Digitization of trade finance, doping for corporations

The digitalization of trade finance could boost companies' competitiveness. The ability to innovate does not only lie in products or services. The digitization of trade finance is a genuine (and now essential) lever for improving performance. Simplifying operations, standardizing and automating them, managing risks and improving transparency are the major challenges facing European companies, and hence their treasurers.

Importance of digitization of trade finance for European companies

In a global landscape where trade has reached record levels, the digitization of trade finance offers companies a crucial opportunity to optimize their financial operations and greatly reduce operational friction. On a continent where treasurers must deal with complex European regulations and a multiplicity of banks, automation is becoming a necessity, not only to improve efficiency, but also to manage the risks associated with the financial instruments used, such as documentary credits and other bank guarantees. Even if TMS and ERP systems cover some of the financial aspects of these operations and processes, they still have their shortcomings. They remain insufficient to manage the number and complexity of trade finance operations. Companies still manage part of the process manually or on spreadsheets. Complexity leads to errors and delays and increases operational and financial risks. Fortunately, there are solutions tailored to the needs of multinational companies, such as SURECOMP (see www.treasurymap.com).  They improve connectivity with banking partners and centralize the management of financial instruments. The benefits include shorter transaction processing times, greater transparency and more rigorous management of financial risks.

What do we mean by “trade finance”?

Trade finance refers to the financial instruments and products that companies use to facilitate international trade and commerce. It helps importers and exporters conduct business transactions by providing various financial solutions to manage the risks associated with global trade. The key components of trade finance include the Letters of Credit (LC), guarantees from a buyer’s bank that payment will be made to the seller once certain conditions are met. It also includes factoring, with companies selling their receivables to a third party at a discount to get immediate cash, and export credit, for financing provided to exporters to help them fulfill orders. Eventually, it includes insurance to protect against risks such as non-payment or political instability. Trade finance not only reduces the risk of non-payment and non-receipt of goods but also improves cash flow and operational efficiency for businesses. When it comes to the digitalization of trade finance, it involves the use of technology to streamline and automate the processes involved in international trade transactions. This transformation aims to reduce reliance on paper documents, enhance efficiency, and improve security and transparency in trade finance operations. Digitalization means recourse to new technologies like the electronic documentation, replacing paper-based documents like letters of credit and bills of lading with electronic versions to speed up processing and reduce errors, or blockchain technology, using blockchain to create immutable records of transactions, which enhances trust and reduces the risk of fraud. Artificial Intelligence (AI) and Machine Learning enable us to leverage AI to analyze large volumes of trade data, predict risks, and automate decision-making processes. The digital platforms enable us to connect various stakeholders (banks, exporters, importers, insurers) to facilitate seamless transactions and real-time updates. These advancements help in reducing costs, improving supply chain resilience, and making trade finance more accessible, especially for small and medium-sized enterprises.

Bank guarantees management

Managing bank guarantees can quickly become complicated, given the sheer volume involved and the sheer number of credit lines worldwide. This is a real challenge for any treasurer. As his/her tools are generally inadequate, he/she must look elsewhere for the solution and automate what is still too manual. There is also the question of where to store these guarantees in a dynamic database. For example, the management of maturities, extensions and endorsements, among other things, involves several stakeholders. This slows down the process considerably. By centralizing management, automating it and professionalizing it, we can track every stage from the issuance of a guarantee to its extinguishment and unwinding, while reducing the risk of inherent human error and facilitating the management of financial exposures globally. A platform of this kind can provide total, instantaneous, real-time visibility, making operations more transparent, clearer and smoother. Digitization can therefore become a strategic asset. Europe's adoption of MLETR into national law is encouraging companies to adopt digital solutions to improve their competitiveness. This digital transition is vital and will enable us to fight more effectively in an increasingly aggressive and competitive environment.

MLETR (“Model Law on Electronic Transferable Records”)

Couple of years ago, it would have taken (indicative figure) 34 days from picking a rose in Kenya to selling it to European florists. And of those 34 days, 10 were just for document processing. This example illustrates the complexity and inefficiencies of international trade, which is still too poorly digitized. Adopted in 2017 by the United Nations Commission on International Trade Law (UNCITRAL), the MLETR, for “Model Law on Electronic Transferable Records” has nonetheless marked a major step forward for international trade. By giving legal recognition to electronic documents (bills of lading, bills of exchange, promissory bills, warehouse receipts, international guarantees, stand-by letters of credit, etc.) at both national and international level, it has finally opened the door to the true end-to-end digitization of operations. But more than a “Big Bang” that would change everything overnight, this text above all represents a foundation on which to build the digitization of the entire sector. It is an enabler of transformation, which, thanks to the definition of common standards, will enable all players in the value chain - physical, financial or documentary - of international trade to transform their modes of operation to gain in operational efficiency. But, at the end of the day, more than regulation, trade finance optimization passes through digitalization and automation. It now time to adopt the best in class solutions.

François Masquelier, CEO of Simply Treasury – Luxembourg – October 2024

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).