By John WH Denton, Victor K Fung, Bob Sternfels and Marcus Wallenberg / Paris
Goods and services move around the world through critical infrastructure: roads, ports, rail networks, shipping routes, and data servers. Equally essential is the $ 5.2 billion global trade finance ecosystem that facilitates these flows. Unfortunately, this doesn’t always work as well as it could.
Today’s trade finance system is characterized by a complex web of decades-old manual processes and newer âdigital islandsâ – closed systems of trading partners that are disconnected from the global whole. New research from the International Chamber of Commerce’s Trade Finance Advisory Group, Fung Business Intelligence and McKinsey & Company highlights how streamlining processes and connecting and integrating these islands through networks and platforms -forms could transform the global economy.
According to the Asian Development Bank, the global trade finance gap widened in 2020 to a record $ 1.7 billion, equivalent to 10% of world merchandise trade, up from 8% in 2018. The deficit is even more acute for micro, small and medium enterprises. small businesses (MSMEs), which accounted for 40% of rejected trade finance applications in 2020. So while digital networks are undoubtedly the future of commerce, their development in their current form risks expanding the gap between large connected multinationals and MSMEs at the heart of economic growth
and job creation throughout the
For example, imagine an artisan entrepreneur in Southeast Asia whose microenterprise employs four people locally. She is digitally savvy and has found a small but valuable online market for her products halfway around the world. But her country’s tax, credit, and customs system, including bills of lading and purchase orders, is not designed to serve her small business. Its assets are below the thresholds required to pass credit score tests, and all documents must be filed manually. And the import documents of the destination country are totally different from the export documents of its country, which adds more labor and cost.
Now imagine that something is lost.
The smaller the company, the more difficult it is to manage such complexity, fragmentation and opacity. But a more digitally interconnected trading system would help MSMEs sell to countries and customer segments that they currently cannot reach.
System repair is vital. By 2030, the world will need to create 600 million jobs to absorb new entrants into the labor market, mostly in developing countries. MSMEs, which account for around 90% of global businesses and the majority of jobs, will play a huge role in meeting this demand and unlocking the potential of trade to spur economic growth. Additionally, 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 trade finance have resulted in a proliferation of networks, digital standards and digitization initiatives. While many of them are great, we need a âglobalâ solution to close the $ 1.7 billion trade finance gap.
We propose a more systematic model that combines everything numerically, in what we call an âinteroperability layerâ. It would neither be a new layer of bureaucracy nor a substitute for regulation. Rather, it is a virtual construct providing an overarching framework for existing and future standards, protocols and principles, with the aim of connecting all participants of the trade finance ecosystem to current and future networks.
This construction would be based on three main pillars: digital trade enablers, or standards facilitating the digitization of both trade finance and global trade; specific standards enabling the digitization of the trade finance industry; and best practices for the interoperability of trade finance. A single global industry entity or consortium could govern the layer, building on existing schemes such as the ICC Digital Standards Initiative launched last year.
The interoperability layer would create something akin to the ISO global quality standard for the business system and would work like the Internet Engineering Task Force, which develops Internet standards. Its establishment will require a strong commitment from banks, governments, commercial organizations and NGOs. Uniting now would allow actors to benefit from tangible benefits, potentially in 2-3 years with strong governance.
For our hypothetical Southeast Asian craftsman, such a systemic solution would mean that every step of the business process would be online and navigable from his laptop. There are many steps, including credit referral, would be guided and powered by artificial intelligence and suitable for his small business. Import and export systems would share a common language for entering data, which would result in a simpler process for them, customs officers and the panoply of system operators, while simplifying the process. repair
Building interoperability is complex, but the benefits would be vast and profound. Buyers and suppliers would likely benefit from more liquidity, lower costs, less complexity, and better access to credit and business-to-business markets. An improved and integrated trade finance system could attract institutional investors who so far have largely remained on the sidelines. Logistics providers, many of whom still use paper, would benefit from the reduced costs and increased security and efficiency resulting from standardized business documents. And governments and regulators would have access to more and better information to support collaboration with financial actors and potentially unlock additional funding.
Beyond that, innovations in blockchain and digitization can dramatically improve the global trade finance system and ensure that the gains extend to businesses of all sizes and consumers around the world.
Repairing trade finance is vital for a more sustainable and inclusive global economy. And, given that it’s also essential for securing a strong post-pandemic recovery, the potential short-term returns are huge. – Project union
â¢ John WH Denton is Secretary General of the International Chamber of Commerce.
â¢ Victor K Fung is Chair of the Fung Group and Co-Chair of the International Chamber of Commerce Trade Finance Advisory Group.
â¢ Bob Sternfels is Global Managing Partner of McKinsey & Company.
â¢ Marcus Wallenberg is Chairman of the Board of SEB and Co-Chairman of the International Chamber of Commerce’s Trade Finance Advisory Group.