The digital transformation of trade finance: An urgent present and a bright future

The digital transformation of trade finance: An urgent present and a bright future

Published 4th March 2021 by Maurice Benisty in Blogs

Trade is the lifeblood of the global economy – it drives growth and competitiveness. It promotes fairness. It spurs innovation and efficiency. When trade flows in a rules-based system, jobs, wages, and investment increase.

Underpinning trade at every stage of the global supply chain: trade finance. By providing liquidity and cash flows and lowering risks, trade finance ensures that buyers receive their goods and sellers receive their payments. Simply put, the movement of goods and services across borders doesn’t occur without trade finance. Yet the world faces a massive and persistent trade finance gap—by some estimates as large as $6.5 trillion—as the pandemic continues to hit businesses across the globe.

The COVID-19 crisis arrived during a transformative period for trade finance, largely through digitization and the emergence of new platforms. As we discussed in a panel at IFC’s recent Financial Institutions Conference, the sector now has an opportunity to continue its evolution and emerge stronger from the crisis.

We see three key trends in the world of trade finance. First, banks, financial institutions and technology providers need to work together to ensure that liquidity is getting to the places where it’s needed most. While we haven’t seen anything like the reduction in liquidity of the Global Financial Crisis of 2008, the pandemic has caused banks to focus their funding on established relationships. This “flight to quality” has left many worthy businesses—particularly small and medium-sized enterprises (SMEs) in developing countries—without an option for trade finance.

This risk aversion from global banks needs to be remedied. In the short term, multilateral development banks can provide vital support. But in the longer term, local financial sectors will need to strengthen their ability to finance their own trade. That’s where new platforms can play a major role  in disseminating and managing risks across institutions.

The second trend we see is a more intense movement toward innovative technologies and digitization. For an industry that has been based on paper for centuries, the embrace of technology hasn’t been instigated by COVID-19, but it has been accelerated. The “procurement super-cycle” at banks will last long after the pandemic had subsided. To fully reap the benefits of new technologies, the entire trade ecosystem—banks, regulators, border agencies, trade bodies, and corporates—must work together to apply digital innovation and drive efficiencies.

The third trend affecting trade finance now is related to the product innovation heralded by the rampant digitization. New platforms, as tools to aggregate and analyse huge volumes of data in real time, can drive intelligent models for banks, enabling them to innovate around financing solutions in the same way that their customers are innovating around products. These sort of shifting business models were ripe for financial innovation from banks. For example, data collection and analysis can be a boon to the industry. As platforms collect granular data on transactions, the ability for banks to understand how their financing can support sustainable activities is immeasurably enhanced.

The current landscape is challenging, but we are hopeful. Despite the hardship caused by the pandemic, the crisis has also reinforced a desire for banks, global institutions, and technology providers to work together, both to support a strong recovery and to build an even stronger trading ecosystem around the world.

Maurice Benisty

Maurice joined Demica in October 2017 from Wells Fargo where he was CEO, Commercial Distribution Finance, responsible for a $3.0bn of receivables assets and over 400 people. Maurice joined Wells from GE Capital where he held a number of senior positions including Chief Commercial Officer of GE Capital International. Prior to GE, Maurice worked as a senior investment banker at Lehman Brothers, Bankers Trust and Paribas.