BNY Mellon's Broom and Kim: "Digital innovation could be a true game changer in the world of trade"

By Dominic Broom, Joon Kim

Digital innovation could be a true game changer in the world of trade, delivering new capabilities that could not only facilitate optimised, efficient processes and more frictionless trade, but that could also subsequently help to significantly boost trade activity and economic growth.

  • Despite rising trends towards protectionism, the outlook for global trade is positive, with Asia Pacific firmly established as a trade anchor
  • Digitalisation has the power to transform global trade, and trade finance is increasingly becoming a data-led, data management business
  • Collaboration can help banks to deliver trade enhancements, and enable trade opportunities for businesses across the region to be grasped

As seen with recent stock market gyrations, protectionism and anti-globalisation sentiments are continuing to fuel great uncertainty for trade and the global economy. Yet in spite of this, global trade remains robust, with predictions that it is close to reclaiming its status as an invaluable engine of economic growth. 2017 saw global trade growth reach 4.3% – the fastest rate in six years, as reported by the World Bank – while Boston Consulting Group expects trade flows to hit a record $24 trillion by 2026.

A number of factors are contributing to this growth, with increasing south-south trade and the rapid progression of emerging economies – particularly in the Asia Pacific region – playing a prominent role. Astonishingly, over two-thirds of major commodities are now produced, traded and consumed in Asia, and the region is set to account for approximately 60% of global trade growth up to 2020, according to International Enterprise Singapore reports.

If trade in the region is to reach its full potential however – and help to drive global trade as a whole – banks, together with the wider trade community, must ensure that businesses are equipped with the tools they need to maximise trading opportunities.

Transformational tools for trade

Digital innovation could be a true game changer in the world of trade, delivering new capabilities that could not only facilitate optimised, efficient processes and more frictionless trade, but that could also subsequently help to significantly boost trade activity and economic growth.

          The potential benefits of digitalisation range from cost savings and enhanced efficiency, transparency and security throughout the supply chain; to enabling the adoption of common documentation standards; to improving the ease of doing business. For example, various initiatives involving digital platforms, which can be used by trusted user groups to facilitate the secure exchange of information between participants across the trade finance ecosystem, are already in the works.

The Asia Pacific region is leading the way with such transformational concepts. Regulators in both Hong Kong and Singapore are encouraging the development of such digital platforms, including for secondary market trading, thereby enabling financial institutions to trade assets securely with a broader range of counterparties, and helping to optimise their balance sheets.

A particularly exciting development is the growing role of data in trade finance. Banks, equipped with phenomenal amounts of data, can harness this – using technology – to build enriched relationships with clients; supporting their business needs and helping to generate opportunities for growth.

Here, application programming interfaces (APIs) can play a particularly important role. APIs enable the easy exchange of information between systems, allowing data to be extracted from multiple sources and collated. Powerful analytic capabilities can then be used to deliver comprehensive, meaningful insights, from which banks can build bespoke solutions and add real value to the client experience.

The “gap”

While technology has the potential to help drive enhanced trade experiences, ensuring businesses can access trade finance is fundamental to ensuring the wheels of trade turn smoothly, with the World Trade Organization (WTO) estimating that finance underpins 80%-90% of world trade.

As the mammoth trade finance gap endures however, impacting SMEs in emerging Asian markets in particular, this could have considerable implications for the health of global trade. This issue –

driven primarily by the associated costs for banks of complying with heightened KYC and AML requirements, as well as Basel III specifications – is of real significance to businesses in Asia Pacific, where trade finance rejection rates continue to be the highest across the globe at 21%, as reported by the International Chamber of Commerce’s (ICC) 2018 Global Survey on Trade Finance.

Establishing a balance between effective, practical due diligence and improving trade finance accessibility is therefore paramount – and technology, again, could play a prominent role. Innovations, including distributed ledger technology, could help to reduce compliance and operational costs, digitalise paper-based information and automate verification. Similarly, KYC registries could streamline compliance processes and reduce costs. The Global Legal Entity Identifier (LEI) Index, for instance, is a centralised database that stores details of registered companies worldwide and contains details needed to automate KYC checks.

Addressing the trade finance gap and promoting the use of digital business solutions is an important focus for business organisations such as the ICC which, alongside other industry bodies, is striving to ensure that regulatory requirements are aligned with Financial Action Task Force (FATF) and Financial Stability Board (FSB) guidance.

Collaboration: a winning formula

Collaboration is essential to overcoming these challenges and ensuring that a strong and common message around the undisputable value of maintaining free-flowing trade, continues to be heard. Collaboration can also be key for facilitating trade transactions and delivering enhancements to global trade. For example, through correspondent banking partnerships, local banks – which often experience obstacles when it comes to investing in substantial technology initiatives – can tap into the digital capabilities of their global banking partner, and in turn provide cutting-edge trade solutions to support their clients’ evolving needs.    

Global trade remains a dynamic economic force, and the network of new trade corridors resulting from the growing strength of emerging markets means today’s global economy is more interdependent and connected than ever before. Technological developments are integral to the success of trade and trade finance, and banks across Asia, and the globe, need to ensure they leverage technology to provide effective, robust, streamlined solutions – and enable opportunities to be grasped to the full in this vibrant trading marketplace.

Dominic Broom and Joon Kim are Global Heads of Trade Business Development and Trade Product & Portfolio Management, respectively in Treasury Services, BNY Mellon

Keywords: Global Trade, Digitalisation, Technology, API, KYC, AML
Institution: World Bank, Boston Consulting Group, World Trade, Financial Action Task Force, Financial Stability Board (FSB) Organization
Region: Asia Pacific
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