In 2020, Covid-19 accelerated the digitalisation of trade finance. When governments around the world locked down economies, trade banks had to go online overnight. Where are they now in the digitalisation process and what will the future bring?
The digitalisation of trade finance was already underway before the pandemic.
Chris Southworth is Secretary General of the International Chamber of Commerce (ICC) UK. He says, “We surveyed banks to get a feel of where they are in digitalisation in February and March of 2020. At the time, over 50% had actively been digitising their processes.”
But lockdowns forced banks to move further and faster – sometimes before regulation was in place to support it. Southworth says that it’s “safe to say” that a lot more than 50% of trade banks are digitalising now.
And it’s not just banks that are re-examining how to do trade finance.
“A much wider range of governments have been very active in changing laws and removing barriers,” says Southworth. “It’s a transformatively different conversation now. They are all around the table. That has never happened before.”
Commodity trade finance faces increased capital costs
Last year saw some banks also fundamentally reassess their commodity trade finance book.
ABN Amro, BNP Paribas and Société Générale all cut back. Rabobank is reportedly due to close its commodity and trade finance offices in London, Shanghai and Sydney in 2021.
The moves in commodity trade finance are partly a response to fraud losses and tough markets, but also to regulation.
The full implementation of the so-called ‘Basel IV’ rules on capital risk-weighting in January 2022 will mean trade banks can no longer use physical collateral in calculating risk weights.
That increased cost of capital is likely to be particularly onerous for smaller players in commodity trade finance, or for those with limited ancillary business.
Certainly, some bigger trade banks see an opportunity in the general retreat. Deutsche Bank told S&P that it expects to see a “flat to single-digit” increase in its commodity trade finance revenue in 2021.
The advantage of big platforms in trade finance
The trade ecosystem is large, diverse and global. So being able to interoperate digitally with many different organisations will be an advantage.
Vinay Mendonca is Managing Director and Global Head of Product, Propositions & Structuring, Trade and Receivables Finance at HSBC. He says customers who are used to ecommerce want the same level of service from banks. Going forward, he expects ‘platformification’.
HSBC has over 400 prepublished application programming interfaces (APIs), which let others dock onto its systems to exchange data.
Sustainability is likely to be another driver of big platforms. Banks that want – or need – to support a transition to green finance will have to be able to gather and analyse the right data. But banks won’t do it alone.
“There is a role for everybody,” Southworth says. “Google and Apple for example have a huge contribution to make things like cyber policy.”
Trade and central bank digital currencies
One of the hottest debates in payments is around central bank digital currencies (CBDCs).
Many central banks are looking at the feasibility of CBDCs. Banque de France, for example, is reportedly interested in being the first international issuer of a wholesale CBDC – to gain the benefits of being a reference for the rest of the market.
China is said to be trialling the use of a the digital yuan in trade finance facilities. And, the Hong Kong Monetary Authority is reportedly looking at the business case for cross-border trade settlement using CBDCs.
What will that mean for trade in the near-term? Research rather than implementation.
A Bank for International Settlements (BIS) report on CBDCs – published at the end of 2020 – says cross-border interoperability is “not just a question of technical design and work on common standards and interfaces”.
The legal and regulatory frameworks are at least as big a challenge as the infrastructure.
Given that digitalisation of a supply chain for one company is not simple, the full digitalisation of trade finance is likely to take a while – even after the digital turbo charge of 2020.
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