The International Chamber of Commerce (ICC) Banking Commission’s 10th annual Global Survey on Trade Finance reveals that digitalization of the sector is increasing, although obstacles remain in the path toward efficient and paperless trade finance.
The survey, which gathered insights from 251 respondents in 91 countries, indicates that a key barrier to digitalization is the lack of standardization throughout the sector.
This indicates work is still needed to drive forward the digital agenda, although progress to date has been positive.
Download the full ICC Global Survey on Trade Finance at: http://www.iccwbo.org/global-survey-report.
The move toward paperless trade finance has been a long-standing objective for many in the industry. And, as our 10th annual survey indicates, digitalization is beginning to gain significant traction. Some 45 percent of respondents to this year’s survey indicated they intend to prioritize digital trade and the development and deployment of platforms over the next one to three years.
In a related development, interest in supply chain finance (SCF) is also gathering momentum. SCF, which usually involves financing through an online platform, is providing a growing number of banks with a strong alternative to traditional trade finance. What’s more, some 56 percent of bank respondents that offer SCF stated they had already developed their own proprietary systems rather than rely on an outsourced platform.
Nonetheless, the benefits of implementing technology solutions in trade finance processes have not been felt by all banks, with only 9 percent of respondents agreeing digitalization had improved efficiency to date. Divergent standards are cited as a key reason for the lack of improvement. This is apparent within SCF platforms and their lack of common standards for exchanging data.
As a result, some 32 percent of respondents with proprietary systems reported issues due to the lack of interoperability. Nevertheless, over 60 percent of banks said they were moving toward further digitalization, while just 7 percent indicated they had no plans to implement technology solutions in their trade finance offerings.
Enduring Problem: The Trade Finance Gap
Certainly, digitalization of the trade-finance sector is aimed at improving efficiency and processes, which should allow for greater trade finance capacity. And that should help relieve one of the greatest concerns for trade finance: the trade finance gap.
The difference between the demand and supply of trade finance currently stands at US$1.5 trillion, according to figures from the Asian Development Bank. What is more, some 22 percent of respondents expect the unmet demand to increase in the next 12 months.
Nonetheless, the survey indicates a positive outlook on the current and future provision of trade finance. Two thirds of respondents declared the amount of traditional trade finance they provided in 2017 was higher than the previous year. SCF provision is also increasing, with 43 percent of respondents indicating their SCF business grew in the past year.
In total, respondents to the survey provided over US$4.6 trillion in traditional trade finance and US$813 billion in supply chain finance last year. Over the next one to three years, some 41 percent of respondents expect the trade-finance gap to shrink.
Regulation: Key Barrier to Provision
Unfortunately, regulation remains one of the major barriers preventing the bridging of the trade-finance gap. The survey revealed that regulatory compliance requirements are still inhibiting banks’ ability to provide trade finance.
Some 90 percent of respondents highlighted regulatory compliance as a major obstacle to growth. Know Your Customer and Know Your Customer’s Customer (KYC/KYCC) obligations remain an issue for trade finance providers, with 18 percent of respondents to the survey citing compliance with KYC/KYCC regulations as the reason for a decrease in their provision of trade finance. What’s more, some 40 percent of respondents revealed the requirements were already a persistent challenge for SCF delivery.
The survey also outlines regulation to counter the financing of terrorism (CFT) as a key concern. Some 56 percent of respondents have serious concerns about the impact of CFT regulations on their ability to provide adequate trade finance in support of cross-border trade.
While practitioners recognize the need for adequate compliance measures, the lack of clarity surrounding regulatory expectations has led to overly stringent, self-imposed industry measures. Fulfilling all these regulatory requirements consequently represents an unnecessarily resource and time-heavy burden for banks.
Looking Ahead: What to Expect?
Despite these issues, the survey revealed a generally positive outlook on the future of the trade-finance sector.
Some 73 percent of respondents to the survey expect trade financing to grow over the next 12 months. Banks, especially, see the potential for SCF, with 91 percent of bank respondents expecting revenue growth from SCF in the next one to three years.
Regarding the potential for future digitalization, respondents agree that continued investment is necessary, with 46 percent believing the long-term focus should be on implementing and leveraging the opportunities from new technologies.
Importantly, the implementation of common standards is necessary to increase efficiency and market capacity, while enabling cost-effective due diligence.
Olivier Paul is head of Policy at the International Chamber of Commerce.