RISK MANAGEMENT | 12 OCTOBER 2022

Trade Finance’s Digital
Transformation

Absa-CIB-Author

Doreen Fick

Head: Funded Wholesale
Trade Finance, Absa CIB

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Trade finance is drowning in a sea of paperwork. Digitisation is the obvious answer – but the journey to digital will take time

Trade finance keeps the wheels of modern commerce turning, but the systems that make it possible are long overdue for an update. “The industry is very paper-based,” says Doreen Fick, Head of Funded Wholesale Trade Finance at Absa CIB. She points to World Trade Organization (WTO) estimates that the average cross-border transaction can involve the exchange of up to 36 documents (plus a further 240 copies) between the various parties and corresponding banks.

“It’s also very siloed,” she adds. “There are lots of handoffs between the various parties. The buyer and seller will each do something separately, then they’ll go to the bank, where they have to repeat themselves, and then to a logistics house where they have to repeat that process again, and then it’s the same with insurance… There’s so much replication and duplication of paperwork in trade finance, which slows things down. And if it’s slow, that means it’s expensive.”

Digitisation is the obvious solution, and many fintechs are jumping at the opportunity to create a digitised trade ecosystem – or what Fick describes as “one world, where you create a transaction digitally and everyone sees it immediately”.

The power of co-opetition

While banks and fintechs are typically in competition with each other, trade finance is a space where they can work together in cooperative competition, or “co-opetition”, as some business analysts are calling it. “Unlike in other industries, the majority of fintechs in trade finance are willing to partner and collaborate with financial institutions, instead of competing with them,” says Fick. “Here we have a situation where banks can say, ‘We have the infrastructure and clients’, and fintechs can say, ‘We have the skills and the tech’. Both sides are realising how powerful it can be if they come together and collaborate.”

For example, paper documentation opens the door to fraud, but the transparency enabled by digitisation would enable banks to reduce that risk significantly. “Banks typically struggle with this, especially with smaller clients,” Fick explains. “Applications can be rejected if the bank doesn’t know if the applicant is credit-worthy, or if they are a legitimate trader. Currently, fraudsters can create fictitious invoices or present duplicate invoices without the financial industry having the means to detect that these invoices have already been financed. Many digital offerings offer peer-to-peer interaction, which eliminates intermediaries. These digital transactions are also executed on secure platforms, which reduces the risk of any unauthorised person being able to make alterations.”

The journey to digital

Despite the enthusiasm, there are still many hurdles that need to be overcome before trade finance can be fully digitised. Fick points to a lack of standardisation, interoperability and low adoption rates as being some of the big concerns. “For all the various systems to integrate and talk to one another there needs to be a level of standardisation among the various players,” she says. “By that I mean standardisation in terms of similar technology built, privacy protection and legal digital frameworks. All of these are key for successful adoption rates on a large scale.”

The International Chamber of Commerce and WTO recognise this challenge and have launched various standard toolkits to help participants gain an awareness of the existing digital standards and rules that are already being used to standardise digital trade across the globe.

“It’s a case of pull-and-push,” says Fick. “Everything has to be built with the client – or end user – in mind. Absa’s clients will put their information on these ecosystems, and we will pull it together with our Application Programming Interface capabilities, feeding into our workflow systems. That will take time. You can’t suddenly have everyone operating in a digital space, because the industry is so disparate – and it’s been built over hundreds of years. We’ve done some proofs of concept, but clients will typically say, ‘If you can’t give me all the front-end capability, and if you can’t take all my pain points away, I’ll just continue as is. Yes, it’s a long process, but it’s working, right?’ And it is … but it could be so much better.”

For trade finance, the digital transformation journey will be neither quick nor simple. But, Fick concludes, “It will be rewarding. And it’s going to happen – if not today or tomorrow, then within the next few years.”

Absa-CIB-Author
Doreen Fick

Head: Funded Wholesale Trade Finance, Absa CIB

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