DLT not a silver bullet for trade finance
• It has the potential to enhance aspects of the trade cycle but there is no one solution every party can use
Given that many of the core processes and techniques have not changed significantly in the past 50 years, trade finance is long overdue digitisation, says Minos Gerakaris, head of Trade Finance at RMB.
“Applying for trade finance is typically a slow and inefficient process involving numerous different parties including importers, exporters, banks, logistics companies, inspection agencies, warehouse managers, clearing agents and customs officials in various countries. From an administrative perspective trade finance is faced with increasing regulation including requirements to ‘know your customer’ (KYC) and antimoney laundering (AML) initiatives, especially with trade-based money laundering fast becoming a global theme. Each party makes their own ‘additions’ to the process and, until recently, it’s all been largely manual.”
At each link in the chain, maintains Gerakaris, there is an opportunity to add efficiencies by using digital technologies. However, while distributed ledger technologies (DLT) are being touted as the panacea that will resolve many of the challenges found in trade finance, it’s not a silver bullet, he insists. “DLT undoubtedly has the potential to enhance aspects of the trade cycle but the reality is there is no one solution that every party in the international trade cycle can use.”
While the immutable aspect of DLT is its core benefit, Gerakaris says stakeholders need to define what they are solving for. If it’s to prove that the goods being shipped are what they say they are, then that’s fine. However, if it’s moving an efficient working process between banks onto a new ledger run by a third party fintech then the definition is less clear cut.
“Currently banks and fintechs are developing these ideas in small ring-fenced consortiums with 10 to 15 members each, without much thought relating to interoperability. However, if your client, shipper or customs agent in Bujumbura — or their bank — is not online and party to the particular individual DLT ‘club’, how then do you trade?” he asks, questioning who regulates the new technology and designs standards.
As an example, he outlines the challenges faced by a client who mines copper in the Democratic Republic of Congo, transports it on trucks through Zambia, Zimbabwe and SA before shipping the commodity to China. At each stage of that process and border crossing there are different customs rules, taxes, stamps and duties.
“It’s not like shipping something from Germany to
Austria, both within the European Union and all settled in euros, where a replacement for an invoice to a DLT token could well be a better solution,” points out Gerakaris.
Instead, he argues that DLT solutions needs to be a utility with uniform rules and standards that all players can potentially access, like SWIFT, rather than a pure bespoke solution. “In my opinion, evolving digital technologies should focus on bite-size problems; it should solve for a specific pain point rather than a neat technology solution looking for a problem to solve.”
Much of the DLT focus has been on looking for a problem to solve which explains the very low uptake, particularly in emerging markets, he says.
“DLT solutions which are focused on solving issues such as proving who someone is which addresses the KYC requirement, or where something comes from (which typically requires a certificate of origin), or electronically signing the bill of lading by the master of a vessel electronically rather than with ink, will gain traction. Ultimately, DLT needs to be making trade simpler, safer and quicker. It needs to be focused on taking the pain out of international trade by, for example, removing physical forms, the need for wet ink signatures, address multijurisdiction, KYC or customs requirements and long courier times for physical documents, among others, rather than debating how it will happen below the surface.”
Gerakaris reveals that technology-based solutions focused on these kinds of efficiencies are gaining momentum. “Technology is allowing for optical character recognition (OCR), scanning of documents and electronically checking against the ICC rules for discrepancies and sanctions which is reducing checking times of four to six hours by three people to under a minute, leaving the specialists to do exception management. These systems use machine learning and artificial intelligence to improve the process and reduce the incidences of false positives.”
Over time this frees up scarce trade experts to focus on customer advisory services and structuring rather than mundane document checking. “Where technology and automation are also speeding up processes is in automating the signature of applications forms using tools like 2 Factor Authentication and mobile app technology. It will be about proving an individual’s identity remotely rather than relying on them printing a hard copy of a document, signing it in front of witnesses, then scanning and sending it while the originals are posted or couriered to the relevant parties.”
Technology will change the trade landscape, says Gerakaris, but it needs to be more focused around the problem being solved for, rather than the current obsession with which type of technology will enable it.
IT’S NOT LIKE SHIPPING SOMETHING FROM GERMANY TO AUSTRIA, BOTH IN THE EUROPEAN UNION AND ALL SETTLED IN EUROS