Digitalisation Of Trade Finance Underway, Despite Geopolitical Concerns

Trade finance is being transformed, not least because banks are finally making headway with respect to one of the sector’s most longstanding objectives—the removal of paper from trade finance processes. Results from the ICC’s 10th Global Survey on Trade Finance back this up— revealing that banks in the Middle East are also embracing the move towards digitalisation.

The survey, which gathered insights from over 250 respondents across 91 countries, highlighted the particular optimism of banks in the Middle East with respect to tech, despite reservations regarding both geopolitical applicability and the technological innovations underway.

Encouragingly, some 47 per cent of banks in the Middle East would already class their implementation of technology solutions as “mature”. What’s more, 44 per cent of respondents in the Middle East indicated the development of digital trade and online trade platforms as a strategic priority for the next one to three years.

With almost 80 per cent of all global trade now taking place on open account, only six per cent of banks in the Middle East believe traditional trade finance (TTF) processes—such as the use of documentary letters of credit—will remain a priority in the next three to five years. Instead, focus is shifting towards the use of supply chain finance (SCF) processes, which are far more open to the adoption of digital provision (perhaps via online platforms).

Yet familiarity with traditional trade finance methods has resulted in slow progress. Surveyed respondents in the region claimed that over 80 per cent of new clients onboarded in 2017 still preferred to use TTF over SCF. What’s more, only five per cent of existing clients exhibited a shift from TTF to SCF. Nonetheless, over 60 per cent of respondents in the region anticipate revenue growth from SCF in the next three years.

Certainly, banks in the Middle East remain optimistic about the integration of technology solutions into their offerings, with 50 per cent of respondents regarding emerging technologies—such as distributed ledgers—as an important focus for the next three to five years. Meanwhile, 59 per cent of respondents believe in the potential for digital channels to impact sales volumes, while over 70 per cent of banks in the Middle East are planning the implementation of technology solutions into their trade finance offerings.

Geopolitical setbacks

As for concerns, geopolitical tensions certainly trigger bank’s fears with respect to their expected impact on stability and growth in the Middle East. The US withdrawal from the Iran nuclear deal earlier this year caused significant disquiet, for example. With fears of oilprice volatility, due to the renewal of sanctions, banks in the Middle East have become particularly concerned about their ability to provide adequate trade finance in support of cross-border trade.

Results from the survey reveal that 40 per cent of respondents in the region were already concerned that such volatility could become a major obstacle to growth in the sector, even before the withdrawal. Another concern is the impact of protectionist and trade-restrictive measures.

Indeed, 67 per cent of banks in the region indicated concern over the negative impact of such measures, while 20 per cent of them stated they were “extremely concerned” about the potential repercussions of protectionist policies on growth for the sector.

Opportunities ahead

That said, banks are persevering with the shift towards paperless trade. Digitalisation of the trade finance sector is forecast to help accelerate growth in the sector, increase efficiency, decrease costs and improve market capacity. Yet the shift is unearthing its own challenges, to which banks are having to overcome and adapt to. One example is the fact the emergence of fintechs and non-banks within the industry is conflicting banks.

While 82 per cent of participants in the Middle East said they were concerned about competition from these new entrants, 43 per cent of respondents also agreed that forging alliances with such companies should be a priority in the next three to five years. Increased choice in trade finance providers will help improve capacity and provision to the market, most agreed, with small and medium-sized companies (SMEs) to be the most likely benefactors.

Certainly, as digital trade finance revolutionises processes, SMEs will no longer be reliant on banks, which should help improve access to trade finance for smaller borrowers and help reduce the trade finance gap. Indeed, requests from companies in the Middle East have been especially prone to rejection, with around 18 per cent of all requests being denied. This is the second highest rejection rate surveyed, behind Asia-Pacific’s rate of 21 per cent.

However, the use of new technologies, such as distributed ledgers, and the move towards open account trade, is forecast to help to increase approval rates by decreasing risk and increasing transparency. The development of proprietary trade finance platforms—a popular choice for banks diversifying into SCF—has also faced challenges.

A lack of common standards and regulations have led to interoperability issues between online systems, with over 30 per cent of respondents worldwide complaining about such difficulties. Yet their deployment will help reduce the use of paper in trade finance processes, as well as lessen the burden of bureaucracy and decrease the overall cost of transactions. Despite the challenges, therefore, Middle Eastern banks are embracing the move towards paperless trade. Yet it remains to be seen whether their clients will adapt to the transformation with similar gusto.