Global Trade Finance Infrastructure in 2018

The infrastructure of global trade finance is set to change in 2018 with the introduction of real-time payment schemes. Updates to trade finance training will cover the new systems and the impact they will have.

Regulators want commerce to alter the negative trajectory of the already worryingly low ratio of trade growth to GDP growth - 0.6:1, according to the WTO, so they want the $1.5 trillion trade finance that ADB identified in 2016 closed. They also want more money volatility in their national economies, both considered major spurs to growth and jobs. And finally, as the Revised Directive on Payment Services (PSD2) indicates, regulators also want greater security of payments and more fraud-fighting capability – in the UK, for example, ideally below the 0.007% current payments systems deliver.

Typical trade finance contracts are loaded with optionality, frequently linked to information provision. This can be financial, as in the case of structured finance agreements or rating agency decisions; legal, such as signatures on other contracts or confirmation of payments made; or commercial: the results of due diligence, important notifications about goods having arrived in warehouses, confirmation of quantity and quality certification from a company like SGS or of successful loading from a shipping company. What global trade finance infrastructure lacked were means to conduct complex instantaneous, secured, linked, cross-border, verifiable multi-party transactions electronically. Until now.

 

Real-Time Payment Schemes

After years of promising, held back both by gaps in technology and corporate policy, the development of real-time payment schemes (RTP) is finally about to transform global trade finance operations, in largely the same way that the internet did for airlines. This is thanks mainly to distributed ledgers and open APIs launched by firms and alliances such as GPII from SWIFT. The key, though, is to see national systems interlink. Trade finance courses provide a global assessment of the viability of different systems and their speed of implementation, as dozens of countries are adopting RTP, with the first line European SEPA Instant Payment trials planned as early as this month, albeit at an initially very low level of €15,000. Developing countries are also drawing level, for example India’s UPI. Even firms in the USA are now adopting ISO Standard 20022.For true globalisation of the systems, there must be more conformity with this, and fewer local variations.

 

How they will work

Trade financiers envisage that RTP will have keys and gateways installed to accommodate optionality and multiple party legally enforceable smart contracts. These will all be accessible on mobile devices once there are interoperable, low cost platforms with minimum standards that are universally available, including to the digital trade finance banks that will base their business on them. These will cover a wide range of trade finance essentials, generating e-bills of lading, enforceable liability and security standards and data conformity, e.g. with the World Custom Organization’s (WCO) data model, and also with common IT formatting standards for international readability, with trade finance training now incorporating fine-grained explanations of how they will work.

 

Who will benefit

Smaller firms, which have the most difficulty in accessing trade finance, will clearly benefit most, - whilst RTP will deliver significant efficiency benefits for manufacturers and shippers, e.g. cheaper Letters of Credit and more ability to deliver just-in-time ordering and supply, customers also will benefit from greater choice and faster delivery. Banks that are ahead on digitalisation are also likely winners. But there will be losers, too. Imminent now is the replacement of daily cut-off times by real-time cash balances for corporates – giving treasurers cash forecasting problems and demanding pre-determined cash management strategies. Any entity that has thrived on information asymmetry and inconsistencies – brokers, especially, but those banks that have profited from deposit cash and lent to trading firms with the type of significant working capital needs that RTP erodes as well.  But the change is irreversible. International traders and manufacturers are looking forward to 2018 to see trade finance infrastructure start to transform.

 

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