What are the challenges of digital trade finance?

23 May, 2022Ouida Taaffe

Trade singaporeThe announcement of the Electronic Trade Documents Bill signals a transformation to digital trade. Ouida Taaffe looks at the likely challenges for trade finance professionals and how developing countries might benefit from digital trade.

Trade finance is one of the few industries that’s still legally required to rely on reams of paper documentation. The end of that is now in sight.

Prince Charles formally announced the Electronic Trade Documents Bill in the Queen’s Speech, in the UK Parliament, on 10 May. It’s expected to come into force within six to nine months, according to Chris Southworth, Secretary General at the ICC UK.

Why is English law the sticking point to more efficient trade finance?

Because English Law underpins most of the rules in trade and currently says that some documents of title – such as bills of lading – can’t be signed digitally.

The change in law is not just about doing away with couriering about four billion documents around the world. Digital trade promises to allow for new standards and efficiencies.

It should also help close a gap of around US$3.5bn in access to trade finance that particularly hits small to medium enterprises (SMEs) and emerging markets.

Revising the law has been under serious discussion since 2017 and got a boost during the Covid-19 lockdowns when shipping documents often stopped.

In April 2021, the G7 agreed to collaborate on electronic transferable records. The International Chamber of Commerce (ICC) described the G7 move as “momentous”.

Preparing the market for digital trade

The change in English law is fundamental to digital trade finance. But that’s just the start, according to Chris Southworth, Secretary General at the ICC United Kingdom.

“We’ve got to pilot more [new approaches] because digital trade is different to normal trade,” he said at the International Chamber of Commerce (ICC) Digital Trade Conference in April.

“To really operationalise a digital trade corridor…you’ve got to prepare the market, understand the standards in system, [have a] business case for investing in system and make sure test it end to end [so] that all documents can be handled digitally.”

And the market has to ensure that everybody can participate, Southworth stressed.

How developing countries can benefit from digital trade

In the interests of digital trade inclusion, the ICC launched a strategic partnership with the eTrade for all initiative led by the UN Conference on Trade and Development (UNCTAD) at the end of April.

eTrade for all helps developing countries with information and resources on ecommerce and the digital economy. The co-operation with the ICC aims to create a “trusted, neutral and global channel to bring private sector voices to the discussion and enhance co-ordination”.

It also hopes to finally close the trade gap that sees small companies struggle to access trade finance. That gap widened by an estimated US$2bn during Covid-19 because it increased the digitisation of trade.

eTrade for all say only 27% of people in least developed countries use the internet and few small businesses in those regions are online. One of the aims of the new initiative will be to “bridge the gaps in digital readiness” using “smart partnerships” that make the best use of scarce resources.

Fintechs are expected to have a significant role in making trade more accessible to SMEs by linking them cost-effectively to banks.

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