Traditional trade finance facilities offered by banks and institutions are being usurped by competitive alternative financiers who can offer more flexible terms, faster payment and great lending rates and digitilization of services is driving this. Currently, most documents, subcontracting and outsourcing services such as Letters of Credit (LCs) and Bills of Lading are paper-based and involve laborious manual processes.
At the recent Global Trade Review’s ‘Trade Finance Week’ (http://www.gtreview.com/news/europe/icc-offers-digital-trade-finance-dispute-settlement-docdex/), traders called for banks to step away from paper-based shipping documentation, highlighting the digital trade could increase speed, efficiency and accuracy of facilitating the import and export of goods.
At Trade Finance Global (www.tradefinanceglobal.com), we have seen many advances in digitalization which are revolutionizing trade finance:
1. Digital Generally
Advances in digital have meant that in finance, speed is increased and costs are reduced along with secure settlement of transactions. This includes requests for credit, insurance applications, payroll services, and Letter of Credit confirmations. It is estimated by UNCTAD that bank-to-branch transaction costs are no less than US$1 and Automatic Teller Machines (ATM) reduce the cost to US$0.20. Building on this, transactions online reduce the online transaction costs to US$0.01. Therefore electronic transactions are the best method to use.
Electronic applications for accounts and management of portfolios can now be done online and this will save costs and allow investment in other areas of the bank; where man power can also be cut. Newer electronic advancements have been integrated in supply chain management with invoices and Electronic Data Interchange (EDI) used for inter company communication. Another inter company exchange that is similar to this is the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Bolero, which is an open system operated by SWIFT, allows documents and data to be exchanged online. Security which was once an issue is combatted by Secure Electronic Transfer (SET) with new standards for secure online transactions. E-signatures are also used to speed up the process as handwritten signatures can be digitally applied to documents in international trade.
2. Crowd-funding for exporters
Crowd funding has been used for exporting companies, where investors acquire equity or are promised goods in a company so that they can trade and grow to international markets. However, there is a void where crowd funding or Peer to Peer lending could get involved to help further facilitate trade. The current P2P market is usually for individuals, but companies have started to benefit from this market with a £614,000 loan recently being raised in Northern Ireland for a specialist engineering company; this was a new record in Northern Ireland.
3. Online platforms
Many online platforms have sprung up over the last few years, benefiting off the low interest rate environment with high levels liquidity in the market. This is partnered with changes in banking regulations and a technology boom within finance. The new companies have been from invoice finance to P2P lending platforms. Quick credit checks, relatively low amounts advanced and diversity of borrowers have meant that risk is spread and credit can be advanced a lot faster.
4. Risk and credit online
Financiers provide both export and import financing and trade risk mitigation products to secure the risks exporters’ are met with when trading internationally. As trade finance is a form of short-term capital and is lower risk because there is an agreement fundamental to it, whether it be a sale contract or an invoice, it means trade finance is a possibility where before working capital arrangements where used when a company was growing.
The technology boom in lending has not yet fully moved into the trade finance sphere. A number of companies have dipped their toe in the water. Most notably, invoice discounting and peer-to-peer lending platforms. However, we see that with the increasing regulation of the banks, higher capital adequacy requirements and advancements in technology, that there will be further moves within this sector and we look forward to seeing international trading companies growing fueled by new lenders.