The rising tide of trade digitization

Due to its economic and social benefits, most countries actively promote international trade through levers such as industrial policy, tariff liberalization, trade agreements with other nations and trading blocks, logistics and infrastructural development and trade finance.

Justin Milo, head of Trade for South Africa at Standard Bank says trade finance has become a key driver of global trade flows through financial intermediation by banks and development finance institutions. “Trade finance is made available to trading counterparties to facilitate imports and exports through solutions to assist with working capital and cash flow support, as well as risk mitigation instruments such as letters of credit and guarantees to mitigate the payment and performance risks inherent in cross-border trade.”

Despite the growth of the trade finance industry in recent years, the international trade value chain largely remains “traditional” and unchanged over decades. Trade finance remains primarily paper-based and continues to rely on manual processes in many areas.

According to the International Chamber of Commerce, a cross-border trade transaction on average involves the exchange of up to 36 different documents and 240 copies.

Milo is amongst those who believes the industry needs to embrace technology and digitization to improve efficiencies. “Digitization can come in many forms including customer channels to enable customers to transact digitally, robotics, application programing interfaces (API’s) and artificial intelligence (AI) solutions to create efficiencies within a bank’s processing environment resulting in quicker turnaround times for customers.”

Digitization of trade finance has many benefits, he says. “Fewer manual data entries help to improve efficiencies and make turnaround times faster. Electronic formats can make data more reliable and lead to more accurate reporting and analytics. Less paper means more sustainability in supply chains.  Decreased reliance on couriers to deliver physical documents results in lower costs. Quicker turnaround times often result in faster financial settlements, which goes a long way to reducing financing costs and increasing liquidity and cash flows for exporters.”

While the time-saving and efficiency benefits of going digital may seem obvious, there is an opportunity to boost digital adoption, says Milo. “Stakeholders are accustomed to established manual processes, so it naturally takes some change management to make the shift to digital solutions. Other potential barriers to adoption include, concerns around cybersecurity and fraud risks, as well as the complexity of harmonizing various technology solutions across the business”.

Ilhaam Jakoet, a senior legal advisor in Standard Bank’s Trade Finance division says another challenge is a lack of a suitable legal framework to recognize digitization efforts.   

“Guidance on legal frameworks does exist in the form of the Model Law on Electronic Transferable Records (MLETR) drafted by the United Nations Commission on International Trade Law. However, MLETR is not law but instead includes key principles to uphold when developing local laws to recognize electronic formats of transferable records.”

Each country, she says, must still enact its own laws to give effect to MLETR. In September 2023, the Electronic Trade Documents Act came into force in the UK to give legal recognition to electronic formats of documents commonly used in trade and trade finance.

“The UK legislation is important because the majority of international trade contracts are governed by English law, including contracts involving South African exporters and importers. It’s also a significant step toward creating legal certainty in contracts between buyers and sellers. However, we need further action to have the actual electronic trade documents recognized, accepted and enforced in the various importing countries. For example, customs authorities require assurance of adequate processes and systems to mitigate the risk of fraud in trade documents,” says Jakoet. 

While South Africa has legislation governing electronic transactions, there is no legislation yet to address electronic trade finance documents specifically.

The processes for enacting legislation to give effect to digital trade finance and making the necessary arrangements to be ready operationally to implement the legislation, take time.  Nevertheless, says Jakoet, there are still ways to implement digital trade finance.

“Buyers and sellers can agree in their contracts to accept electronic formats of trade documents.  Banks, financiers, shippers, freight forwarders, suppliers and purchasers can partner with financial technology companies to perform their respective roles via digital channels. Efficiencies can be optimized if the digital solution is neutral as to the type of technology or platform, as the solution is then available to more users,” says Jakoet,

Milo adds that Standard Bank, which is at the forefront of digitizing trade finance, has deployed several “best of breed” technologies to enhance customer experience. The bank’s TradeOnline platform is a web-based channel that allows customers to issue letters of credit, facilitate import collections, request for a short-term loan and issue local and foreign guarantees digitally without the need for manual forms or any specific software integration. The platform also provides the convenience of transaction status tracking and visibility of credit limit utilization.

The bank has also collaborated with financial technology companies to implement accounts payable management and supplier finance, via platforms that are interoperable with its clients' technology systems. Digital solutions such as API’s, robotics, AI, optical character recognition, machine learning and fintech platforms are used in Standard Bank’s Trade Finance Operations environment to automate and streamline tasks for processing efficiency with the benefit of improved turnaround times for customers.