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Trade finance is the lifeblood of global commerce, enabling companies around the world to expand their operations across borders. 

However, the sector faces pressing challenges that can restrict access and impede efficiency. 

To uncover more about how digital innovation is poised to revolutionise this vital field and enhance transparency, security, and inclusivity in global trade, Trade Finance Global (TFG) spoke with Steven Beck, Head of the Trade Finance Private Sector Operations Department at the Asian Development Bank (ADB) and Neil Shonhard, CEO of MonetaGo.

Trade finance challenges and the promise of digitalisation

Two of the most significant challenges facing the trade finance sector today are a lack of financial inclusion and the substantial trade finance gap, which, according to the Asian Development Bank, reached a staggering $2.5 trillion in 2022. 

This gap highlights a significant barrier to access to financial services and particularly affects small and medium-sized enterprises (SMEs) and women-owned businesses, hindering many from accessing necessary financing to engage in international trade.

The status quo has failed to address these challenges. Beck said, “The current system is an antiquated, outdated architecture for trade that we need to tackle.”

While these challenges may seem daunting, advancing digital technologies may hold a solution. 

The drive towards digitalisation promises to streamline processes and aims to make trade finance more inclusive and accessible. It can lower barriers to entry for smaller companies and enhance the transparency needed to tackle issues like trade-based money laundering and other related crimes.

Beck said, “We believe that if we can digitalise trade, it would truly be transformative on a number of different levels.”

This feeling is echoed by many actors in the industry. In the Asian Development Bank’s “2023 Trade Finance Gaps, Growth, and Jobs Survey”, 73% of firms believe that digitalisation will increase their efficiency and access to international trade, and 70% of banks plan to leverage new technologies to increase support for SMEs.

However, adopting new technologies on an industry-wide level can be challenging, particularly given the multi-jurisdictional and heavily paper-based nature of international trade.

Shonhard added, “Trade finance is reliant on data. High-quality and verifiable data. Due to the nature of trade, it’s about enabling the transference of this data across the ecosystem, across jurisdictions, through businesses, banks, financiers, fintech, and many more.”

Given this vast array of stakeholders, successfully digitising the industry will require a degree of alignment to create a standardised ecosystem conducive to digital growth and regulatory acceptance.

DSI and the strategic push for standardised digitalisation

Digitalisation in trade finance is a transformative force capable of reshaping the landscape of global trade, with potential benefits including increased global GDP, enhanced productivity, and lower barriers to entry for smaller companies. 

These advancements are crucial for enabling broader access to the international trading system and fostering greater economic inclusivity, but industry efforts need to be focused to be effective.

This is where initiatives such as the Digital Standards Initiative (DSI) come into play. 

This DSI aims to push trade finance into a new era by standardising around 30 paper-based documents prevalent in trade today, allowing them to be used and legally recognised in electronic formats. 

This initiative by the ICC DSI, called “Key Trade Documents and Data Elements (KTDDE)”, is an important step in creating an industry wide standard for the most commonly used trade documents. By collating agreed upon definitions and best practices, it provides a starting point to move forward to a standardised industry.

But this is just a first step. The DSI is a collaborative effort, which needs actors from across the industry to come together to ensure progress moves forward at a faster pace.

Beck said, “We’re also bringing multilateral development banks together to complement and to boost the work of the DSI, the Digital Standards Initiative, to try to move the needle more quickly to get this done.”

The potential impact of the DSI on global trade is profound. By digitalising trade documentation and gaining legal acceptance for electronic records, the initiative promises to enhance transparency across the trade finance sector. 

This transparency will help address challenges such as trade-based money laundering and other forms of financial crime currently prevalent in the sector. 

Furthermore, many experts expect the shift to digital documentation to reduce processing times, decrease costs associated with trade transactions, and mitigate the risks of document fraud, thereby making trade more secure and reliable.

But simply standardising key trade terms and documents is a moot point without proper legal recognition. According to Beck, an equally important step in this process is working with governments, policymakers and legal experts to ensure there is codified recognition of these documents.

Public-private partnerships for trade finance innovation

Collaboration between the public and private sectors is a critical driver for innovation and security. This partnership is pivotal in leveraging technological advancements and establishing a regulatory and operational framework that supports secure, efficient, and inclusive trade financing practices.

Shonhard said, “It’s important to recognise how public and private are different. The private sector is great at innovating and using technology to solve problems. The public sector is there to ensure that necessary foundations are in place – be it roads and bridges, or regulations and laws – to safeguard a market.”

There are several examples where such collaborations have significantly impacted the trade finance ecosystem. 

In India, for example, MonetaGo’s technology is being used to shut out fraudulent activities from the trade finance market, showcasing a substantial annual growth in secure, fraud-free transactions. 

This use case highlights the efficacy of technological solutions in enhancing security and the essential role of public-private partnerships in facilitating the adoption and implementation of these technologies across different markets.

But India is just one example, in one region. In the last fiscal year, MonetaGo has seen that between 17-37% of lenders suffer duplicate finance fraud in developed markets, and the same fraud is seen as high as 85% in emerging markets.

In addition to private sector innovation, multilateral development banks, like the ADB, play a key role in advocating for and helping governments implement enabling legislation, such as those based on the Model Law on Electronic Transferable Records (MLETR). 

According to the ICC DSI’s MLETR Tracker, There are currently 8 countries, including Bahrain, France, Germany, the United States, and the United Kingdom, where MLETR laws have entered into force. Singapore and the Abu Dhabi Global Market have also adopted MLETR equivalent laws. 

Shonhard said, “Where multilateral development banks are important – if not inspirational – is how they can often bridge the gap between public and private, creating inclusive markets, ecosystems, and economies.”

These laws are crucial for the broader acceptance of digital solutions in trade finance, ensuring that the legal frameworks keep pace with technological advancements and empowering the private sector to continue to create innovative solutions, without fearing that they won’t be legally viable.

Beck said, “If we can accomplish the digitalisation of trade through the standardisation of these documents and through legal systems that recognise those documents, I think then the decision for companies becomes a lot easier.”

Integrating public policy frameworks with private sector innovation through collaborative efforts is indispensable for advancing security and efficiency in trade finance. 

These partnerships foster technological adoption and ensure that innovations are effectively integrated into the global trade system, enhancing regional and global economic stability and growth.