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Treasury & Capital Markets
Why trade finance is difficult to digitize
A multitude of documents and players such as banks, customs, shippers and insurers
Chito Santiago 24 May 2018

Over 60% of banks are moving towards greater digitalization of their trade finance operations, though only 9% say technology solutions have so far increased efficiency. In the annual global survey by the International Chamber of Commerce (ICC) released on 23 May, 30% of respondents say their banks remain one to two years away from implementing technology solutions, while 7% say digitalization is not on their agenda.

Trade finance is often noted to be ripe for digital disruption for being a heavily paper-based industry with transactions worth over US$9 trillion in 2017. The multitude of documents and players — banks, customs authorities, shippers and insurers, among others — involved in trade finance transactions, however, make it difficult for the industry to digitize quickly.

The ICC says a single trade finance transaction can require over 100 pages of documents, with an estimated four billion pages of documents currently circulating in documentary trade. According to estimates by Boston Consulting Group, digitization could cut trade finance costs by up to US$6 billion in three to five years and increase the banks' trade finance revenues by 10%.

The survey shows that 65% of respondents say that physical paper has to some extent been removed in the issuance/advising and settlement/financing of documentary transactions. A notable exception is the document verification process where 52% of respondents say that paper has not been removed at all.

Commenting on the survey, ICC secretary-general John Denton says digitalization in the trade finance sector will boost economic growth and sustainable development and it will make trade more inclusive.

Olivier Paul, head of policy at ICC Banking Commission, which launched a digitalization working group in June 2017, says adapting global trade finance rules to the digital era will play a pivotal role in enabling banks to capitalize on new technologies.

The ICC survey also shows that banks are bullish on future trade finance growth trends. Nearly three-quarters of banks presented an optimistic outlook for the next 12 months, with respondents headquartered in Africa and Asia-Pacific the most positive, at 89% and 81%, respectively. Nearly half of respondents agreed that attracting non-bank capital, leveraging emerging technologies such as blockchain, and shifting geographical coverage were priority areas for the next three to five years.

Regulation and compliance are potential obstacles to trade finance provision according to 93% of respondents, while 87% pointed to complying with counter-terrorism and international sanctions regulation.

Another 35% of respondents affirmed that rates were driving up the cost for clients. This was particularly notable in Africa and North America where 60% and 54% reported an increase in interest rates related to trade financing. Yet, a total of 38% reported maintaining the same rates, suggesting that the rise in financing costs is at least partly driven by bank-specific pricing strategies. Conducted annually, the ICC global survey on trade finance was based on information from over 250 banks in more than 90 countries.

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