How financial institutions are going digital to keep the wheels of trade turning

22/09/2020

Person holding tablet with graph illuminated above

Person holding tablet with graph illuminated above

The current, unprecedented circumstances have forced banks operating in global trade – an industry not necessarily renowned for being nimble – to adapt quickly.  So what changes are banks making to ensure the cogs of trade continue to turn? Joon Kim, Global Head of Trade Finance Product and Portfolio Management, BNY Mellon Treasury Services, explores.

Over the past few months, the global trade industry has faced a number of profound challenges. As countries continue their lock-down measures, or begin the long journey to ease them, value chains, logistics networks, spending and production in many areas remain heavily impeded. Against this backdrop,

Volumes of international trade have fallen significantly – with the World Trade Organisation predicting that global trade will fall by between 13% and 32% in 2020.[i]

But as the pandemic shifts us into a “business unusual” environment, what is being done to mitigate the impact on trade? For one, the trade finance industry has been forced to rapidly implement measures that move away from more traditional, paper-intensive practices. So, while in the short-term trade volumes may be impeded, an opportunity to create a new, more agile environment for the future has been created – one more willing to embrace digital change.

Risk appetites changing

The extraordinary circumstances of the last few months have called for an extraordinary response. Banks have rapidly set in motion their business continuity plans (BCPs) to curtail disruption, while also seeking to optimize the flow of trade finance transactions and protect their balance sheets. As the situation changes, and numerous nations begin easing their lock-down restrictions, these BCPs are being continuously evaluated and adapted to evolving conditions.

But what are the primary considerations in this rapidly-changing landscape? The likelihood of rating downgrades for various corporates and financial institutions, as well as the heightened chance of a recession in the jurisdictions worst hit, mean that risk profiles have increased across the board.

Combine this with the fact that the shifting conditions have created opportunities for fraud, and the need for additional due diligence and improved cybersecurity measures has become more critical than ever.

Consequently, many banks have adjusted their risk appetites and are more judicious in choosing counterparties, providing financing primarily to core clients with whom they have long, trusted relationships.

Creating the new digital norm

Amid the short-term challenges, there are some potentially long-term benefits. The trade finance industry has long sought a workable solution to bringing the heavily manual, paper intensive business into the digital age.

With airports operating at reduced capacity, courier services shutting down and end delivery addresses being closed for business, there are numerous logistical difficulties in getting crucial, physical trade documents to the necessary counterparties. What’s more, with original documents going back and forth multiple times among parties to a trade, it is critical to ensure that employees and clients are suitably shielded from potential risks.

To enable trade processes to flow effectively, concerted efforts are being made to find ways to migrate to digital formats and to reduce the use of paper. These efforts are driving the industry towards a common goal: the optimisation of transactions through digitalisation.

So far, considerable progress has been made.

For example, rather than putting pen to paper, trade finance distribution transactions can now be approved through e-signatures, while manual pickups are being reduced within export collections through the use of digitalised cover letters.

And while some paper-based elements are harder to digitise than others, particularly with regard to Letters of Credit, the current situation is changing attitudes – making the industry more willing to collaborate, advocate and drive digital adaptation across all aspects of trade finance.

The changes that are occurring now and the shift in attitudes they engender, are providing the industry with an opportunity to leverage technology to create a new norm. Once the world settles, rather than looking backwards, the industry can look forward to an era of more efficient, streamlined, value-added transactions.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.

[i] https://www.wto.org/english/news_e/pres20_e/pr855_e.htm

About the author

Joon Kim

Author: Joon Kim

Joon Kim is the Global Trade Product and Portfolio group manager in the Treasury Services Product Management group. In his current role, Joon is responsible for managing, developing and executing Trade Finance Product and Distribution strategy, working with all Treasury Services Global segments and Global Sales organizations to grow revenues and ensure risk and compliance measures are met.

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