Digitalization, new services and products, big data and cooperation between leading industry players are successfully bringing innovation to trade finance.
Macroeconomic headwinds such as rising protectionism, the slowing of the Chinese economy, and sluggish growth in many developed economies mean international trade finds itself in choppy waters. But emerging markets in Asia and Africa hold promise for enterprising businesses, and demand for trade finance in these riskier regions is rising as a result. Trade finance has never been more relevant, and below we examine the ten topics that are dominating the industry, covering – amongst other things – the steady advance of digitalization, the latest trade finance products and services, and the challenges and benefits of alignment and collaboration between leading industry players.
In a trade finance world still dominated by time- consuming and inefficient paper-based processes, digitalizing documentary trade promises to cut the cost of trade finance and slash the time it takes to process transactions from days to hours. SWIFT’s Multi Bank MT798, a trade envelope that simplifies the digital exchange of trade documents, is just one successful example. But businesses are also demanding high-quality digital front ends to accompany the processing of transactions. That is why UniCredit has developed a comprehensive, digital trade finance portal that boasts a number of features, including an advanced platform for executing supply chain finance programmes for both buyers and sellers.
Two digital trade finance technologies of note are the Electronic Bill of Lading (EBL) and Bank Payment Obligation (BPO). EBLs accelerate the transfer and presentation of trade documents used to certify ownership of goods, shortening the payment cycle and improving the working capital position of exporters. They make documentation not only cheaper to process, but more traceable and more secure.
The BPO – a standardised, irrevocable digital payment instruction that enables buyers and sellers of all sizes to secure and finance their trade transactions – is also seeing increased uptake. Since BPO transactions are mediated digitally by the transacting parties’ banks, payment risk and processing times, errors and costs are all drastically reduced. UniCredit is a market leader with the BPO, having developed an award-winning platform for executing BPOs entirely digitally, as well as implementing the first BPO transactions in countries such as Germany, Italy and Romania.
Companies can finally protect theirselves against payment risks in connection with open account commercial transactions. They can sell and book receivables to the house bank to improve liquidity. To make this happen the payment protection tool Bank Payment Obligation (BPO) is used.
It’s no secret that blockchain technology is turning heads in the trade finance industry, showing promise in all areas – from validating ownership and certifying transactions, to making payments and reducing fraudulent documentation. The main challenge, however, is finding specific use cases. Here, industry collaboration will be essential to ensuring widespread adoption. In this respect, UniCredit is ahead of curve. The bank is involved in developing universal standards and a shared protocol for blockchain in financial services. We are also one of seven banks collaborating on a blockchain-based trade finance and supply chain platform called Digital Trade Chain (DTC). DTC aims to make domestic and cross-border trade easier for small and medium-sized enterprises (SMEs) in Europe.
If digitalization is to deliver on its potential, industry bodies, financial institutions and businesses will have to work together to consolidate innovations in the industry and ensure interoperability. Blockchain initiatives such as DTC are an example of standout use cases where joint efforts could potentially bear most fruit, and in payments – the field that underpins so much of trade finance – a pan-European, harmonised instant payments system is fast approaching. This follows on from the introduction of SWIFT’s global payments innovation earlier this year where UniCredit acted as a pilot bank. Smaller scale collaboration between individual banks is also important – the case of UniCredit and Commerzbank working together to process the first UK BPO live transaction in 2016 being just one example.
Collaboration – rather than competition – between banks and new market entrants is now recognised as the model for successfully bringing innovation to the industry. Combining the agility and innovative approach of fintechs with the widespread, intimate customer relationships and financial muscle of banks is opening up compelling avenues for innovation in trade finance. And by bringing in “pilot” customers at initial stages of development, the effectiveness of solutions can be seen in a real-life environment. At UniCredit, for example, we have already completed two proofs of concept for blockchain-based trade finance initiatives in partnership with a fintech company.
SMEs, who make up the vast majority of businesses and contribute significantly to national GDPs, also stand to benefit from digital technologies – even though many innovations are initially aimed at large and multinational corporates. The BPO is a strong example of a digital tool that is well suited to SMEs, and at UniCredit we offer the possibility of SMEs participating in “supply chain communities” as part of our digital supply chain finance portal. This enables businesses to share financial information with their supply chain so mutually beneficial payment terms can be agreed, serving to alleviate liquidity squeezes across the length of the supply chain.
Big data – harnessing data and combing it in intuitive, creative and useful ways – is a trend leaving almost no industry untouched. Trade finance is no exception. With UniCredit’s digital supply chain finance portal and the supply chain communities it enables, for example, there is a vast supply of data available to inform payment terms. One option could be to use real-time data on the location and condition of traded goods to create payment “triggers”. This could be the arrival of goods at their destination, provided they are in an acceptable condition as judged by pre-agreed metrics. The advantages here are clear: better payment terms, better transparency, and better relationships with all supply chain participants.
Emerging markets – particularly in Asia and Africa – are presenting enticing and varied opportunities for growth, and businesses are shifting their attentions accordingly. One consequence of emerging market trade, however, is heightened risk, whether through unfamiliar counterparties or the challenge of converting funds from local currencies. Guarantees and other trade finance tools can help mitigate counterparty risk, but local-market expertise from banking partners is often the most important factor as they can offer tailored support along each step of the trading process. UniCredit’s long history in Asia and Africa, as well as our market-leading presence in Europe, mean we are ideally positioned to assist businesses who want to make the leap – in either direction.
Due diligence is crucial for businesses and banks to transact safely and securely, but acquiring all the relevant information can be costly. The pricing of insurance and guarantees can be affected, access to trade finance services in risky markets can be withdrawn, and a trade finance “gap” for SMEs can result. Again, intimate knowledge of country-specific regulatory requirements from banking partners will enable businesses to navigate these barriers to trade, but collaboration in terms of data sharing and standardising due diligence processes is equally important. At UniCredit, we’ve streamlined our know your customer (KYC) data collection with SWIFT’s KYC Registry, and are actively encouraging other institutions to join the platform.
No matter what support a business might need as it trades with foreign markets, there is no substitute for being able to lean on a trusted banking partner to smooth the process and open new doors. At UniCredit we have unmatched market knowledge in core European markets, bolstered by extensive coverage through an international network of branches, representative offices and 4,000 correspondent banking relationships, covering approx. 175 countries. We are leaders in the field, prioritising innovation through investment in digital platforms for trade finance, supply chain finance and BPO execution, and offer a comprehensive suite of solutions that serve clients of all sizes. And don’t just take our word for it. Euromoney named UniCredit "Best Trade Finance Provider" in both Central & Eastern Europe (CEE) and Western Europe in their Trade Finance Survey 2017, and Global Finance named us “Best Trade Finance Provider” in CEE 2017. For all your trade finance needs, UniCredit is the bank of choice.
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How we do Trade Finance
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