Fix global trade finance

The smaller the business, the more difficult it is to navigate the complexity, fragmentation and opacity of today’s trade finance system. But greater digital interconnection would greatly benefit micro, small and medium-sized enterprises and therefore also the global economy.

PARIS – Goods and services move around the world through critical infrastructure: roads, ports, rail networks, sea routes, and data servers. The $ 5.2 trillion global trade finance ecosystem that facilitates these flows is equally essential. Unfortunately, it doesn’t always work the way it should.

Today’s trade finance system is characterized by a complex web of decades-old manual processes and more recent “digital islands” – closed systems of trading partners that are disconnected from the global whole. New research from the International Chamber of Commerce Advisory Group on Trade Finance, Fung Business Intelligence and McKinsey & Company highlights how simplifying processes and connecting and integrating these islands into networks and platforms could transform the global economy .

According to the Asian Development Bank, the global trade finance gap increased in 2020 to a record $ 1.7 trillion – equivalent to 10% of global merchandise trade, compared to 8% in 2018. The deficit is even more acute for micro, small and medium-sized enterprises (MSMEs), which accounted for 40% of rejected trade finance applications in 2020. So while digital networks are undoubtedly the future of trade, its expansion in its current form threatens to widen the gap between large connected multinationals and MSMEs that are central to economic growth and job creation throughout the developing world.

For example, let’s imagine a craftswoman in Southeast Asia whose microenterprise employs four people locally. The woman is knowledgeable about the digital universe and has discovered a small but valuable online market for her products on the other side of the world.

But your country’s tax, credit and customs system, including freight costs and purchase orders, is not intended for your small company. Your assets are below the thresholds required to pass the credit assessment tests, and you need to fill out all the paperwork manually. On the other hand, the import documents of the destination country are totally different from the export documentation of your country, which adds more work and more costs. Now imagine if something gets lost along the way.

The smaller the size of the business, the more difficult it is to navigate this complexity, fragmentation and opacity. But a more digitally connected trading system would help MSMEs sell to countries and customer segments that they currently cannot reach.

Reformulating the system is vital. By 2030, the world will need to add 600 million jobs to absorb new incomes into the workforce, most of them in developing countries. MSMEs, which account for around 90% of global businesses and the majority of employment, will play a huge role in meeting that demand and unlocking the potential of trade to drive economic growth. Likewise, a better trade finance system can help alleviate supply chain bottlenecks that are slowing economic recovery and contributing to higher inflation amid the Covid-19 pandemic.

Previous efforts to improve business finance have resulted in a proliferation of networks, digital standards, and digitization initiatives. While many of them are great, we need a solution for “everyone” to close the $ 1.7 trillion trade finance gap.

We propose a more systematic model that combines everything digitally, in what we call an “interoperability layer”. It would be neither a new layer of bureaucracy nor a substitute for regulation. Rather, it is a virtual construct that offers a global framework for existing and future standards, protocols, and principles, with the goal of connecting all participants of the trade finance ecosystem to current and future networks.

This construction would be based on three main pillars: digital business enablers, or standards that facilitate the digitization of both commercial finance and global trade; specific standards that enable the digitization of the trade finance industry, and best practices for trade finance interoperability. A single global industry entity or consortium could manage the layer, leveraging existing schemes like ICC’s Digital Standards Initiative launched last year.

The interoperability layer would create something similar to the ISO global quality standard for the business system, and would work in line with the Internet Engineering Working Group, which develops Internet standards. Its creation will require a robust commitment from banks, governments, commercial organizations and NGOs. Joining forces now would allow stakeholders to experience tangible benefits, potentially with strong governance in 2-3 years.

For our hypothetical Southeast Asian artisan, such a systemic repair would mean that every step of the business process would be online and accessible from your computer. Many steps, including gathering financial background, would be guided and powered by artificial intelligence, and tailored for your small business. The import and export systems would share a common language for data entry, resulting in a simpler process for her, customs authorities, and the panoply of system operators, while making troubleshooting easier. It will be simple and fast.

Building interoperability is complex, but its benefits would be wide and deep. Buyers and suppliers would likely enjoy more liquidity, lower costs, less complexity, and greater access to credit and business-to-business markets.

An improved and integrated trade finance system could attract institutional investors who have thus far been largely on the sidelines. Logistics providers, who in many cases still use paper, would benefit from the reduced costs and increased security and efficiency that result from standardized business documents. And governments and regulators would have access to more and better information to support collaboration with financial players and potentially unlock extra funding.

Blockchain and digitization innovations can significantly improve the global trade finance system, and ensure that the benefits are extended to businesses of all sizes and to consumers around the world.

Fixing business finances is vital to a more sustainable and inclusive global economy. And, since this is also essential to ensure a robust post-pandemic recovery, the potential short-term returns are immense.

John WH Denton is Secretary General of the International Chamber of Commerce.

Victor K. Fung is Chairman of the Fung Group and Co-Chair of the International Chamber of Commerce Advisory Group on Trade Finance.

Bob Sternfels is a global managing partner at McKinsey & Company.

Marcus Wallenberg is Chairman of the Board of Directors of SEB and Co-Chairman of the Advisory Group on Trade Finance of the International Chamber of Commerce.

Copyright: Project Syndicate, 2020

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