At the 2024 Trade Finance Investor Day conference in London, Deepesh Patel, Editorial Director at Trade Finance Global (TFG), sat down with Richard Wulff, Executive Director of the International Credit Insurance and Surety Association (ICISA) and TFG Editorial Board Member.
In trade, no process is more talked about and less acted upon than digitalisation. Digital solutions have been rolled out in sectors far and wide; even street vendors are accepting contactless payment. In a sector as fast-moving and malleable as trade, it’s hard to pin down exactly why digital uptakes have been so slow.
Perhaps the reluctance to digitalise trade comes from the high start-up cost required, both financially and in terms of the effort required to retrain personnel and migrate systems. Perhaps it’s negative attitudes towards legislation, which, though in place to facilitate the process, are cumbersome in the immediate term. Perhaps it comes from scepticism about data security and leaks. Or perhaps organisations have committed the phrase ‘if it ain’t broke, don’t fix it’ to gospel.
Whatever the reason, it appears we could use the reminder: trade digitalisation needs to happen now. Wulff made it simple by providing four reasons why trade digitalisation has become imperative.
- Supply chain transparency for compliance
The conflict in Ukraine has led to a surge in sanctions and export control measures: as of September 2024, over 2,200 entities and individuals are subject to EU sanctions against Russia. The geopolitical aim is to deprive Russia of critical technologies and markets to weaken its economic base, curtailing war-waging capabilities. As banks grapple with this complexity, supply chain visibility is a top priority.
“Trade digitalisation helps to make the supply chain transparent,” Wulff said. “So I can know, where did the goods come from? Where are they going? And is that in breach of sanctions or export controls?”
As major banks seek to minimise risk exposure, they’ve increasingly ‘derisked’ by withdrawing services from entire regions perceived as high-risk. This has come to the detriment of smaller economies that benefit greatly from corresponding banking relationships.
In trade credit insurance, a challenge is to allow institutions to manage rather than avoid risk, ensuring smaller economies are best supported and integrated into the global economy. Data is a guiding torch for this.
“If you have to jump over a ditch and you do that in the dark, you don’t know exactly how broad the ditch is. You take a really big jump to make sure that you don’t fall in,” explained Wulff.
“If it’s bright, you can see how where all the ditch is and you can be more precise. That’s exactly what’s happening here. The more data you have, the more light there is, and the more sure you are that you are going to jump over the ditch.” The more information and data an insurer is provided with, the more accurately they can price and underwrite risk.
- ESG monitoring and measurement
Of course, document digitalisation saves paper and postage costs. But the environmental, social, and governance (ESG) impact of trade digitalisation comes primarily from enhanced tracking, which digital solutions can provide.
Within short-term trade credit insurance, with goods traded all day every day, the environmental impact is not as clearly accounted. But this information is vital to make informed business decisions: if parties can better track the flow of goods and materials, they reduce the risk of inadvertently breaching regulations.
Wulff used lignite as an example of the most polluting type of coal. Containing large amounts of dirt and/or water, it emits 1250kg of carbon dioxide equivalent (CO2-e) per megawatt-hour sent out, far more than black coal or natural gas counterparts (1000kg and 550kg, respectively). In spite of this, the lignite market is expected to grow rapidly to $182.21 billion by 2028, at a compound annual growth rate (CAGR) of 5.2%.
If the impact of this commodity were more clearly measured, companies would likely steer away from it. In essence, Wulff said, businesses should ask themselves: “Do you really want to deliver your spare parts or your commodities to a polluting industry?”
This is one element with significant scope for improvement, as vast amounts of data are required to measure it. “We cannot yet say if you trade these eggs from, let’s say, Thailand to Europe, what does that do to the environment? What does the shipping do? What does the handling do? And what does the further processing do? That’s what we need the data for, and we’re in desperate need of that,” he said.
Digitalisation can help fill these data voids, enabling businesses and financiers to make more informed decisions about the sustainability of their trade activities. An example is the growing popularity of ‘New IT’, or the increased weighting of ESG compliance when selecting IT vendors, which includes consideration of edge computing architecture. Edge computing allows devices in remote locations to process data close to where it’s generated, at the ‘edge’ of the network, reducing overreliance on centralised cloud systems and allowing for quicker, more accurate data distribution. In an era where 91% of companies fail to comprehensively measure their CO2-e emissions, the need for accurate data monitoring is growing more desperate in order to meet international sustainable development goals (SDGs): and digitalisation presents a solution.
- Combating fraud
Fraud poses another major threat. “It is much more than [balance sheet fraud],” Wulff warned. “It’s fake documents; it’s collusion between buyer and seller.”
According to Wulff, digital standards and registries for trade documents are crucial weapons in this fight. “Take the bill of lading, during the COVID-19 pandemic, when international movement was severely restricted, as an example.” These critical shipping documents were simply being photocopied on standard home office equipment and then negotiated at banks. “It was the purest type of fraud: parallel trade, where goods were sold multiple times.”
The scale of financial fraud is significant. Headline cases with billions of dollars in losses this year highlight costly fraud and misconduct issues at global businesses. Financial fraud’s illicit nature makes it difficult to quantify, but MonetaGo has highlighted how over $10 billion in trade finance losses have been publicly identified since 2020: a small fraction of the total cost of fraud.
Digitalisation can strengthen trade record integrity through various mechanisms: for instance, distributed registry systems that create tamper-resistant documentation; or Legal Entity Identifiers (LEI) that provide unique, verifiable identification of trading partners. These digital solutions enable real-time verification, automated consistency checks, and immutable audit trails, significantly reducing the risk of document forgery and manipulation.
While trade finance is already classified as a low-default and low-risk asset class, this position is by no means set in stone. Fraudsters evolve at pace with the industry, so it’s essential to act proactively rather than reactionarily.
- Unlocking new trade finance products
Improved data and transparency through digitalisation are also enabling the development of innovative trade finance solutions, particularly for underserved markets. Without data, insurers remain unwilling to cover riskier regions; without digitalisation, data will remain trapped.
“What a number of parties are doing now is to create that data,” Wulff said. “People can come in and say, ‘This is actually a risk that is worth taking, and we want this.’”
Helping draw finance to underserved economies doesn’t just assuage the trade finance gap: it has the potential to ‘end poverty in all its forms’, the most urgent of the global sustainable development goals (SDGs).
However, these benefits can only be unlocked when global standards are harmonised, and domestic legal systems must recognise electronic transferable records (ETRs). The UNCITRAL’s 2017 Model Law on Electronic Records (MLETR) marked a promising step in this direction, creating an enabling environment for electronic trade. Its international dissemination has been slow but sure.
“I would like to see at least the entire European Union and the US follow the examples of France, the UK, Singapore, and a number of African countries so that we can start getting down to business without those frictions,” Wulff said.
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This year, challenges thrown at the trade, trade finance, and credit insurance industries have made clear that compliance, sustainability, fraud prevention, and financial inclusion must urgently be improved. Luckily, digitalisation takes a giant leap towards this end. “The more precision there is, the better it is for the sellers, the better it is for the clients,” Wulff summarised.
This must be a united effort between businesses and regulators, out of commitment to closing global data gaps and aligning on common standards. Organisations must invest in these digital capabilities now, or find themselves drowning as others surf the internet wave.
