As the world transformed following the changes brought about by the COVID-19 pandemic, along with other global market factors, businesses have found themselves navigating around the newness.
It has been discussed endlessly over the last few years--how digitalisation stepped in and took the centre stage, almost always dictating how the markets will go and flow and what will thrive and what will not.
The Finance function has dealt with enormous changes over the past years, and what seemed like an area of expertise that is out of the chief financial officers' hand has now made its way into their office.
Iain MacLennan, head of trade and supply chain finance at Finastra, believes that digitalisation is a transformative force across businesses, as it redefines how they engage, operate, and innovate through integrating advanced technologies like artificial intelligence or blockchain.
"Digitisation in trade finance signifies a transformative shift from the traditional, paper-based methods to a digital-first approach," MacLennan explains. "This includes leveraging technology to transition from physical documentation to electronic formats like e-bills of lading, reducing risk of fraud and loss."
Amongst trade transaction stakeholders, MacLennan says digitisation "dramatically improves communication and collaboration." Further, digital platforms offers unified access points for all parties and streamlining decision-making processes.
Another critical aspect of trade finance digitisation is the shift towards data-driven operations, according to MacLennan. With a wealth of digital data available, trade finance becomes ripe for advanced analytics, offering deeper insights for risk management, trend analysis, and strategic planning.
Benefits and risks
MacLennan says a major benefit regarding digitalisation is that it allows the convergence of the three flows (Physical, Documentary and Financial), improving visibility, streamlining operations, and reducing risk and costs.
"The ICC has called out its expectation for digitisation to drive sustainable development and economic growth. In international trade, digital platforms allow for seamless cross-border transactions and communication, making it easier for businesses of all sizes to access international markets, enhancing global connectivity and inclusivity," says MacLennan.
However, he points out that disparities in digital infrastructure can widen the digital divide in international trade.
"Moreover, increased digitalisation poses cybersecurity risks, necessitating robust security measures and continuous vigilance as trade finance systems become more interconnected and reliant on digital platforms."
In addition, MacLennan explains that diverse participants are at varying stages of their digital journey in trade finance, and this poses challenges as well as opportunities for collective benefit.
"Even partial digitalisation by some participants can significantly improve efficiencies," says MacLennan. "For instance, digitised documentation and transactions can reduce
turnaround times and errors, benefiting all parties involved even if not universally adopted."
Moreover, as some participants advance in their digital capabilities, MacLennan says they become de facto leaders. Larger players with more advanced digital systems can offer smaller entities support, training, and resources, fostering a collaborative environment that uplifts the whole network.
"We are also seeing more ‘mutualisation’ of innovation, where digitally mature institutions partner fintech companies to bring new solutions to market. This shared approach mitigates risks associated with capital and time-intensive projects, providing scalable solutions that individual entities might not pursue alone."
The goal
MacLennan explains that digital trade finance aims to fundamentally transform trade transactions, making it more efficient, secure, inclusive, and equitable for organisations.
"These transformations aim to automate and digitise trade finance, reducing inefficiencies and errors associated with traditional paper-based processes," he says.
"These transformations will also significantly reduce global carbon emissions due to logistic improvements."
He adds that it also has the power to democratise access to global trade opportunities, particularly for small and medium-sized enterprises.
"By utilising advanced digital solutions and employing robust security measures, this digital shift also enhances transparency and security."
For MacLennan, a more digitally enabled trade finance ecosystem should ultimately support regulatory compliance, integrating automated systems for adhering to regulations such as anti-money laundering (AML), know-your-customer (KYC), and Environmental, Social, and Governance (ESG).
Challenges
"One hurdle is the entrenched reliance on legacy systems within banking and trade, stemming from resistance to change despite competitive pressures and evolving client demands," MacLennan says. "These systems must be compatible with modern digital solutions, posing significant integration challenges."
Apart from this, the Finastra executive says regulatory complexity has historically impeded progress, with varying local regulations hindering uniform digital approaches.
"However, initiatives like the Model Law on Electronic Transferable Records (MLETR) and national legislations improving standardisation (i.e., Electronic Trade Documents Act in English Law) are easing regulatory barriers."
He adds that interoperability remains a challenge, given the varied technologies, datasets, and stakeholders involved. Efforts like the ICC’s Digital Standards Initiative addresses the coordination of standardisation between stakeholders.
"Lastly, we have heard senior leaders express concerns about keeping up with rapid technological innovation in trade finance systems, requiring continual adaptation and learning," MacLennan says.
Core needs
In regards with how CFOs and Finance teams can initiate digital transformation of trade finance workflows without disrupting business as usual, MacLennan explains that the drive to act stems from three core needs: improving efficiency to reduce costs, accessing data-
driven insights to manage risks, and enhancing regulatory compliance capabilities through automation.
"Initiating the digital transformation of trade finance workflows starts with comprehensive planning," he says. "The CFO and finance team need to collaborate with key stakeholders to establish clear goals in line with business objectives, with quick wins to ensure buy-in and to validate the approach."
The Finastra trade and supply chain finance head says the team should also view digital transformation as a journey of continuous improvement, rather than an end state.
"For instance, some clients adopt phased implementation, starting with pilot projects, allowing for gradual transition and agile testing.
Collaborating with a trusted technology partner experienced in large scale transformations can also help. Their outside-in perspective, backed by expertise and tested solutions can 'nudge' businesses to take the first step."
