As much as USD 5 trillion of trade credit may be needed simply to bring the global trade in goods to pre-pandemic levels by next year. As big gaps in trade finance hamper the capability of trade to deliver jobs, growth and reduce poverty globally, it’s vital for this problem to be addressed through advances in technology.
Today, paper-based processes create key challenges to growth and inclusion as small and medium corporates – in both emerging and developed markets – find it hard and costly to get global expertise in legacy systems and document management. Fortunately, there is growing momentum for trade and trade finance to digitise, with many banks viewing it as a top priority. However, this drive needs to be matched with a clear process that the industry can collectively follow.
Barriers to digitisation
The main reason trade has not digitised is because buyers still need paper as the common medium for trusted communication and much more, from meeting regulatory requirements to transferring titles and clearing goods through customs. This challenge is exacerbated when multi-party processes are introduced to provide financing or risk mitigation, such as buyers asking their banks to issue a Letter of Credit (LC) with a long list of original document requirements.
These pieces of paper come from various sources, such as an insurance certificate from a broker, a bill of lading from a shipping company, or a certificate of origin from a local chamber of commerce. Authenticating the source is near impossible even with original ink and stamps, and yet original ink and stamps are still seen as the gold standard of trust.
Removing the reliance on paper is a task for the entire industry, but first it needs to dispel this perception around original ink and stamps. Digital documents can be just as tamper-proof as signed paper, if not more, and data from the source should be the true gold standard.
A desire for change
Tremendous work is happening in this regard, and paper documents are required in fewer places than ever before. Thankfully, this trend looks set to continue, with the International Chamber of Commerce (ICC) recently appointing an executive to lead the Digital Standards Initiative and the Asian Development Bank (ADB) reporting that 85% of banks are now gearing up to service the trade finance needs of more businesses through technology. This desire for digital change will help drive a continued move away from paper.
The impact of Covid-19 has also changed the views towards traditional processes. In a recent podcast between Contour and Steven Beck, the Head of Trade and Supply Chain Finance at ADB, Beck noted that “the crisis has shown us just how vulnerable global trade and supply chains are to antiquated infrastructure.”
“The tech is offering us [a] really important way of resolving some of those impediments [by] making supply chains and global trade more robust and secure,” he said.
However, not all documents can be digitised equally. Title documents like a bill of lading need an electronic registry accepted by all document holders to be in place before the paper can be replaced by a digital document. Fortunately, these electronic registries have been developed on platforms supported by Contour such as Bolero or essDOCS.
Digitising the LC process
To help with trade digitisation, there needs to be a foundation from which the entire industry can grow. LCs are a fantastic starting point, as the experience of using this product – for both banks and corporates – remains largely the same as it was 100 years ago. LCs are the perfect product to begin digitisation because they share a global common standard and process, governed by the ICC. Our work at Contour provides a fully digital LC solution, transforming one of the oldest financial tools in trade finance that currently provides finance and risk mitigation for close to 15% of global trade volumes.
Transforming the LC process can only be achieved on two levels:
1. Having all participants on one platform
- To move everyone to one platform, processes need to be automated by implementing smart workflows and contracts, instead of messages.
- Data can be synchronised and updated simultaneously across all parties, giving each participant control and ownership of their data.
- All communication related to the LC will be on one network, connecting corporate, bank and trade ecosystem partners.
- The whole process thus becomes faster and more secure, cutting costs and spurring decision-making.
- This also reduces fraud as an audit log will need to be maintained.
2. Removing paper and increasing adoption of digital documentation
- Only authorised parties can access this data without Contour being required to maintain a central registry.
- Digital documents can be securely shared using our blockchain technology without reliance on less secure ‘off ledger’ platforms.
- Digital documentation can be uploaded files from a participant or authenticated documents from specialist platforms, such as eBL providers and government certificate providers.
- APIs are available to ease integrations with third-party providers, reducing the need for users to shuffle between platforms.
The advantages of blockchain
Once digital documents are the norm, the world will need a mechanism to share them. Through collaboration, Contour takes it to the next level by making these digitised documents interoperable with other leading digital document solutions.
Many would assume pre-existing processes like email would be an easy solution, but security and authentication are great concerns for international trade.
It is here that blockchain offers a solution that many in the industry are adopting. Deloitte’s 2020 Global Blockchain Survey revealed that 88% of businesses believe blockchain is highly scalable and will become mainstream, while 55% believe blockchain is critical and in their top five strategic priorities.
Contour’s decentralised network connects the worlds of banks and corporates so that they can perform complicated transactions with unprecedented ease. Our platform supports many types of digital documents, from an uploaded PDF to a registry-linked electronic bill of lading. The list of documents we support will continue to grow as the adoption of digital alternatives increases.
However, digitising an entire industry takes time, so it’s important to remain flexible. If paper documents are still required for the process, these can be integrated into our network until a fully digital solution is established. Nevertheless, the true benefits of digitisation can only be realised when the LC uses 100% digital documents.
A change for all
Digitising LCs builds a firm foundation from which wider digitisation can take place. Allowing banks and corporates to connect and work with other providers that help specific elements of digitisation can provide businesses with greater access to global trade.
Digitisation is not a benefit for the few, but an evolution for the entire sector. Digitising trade requires an industry-wide shift, and Contour aims to establish this consistent network for banks and corporates – of all shapes and sizes – to engage with. Crucially, Contour is a platform to grow with the industry. Corporates can start with only a few of their transactions being supported by digital documents and as the world digitises, their benefits from Contour will only increase.
Explore what a digital journey looks like on the Contour Network. Click here to view an interactive case study.
