, forwarders, insurance companies across different countries worldwide are ready to use such platforms – that’s my hope and expectation,” Huber said.
Cotti revealed that three banks and four corporates will announce later this month news of live transactions using the payment commitment module, and all aim to move their operations onto the Marco Polo network.
The need to explore these new platforms has never been more clear, said Cutlan.
“If you are not looking at trade finance solutions to better manage working capital, you are missing a trick,” she urged, noting the ever-widening global trade finance gap. An ICC report last May estimated that there will be a need for $1.9 to 5 trillion in trade credit market capacity to enable a recovery in trade as demand returns to the economy post-pandemic.
“The need for working capital solutions is bigger now than ever before,” she said.
The future of digitalised trade finance platforms does – in part – rely on greater interoperability between networks, said panellists. Although Marco Polo is one of the pioneers, there will of course be other players emerging.
“I have seen a lot of initiatives before on blockchain. To overcome silos and improve digitisation in the future, we need interoperability, and that depends on us using the same language and that means we need standards,” said Koll.
The development of standards is already underway, said Cotti, with the ICC having set up its Digital Trade Standards Initiative.
Despite interoperability challenges, panelists urged more banks and corporates to get involved now. “There is value to be unlocked for yourself and trading partners – if you don’t get started now, you are leaving money on the table,” said Cutlan.
“Keep your mindset open and join these initiatives. If you don’t do anything, you are left behind,” added Koll.
An on-demand version of this debate is available here (registration required).